The January effect

After a rare weak December, markets debate the outlook for 2025, with Wall Street bullish but wary of unreliable January signals.
Chris Watling

Longview Economics

After an unusually weak December (the S&P 500 fell -2.5%), without its typical ‘Santa Claus rally’, the debate continues as to how will the US and other equity markets perform in 2025. Most Wall Street strategists are bullish for the year.

We outlined our longer-term views (i.e. 6 months to 2 years) in our latest ‘Strategic Global Asset Allocation’ publication, published just prior to Christmas (see snippet below).

Elsewhere, the January effect is often watched closely to give clues as to the outlook for the year. There’s a view in markets that “how goes January, so goes the year”. Those relationships, however, are weak. Our analysis of the correlation of the performance of both the first trading day and the first week of January with the year found, in both instances, only a trivial R squared (of 0.01 and 0.001). That is, there’s no clear evidence for the ‘January effect’ over the 85 years of data that we examined (1929 – 2014).

This week brings the first full trading week of the year. The key data comes out at the end of the week with the US monthly non-farm payrolls, average hourly earnings and unemployment rate released on Friday. Ahead of that, ISM services data is released on Tuesday; with various other labour market data coming out over the course of the week (including JOLTS on Tuesday, ADP on Wednesday, and Challenger job cuts on Thursday). It’s also a key week for inflation data (Euro Zone CPI on Tuesday; Chinese CPI and PPI on Thursday).

Global S&P1200 equity index shown with key moving averages

Chinese headline CPI & PPI (Y-o-Y %)

Quarterly Asset Allocation

Published 23rd December 2024

Risks are Rising

(Start) reducing risk exposure in strategic portfolio - meaning stay OVERWEIGHT (for now) but at reduced position size

Compelling opportunities in markets occur when there’s a strong consensus amongst investors (with crowded, one-way positioning), and there’s a good macro reason to face the other way and bet against the crowd.

Next year, especially the first half of the year, is building towards one of those compelling opportunities. That is, this bull run in US large cap equities is looking increasingly tired and overextended, whilst the case for a US mid cycle economic slowdown is brewing. That combination of factors sets the stage for a meaningful pullback in global equity markets in the first half of 2025.

For now, we are waiting for evidence of the final ‘blow off top’ phase before moving fully defensive in our portfolios. Given, rising risk levels, though, and our heavily overweight risk positioning, we are reducing risk levels in the portfolio – albeit remaining ‘risk on’. 

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Chris Watling
CEO & Chief Market Strategist
Longview Economics

Longview Economics, founded in 2003 by Chris Watling, is an independent research house based in London, providing three distinct yet interrelated groups of research products: Short and medium term market timing; Long term global asset allocation...

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