U.S. stocks, welcoming a highly volatile January?

Wallstreetcn
2024.12.24 09:35
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After experiencing two consecutive years of a bull market, Wall Street is optimistic about the U.S. stock market in 2025, but there are concerns about its performance in January next year. Historically, the U.S. stock market has had a "January effect," typically rising in January, but in recent years this phenomenon has shifted to the end of the year, increasing the risk of a pullback at the beginning of the year. Currently, the U.S. stock market faces three major risks: rising interest rates leading to increased valuation pressure, heightened concerns about secondary inflation, and reduced expectations for interest rate cuts by the Federal Reserve

After experiencing two consecutive years of a bull market, Wall Street institutions remain generally optimistic about the U.S. stock market in 2025.

However, being optimistic for the entire year does not mean being optimistic for every month.

As for the upcoming January, should we be optimistic about the U.S. stock market?

"January Effect," Also Predicted

Historically, the U.S. stock market has always had a "January Effect," with January gains becoming a seasonal phenomenon.

One explanation is that at the end of each year, institutional investors need to reduce tax liabilities, so they often sell securities to lower capital gains, triggering a wave of selling. In January, after the year-end, they tend to buy back some of the stocks they previously held, leading to a rise in the stock market.

Another explanation is that investors increase their stock investments with the year-end bonuses they receive in the following month.

However, in fact, since the 1990s, the "January Effect" has increasingly been anticipated earlier in the year, and the risk of a pullback at the beginning of the year has actually increased.

Refer to the statistical chart created by Goldman Sachs below.

Image: Historical rolling monthly average returns of the S&P 500 index (the dark blue line is from 1928, the light blue line is from 1990, and the orange line represents the trend for 2024)

Eight years ago, when Trump first took office, the U.S. stock market emerged from uncertainty into a bull market.

This time, as he "returns with a mission" to the White House, will the U.S. stock market still greet him with a smile?

At least, there are currently three risks in the U.S. stock market:

Risk One: Rising Interest Rates, Increasing Valuation Pressure

In the past two months, concerns about secondary inflation in the U.S. have gradually been confirmed by the market and the Federal Reserve.

The long-term inflation trend over nearly a decade seems to be getting closer to a second round of severe inflation compared to the 1960s and 70s.

Within a week after the Federal Reserve's hawkish rate cut in December, CME FedWatch showed that the market's expectations for rate cuts throughout next year have further decreased from two times to one time