The new year has started, and the performance of the stock market in January is often used as a guide for the rest of the year. Traders refer to this as the “January Barometer.”
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If the stock market closes higher at the end of January than the beginning, nearly 70% of the time, the year will also end above January’s gains. That is far above the normal edge the stock market has for positive year-end gains.
However, if the major indexes lose ground in January, the potential for the rest of the year to be positive reverts back to its normal 55%. So, a bearish January doesn’t make it more likely that the stock market will fall the rest of the year, but a bullish one makes it much more likely that it will rise.
The real secret behind the January Barometer is likely earnings performance. January is when most companies report their fourth-quarter and annual profits to shareholders, and if the data looks good, the trajectory takes a while to change and should remain positive even if economic headwinds worsen before summer.
What Should You Do?
Unfortunately, we are in a lull vis-a-vis good corporate data; earnings won’t really start coming in until after Jan. 10. There are a few companies that report outside the normal schedule — like FedEx (NYSE:FDX), Constellation Brands (NYSE:STZ), and Costco Wholesale (NASDAQ:COST) — and the data looks really good so far, but we could still get a surprise.
Based on the data we have seen, and reliable projections for growth in January, we think investors should remain biased towards the upside.
Currently, we still like retail positions — especially those that have been ignored or oversold recently.
Target (NYSE:TGT) and Costco both look good below $225 and $560 per share, respectively. According to Mastercard, retail sales are up 11% this last shopping season compared to 2019. The comparison is appropriate, so we can see what spending growth has really been like outside of the 2020 pandemic year.
We aren’t ignoring the news about COVID-19 infection rates skyrocketing. It’s a concerning development, and traders have been justifiably concerned about the data. However, the early reports indicate that investors may have overestimated the effect of these trends on retail stocks — and particularly restaurants and takeout food.
- For example, Domino’s Pizza (NYSE:DPZ) isn’t a restaurant per se, but we feel it is close enough to the rest of the sector to be a great buy at anything under $550 per share. The stock recently broke resistance, which is what professional chart-readers say is a solid buy signal.
- Starbucks (NASDAQ:SBUX) is another food-related retail position we really like. The stock has been stuck in a channel for a few months but looks ready to break out. We think SBUX has been oversold on COVID-19 fears as well as worries that a unionization movement will hurt margins. History just doesn’t back up the second issue, so we think investors should pick it up while it’s hot.
What’s Coming Up?
So, why focus on retail stocks this week? Reports look good for consumer-spending growth, and margins are still fat. However, most retail firms and restaurants don’t report earnings until late in the season.
By focusing on this part of the market, you can pick up some stocks in great sectors while we wait for the big stocks in the sectors that report early to come out. Finance, tech, and manufacturing stocks are among the early reporters and will see the most volatility early in January. Retail has enough breathing room to build up a margin of safety before their reports start streaming in.
However, there is an economic event coming up this week that you should keep your eye on if you decide to take advantage of some undervalued retail deals…
Labor on Friday
The U.S. Bureau of Labor Statistics (BLS) reports how many jobs were added or lost in December on the first Friday of January. Economists think the U.S. will have added 410,000 new jobs, which is a little above average compared to the last year.
However, what you should really watch closely is whether the BLS reports that wages are rising faster than expected. Wage growth leads to inflation (which is an issue right now), but it also means that in the short term, consumers are likely to spend faster — which is great for retail stocks.
Hourly wages have been growing about 6% annualized over the last 6-8 months, which is pretty close to price inflation. If wage growth picks up a little in December, we expect that to be a boost to the economy and it will help offset the damage that inflating prices might do otherwise.
Bottom Line
Growth projections and early reports look good for stocks in January. If profits are still rising, we can justify a bullish outlook for the rest of the year. COVID-19 infection rates are a big worry, but so far consumers seem undeterred, which means retail stocks have been oversold.
Sincerely,
John Jagerson & Wade Hansen
Editors, Trading Opportunities