January Barometer on Market
February 5, 2021 | Sage Capone
The narrative to end January was a wild short squeeze in the stock of Gamestop. By shorting a stock, traders such as hedge funds sell stock they do not own. If the price goes higher, they are forced to buy the stock to cover their position at a loss. Shorting a stock is generally a risky endeavor because losses can be theoretically infinite. The concern for Hawaii investors was that it would lead hedge funds who shorted the stock or bet on a price decline, to have to fire sale other stock holdings and buy back their short positions in a big way. The data suggests there were large liquidations in the market, which caused a pullback in stocks broadly. Historically once liquidations stop, the bull market resumes. Maybe there’s more to be liquidated, but either way it’s a temporary condition.
With all the monetary and fiscal stimulus, it might be a surprise to some that inflation is still quite tame in the US. In fact, the monetary policy in the US is to support higher (2%+ inflation levels). This is in stark contrast to how the Federal Reserve (the central bank of the United States) has conducted monetary policy for the last 50 years. The Federal Reserve had long focused on containing inflation and moderating it from any sudden outbreaks. This is largely due to many policymakers studying the experience of the 1970s inflation spiral and trying to avoid it. While a rebound in the economy could put some upward pressure on consumer prices in the US, the core CPI inflation rate in the US was only 1.6% y/y ending December 2020.
The stock market as measured by the S&P 500 ended January down for the year. The market is full of classic sayings. One of those sayings is, “so goes January, so goes the rest of the year.” This saying was found by stock researchers studying seasonal return patterns. They found that if January is higher than the rest of the year is higher and if stocks ended January lower, the rest of the year would be lower as well. However, this has not been true for the last two decades. Of the past 9 years since the year 2000 that January started the year with a negative return, 8 of those years had a positive return the final 11 months of the year.
Source: LPL Research
Past performance is no guarantee of future results. Not a recommendation for any stock but used for illustration purposes. Allocations can change at anytime without notice.