Tariff Tensions, Earnings and FAANGs: Things to Watch in January

As January begins, investors' focus could remain squarely fixed on China trade negotiations and the Fed's latest move.

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5 min read

Key Takeaways

  • China tariff negotiations could remain key focus in January
  • New earnings season could help shed light on U.S. holiday sales
  • The new year might be a time to consider a portfolio check-up

January (and 2019) starts with the clock ticking. The China trade clock, that is.

A handshake agreement between U.S. and Chinese presidents at the end of November set the timetable at 90 days for negotiations to yield fruit, and also pushed back the U.S. threat of higher tariffs on certain Chinese goods. This reprieve—along with China’s pledge to buy additional U.S. agricultural products and reduce auto tariffs—appeared to give the market a slight boost in mid-December before stocks really crumbled after the Fed meeting. However,with just two months to resolve decades worth of disputes, the tariff battle could keep things volatile as January begins.

The market has remained headline-driven, a potential indication that China “news du jour” might drive sentiment on any given day. That could help explain in part why the closely watched fear index, the VIX, climbed back above 25 as December advanced, up from recent lows below 20. Certain stocks that sometimes serve as bellwethers reflecting the ups and downs of negotiations—including Boeing (BA) and Caterpillar (CAT)—might be ones to consider watching for possible hints about how the market as a whole sees the talks progressing as January rolls along.

Gloomy Close to 2018 Doesn’t Provide Much Traction

The new year could begin with investors licking their wounds after a topsy-turvy 2018 capped by a massive sell-off in late December after the Fed hiked rates and indicated more hikes to come in 2019. As of late December, the S&P 500 Index (SPX) was having its worst year in a decade and its first losing year since 2015 as sentiment seemed overwhelmingly bearish. In addition, there was no sign of any sort of “Santa Claus” rally into the end of the year.

Key sectors like info tech, financials, energy, and transports all remained under pressure late in 2018, possible indications that investors apparently have doubts about the lasting power of this long bull market. The Nasdaq Composite (COMP) actually flirted with a bear market—meaning a 20% drop from its high—in late December, and the small-cap Russell 2000 (RUT) did edge into bear territory. With stocks getting crushed, it might be interesting to see if any key sector is able to pull itself out of the mud and take charge once the new year starts.

The FAANG stocks, which had helped drive positive momentum for so long, all hit 20% losses in late 2018. Any potential recovery there could help determine if January starts to look any sunnier than the last three months.

Fed Pulls Back Hike Expectations After December Increase

If sentiment in late December serves as any kind of indicator, January could be a month free of dramatic Federal Reserve action. The Fed hiked rates on Dec. 19, as the futures market had expected, and dialed back expectations for 2019 to two rate hikes (it had previously forecasted three). The futures market has been rapidly lowering expectations of further hikes in the new year. Chances of a hike in March, for instance, stand at just about 20%, down from above 50% a few weeks ago, according to CME Group Fed funds futures.

The Fed itself was arguably responsible for most of the pullback in expectations, with officials from Fed Chair Jerome Powell on down making dovish comments over the last month as the market storm raged. According to Powell, the current Fed funds target range is getting close to what the Fed would consider “neutral” that neither sparks economic growth nor slows growth down. Many analysts see “neutral” being roughly between 2.5% and 3.5%, and expect the Fed to continue to target that area later in 2019. After December’s hike, the Fed funds range is between 2.25% and 2.5%. However, with inflation readings still on the light side and foreign economies slowing, there seems to be little pressure on the Fed to do much early in the year.

There is a Fed meeting in late January, but many Wall Street analysts say that the odds of anything major happening seem slim. That said, Powell put a new policy in place in 2018 where he’ll hold a press conference after each and every Fed meeting instead of just four times a year, so investors will get a chance to hear from him on Jan. 30, at the close of the first Federal Open Market Committee (FOMC) gathering of the year. What once might have been a sleepy meeting could get more attention this time around, especially after the market dived during and following Powell’s Dec. 19 press conference as investors appeared to take away a more hawkish tone from Powell than perhaps they’d expected.

Of course, interest rates can play a key role in an investing strategy. For one, higher rates tend to make income-yielding investments like dividend stocks less attractive. So, as interest rate increases look less likely heading into 2019, investors may want to use more caution when deciding when to turn to bonds and other fixed-income instruments for more historically likely income sources.

Housing is another area of the market sometimes impacted by rising rates, as they make mortgages more expensive and home-buying more prohibitive. If rates do indeed remain low in January, the housing market and homebuilder stocks could be in position to benefit.

The benchmark 10-year Treasury yield traded near 2.8% in late December, down from 3.2% earlier in the quarter. If yields start rising again, it could indicate more optimism about the economic climate. On the other hand, if the gap between 10-year and 2-year Treasury yields narrow further (it was below 10 basis points in late December), that could help to intensify some economists’ worries about the potential for a slowdown in the economy.

When rates invert (a scenario in which the longer-term yield falls below the short-term) that can hit financial sector profits and make banks less willing to loan, triggering further economic weakness. Analysts are divided about whether a yield inversion might occur in 2019.

Earnings Season Begins Anew

Once we get past the holidays, it won’t be long until another wave of earnings reports potentially help shed more light on how companies are faring. Over the past year, companies churned out market-pleasing results, with earnings per share rising more than 20% in Q2 and Q3. At the same time, Wall Street picked up on softening guidance, cues that the Q4 earnings season could be less stellar. That said, research firm CFRA estimates Q4 S&P 500 earnings growth at 15.3%, which would look good most quarters if it weren’t for the better than 28% EPS growth recorded in Q3.

Once again, remember that investors seem to be less focused on past data and more attuned to what companies forecast for the future. There seems to be a sense among investors that the fiscal stimulus helping spark 2018’s historically robust earnings growth might be fading, and that higher interest rates, China tariff concerns, and the task of measuring earnings growth against tough 2018 comparisons all might gang up to force weaker company guidance. Recently, companies across the spectrum have faced severe market punishment for guiding under Wall Street expectations. 

The bulls are likely hoping that CEOs could come on the earnings calls and say things aren’t as bad as they look. Of course, it could go the other way. Either way, it’s arguably important to get to earnings, because even though data is nice to have, it’s backward looking. At this point, with stocks getting buried almost every day, some forward-looking perspective from the corporate world might be useful. Companies have been saying lately that they’ve seen strong business in the U.S. but slowing activity overseas, so investors might want to consider staying tuned to see if there’s any change to that and whether CEOs see opportunity once earnings season gets underway in mid-January.

While holiday shopping is still in full gear, early signs have pointed to a season of spending, which might help to benefit retailers’ end-of-year reports. In the five days from Thanksgiving to Cyber Monday, an estimated 165 million shoppers spent an average of $313 on gifts, according to the National Retail Federation. NRF CEO Matthew Shay, in a statement, called it a “very strong emotional start to the holiday season.”

With many major retailers like Macy’s (M) and Walmart (WMT) expected to report in February, January’s earnings focus will likely be on other sectors like technology and financials. Other major earnings to consider watching next month include Microsoft (MSFT), Facebook (FB), JPMorgan (JPM) and Wells Fargo (WFC). As in every earnings season, the big banks that report early can be key in giving investors a sense of the economic scene. Consider listening to their analyst calls and watching for headlines as the banks report their results.

Both Boeing (BA) and Caterpillar (CAT) report in January, and it’s likely their investor calls could provide investors some insight into how big of a role the China trade issues might be playing in their businesses. To stay on top of earnings news, visit The Ticker Tape’s Earnings page.

FAANG Stocks on Feeble Footing

Tech stocks have been among the more battered this past year. Trends among the FAANG –Facebook (F), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL)—helped to drive much of the market momentum earlier this year, but by December all five had plummeted to well below their all-time highs.

These growth darlings have met resistance for a number of reasons, but declines seemed to be first triggered in part by less-than-stellar Q3 earnings reports, particularly from AAPL and FB. Geopolitical tensions between the U.S. and China have also been weighing on the FAANGs as of late.

These stock swings seemed to have helped bring a change in investor sentiment toward favoring blue-chips like Procter & Gamble (PG) and CocaCola (KO). And that trend could continue into January if investors continue to seek a so-called “risk-off” approach (though no investment strategy is without risk).

If the risk-off action stays intact, it’s possible that sectors like consumer staples, utilities, and health care might all continue to benefit. Watching the sector action as January advances might be helpful for a sense of where investor sentiment might lie.

Will 2018’s Roller Coaster Ride Continue?

Volatility played a key role in the markets in December. The ups and downs of the last three months may have been nudging investors who favor predictability toward fixed-income assets, which have recently seen a rally. There are also signs of some investors either parking their money on the sidelines or simply staying put in their positions. That said, the VIX is really not far from its historical average. It might just seem high because of the sluggish volatility investors got used to in 2017.

As some investors turn toward fixed-income, they might face a new worry—a possible liquidity issue. That means, while fixed-income investments might seem like a good alternative to other investments, consider that they may also be harder to sell.

Watching Crude, Jobs Data as January Begins

Heading into January, broader issues that could affect the market include how housing market fares, whether oil prices can rebound from current levels below $50 a barrel, and U.S.-China tariff issues.

Also, the December U.S. payrolls report due Jan. 4 might be an important one to watch for signs of any change in the inflation outlook. Hourly wages rose 3.1% year-over-year in both October and November. So far, that hasn’t seemed to translate into much impact on prices, but it might be interesting to see if job and wage growth remained on their firm track in December. Also, the December data could potentially shed light into how the holiday shopping season went.

We’ve already talked about China, but issues like the slowdown in the U.S. housing market and a crash in crude prices also played parts in recent market weakness. Higher interest rates raised the average 30-year mortgage back above 5% by Q4, and even with the recent drop in Treasury yields, home buyers now face higher borrowing costs than they did a year or two ago. Home builder and renovation company stocks dropped sharply at times in Q4, so investors might want to consider keeping an eye in January on December’s existing and new home sales data. A drop in mortgage rates late in December appeared to give homebuilder stocks a bit of support, so investors might want to consider keeping an eye on those stocks for more clues into the housing situation.

A plunge in crude from above $76 a barrel in October to below $50 at times in December gave consumers a break at the gas station, but also weighed on the energy sector and brought concerns about possible economic slowing. In early December, OPEC and Russia agreed to clip daily output by 1.2 million barrels a day, but that represents only about 1% of world production and is going to come down from record levels.

It’s unclear how it might impact the market, and as of late December U.S. crude continued to trade below $50. Any crude rally in January might be viewed as positive, potentially reflecting the demand that’s often seen amid a healthy world economy. On the other hand, U.S. production keeps rising, so that might help keep a lid on any rally.

Six Potential Threats to the Market in 2019

If you’re a long-term investor planning 2019 strategy, it’s probably worth considering some of the risks the market might face in the new year. Research firm CFRA did exactly that in early December, highlighting what it said are six “threats” to the long-term bull market that’s suffered two 10% corrections so far this year. The six that CFRA came up with were: 

  • Inflation
  • Peaking earnings
  • Rising interest rates
  • Dollar strength
  • Corporate debt
  • Trade/tariffs

Looking at that list, inflation and the Fed might seem a little less worrisome considering Powell’s recent dovish words and benign price data. However, trade, the dollar, and earnings all could remain on the front burner, with corporate debt stewing in the background. Also, the Fed’s meeting in December might have brought back some of the interest rate concerns going into January, especially if the Fed is serious about two more hikes in 2019. We’ll have to wait and see.

Long-term investors looking ahead might want to consider how these factors could play into their long-term investing plans, particularly from an asset and sector allocation standpoint.

Your New Year’s Resolutions: Include a Portfolio Check

A new year can be a time to start fresh. Amid vows to exercise more and eat healthier, investors might want to make time to get your finances in shape. Revisit your investing strategy and make sure it still aligns with your financial goals. Remember, many people spend more time planning their vacations than planning their financial future. While vacations are fun and important, it’s also important not to neglect your long-term goals.

You might want to consider examining your portfolio and checking whether your assets need rebalancing. For example, look at your investments that have made significant gains, and determine whether your allocations are still appropriate for your goals.

Also, think about taking some time to review what happened in the markets this year and what factors might be at play in 2019. For instance, if you’re worried the trade situation might continue to weigh on emerging markets, maybe it’s time to double-check your exposure to that area. Or if you sense that the U.S. economy has more room to grow, look over your portfolio allocation to determine if it still reflects your views.

The holiday season often gives people some time off. An hour spent reviewing your goals and checking allocations could be worth the time away from year-end celebrations.

Good Trading,

JJ

@TDAJJKinahan


Mark Your Calendar

Here are a few data and events to watch for in January. 
January 4Jobs Report
January 11Consumer Price Index
January 15Producer Price Index
January 16Retail Sales
January 22Existing Home Sales
January 25Durable Goods
January 25New Home Sales
December 21Durable Goods
January 29 - 30Fed Meeting
January 30GDP

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Key Takeaways

  • China tariff negotiations could remain key focus in January
  • New earnings season could help shed light on U.S. holiday sales
  • The new year might be a time to consider a portfolio check-up
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