The January effect was in full effect for the first month of 2019. After a punishing December, stocks rebounded in the first few weeks of January as signs of progress in the U.S.-China trade war appeared, the Federal Reserve adopted a more dovish tone on interest rates, and earnings season revealed that some companies and sectors have more-positive outlooks than expected.

It was a month to remember:

  • The S&P 500, up 7.8%, had its best January performance since 1987, and its biggest monthly gain since October 2015.
  • The DJIA rose 7.17% in January, its largest one-month rise since 2015 and biggest January gain in 30 years.
  • Crude oil prices had their best month on record, surging more than 19% after three straight months of losses. Output cuts and the chaos in Venezuela, had a lot to do with that performance.
  • The U.S. added 304,000 jobs in January, blowing out expectations despite the shutdown.

While stocks have rebounded, notably for U.S. companies and indexes, risks still remain and many of them will become more apparent in February. These are the most notable risks and events coming up this month that investors should be aware of on the horizon. We’ll paint the macro picture for the upcoming month and our team of experts will weigh in on their particular areas of focus across investing and trading.

The Macro Picture

The global economy is slowing. It’s not a secret. China, which had been on a blistering pace of growth for the past decade, now expects its economy to grow in the 6%-6.5% range this year. While that is still an extremely strong rate of growth, it is slower than what was previously expected from the world’s second largest economy. We’ve seen how that slowdown has hit companies like Apple (AAPL), Caterpillar (CAT) and Nvidia (NVDA).

In the U.S., growth is expected to be around 2.5%, according to the Federal Reserve. That’s down from the 3.5% growth achieved in 2018, but it is still growing. The temporary partial government shutdown had a minimal impact on growth, but if Congress and President Trump don’t reach an agreement on a continuing resolution to fund the government on or before February 15, another shutdown may be unavoidable, which will impact economic growth. Remarkably, the U.S. stock market rallied through the three-week closure, but that was attributed to signs of progress on the trade talks with China.

There has been a growing drumbeat about an impending recession later in 2019 and into 2020. While recessions are tough to predict, we have seen the signs in key economic indicators that typically precede a recession. Namely, the inversion of the yield curve, a dip in the leading economic indicators which include housing starts, hiring and other metrics, and stock market volatility. Recessions don’t always cause bear markets and vice versa, but the two are often correlated, as history has shown. This chart from Pension Partners sums it up.

courtesy: pensionpartners.com.

The Fed Shifts Stance

The Federal Reserve has gone from a hawkish stance with planned interest rate hikes through 2019 to a ‘wait and see’ approach, as of its most recent FOMC meeting on Jan. 30. While rising interest rates were one of the culprits many pointed to for the market correction last fall, it may not be a headwind facing the stocks for the near-term. The Fed cited a slowing global economy and volatility in the financial markets as reasons for the about-face, and Chairman Powell has indicated that it will keep this monetary policy in its quiver until it is needed. The Fed may also decide to lower rates in 2019 if conditions worsen, which would be another boon for stocks. Keeping the overnight lending rate at bay, in the 2.25%-2.50% range where it sits today, helps borrowing costs, encourages lending, lowers rates for consumers for mortgages, car loans and credit cards, and weakens the dollar, which is critical for manufacturers and exporters.

Europe – Really Brexit

Europe is complicated. The biggest single issue facing the continent and the EU is Brexit. With the March 29 deadline fast approaching for the U.K. to formally leave the EU, Prime Minister Theresa May, a leading proponent of Brexit, is hanging on to her post by a thread. She has survived several "no confidence" votes in British Parliament, cabinet defections, complicated demands from the EU and Northern Ireland and public discord. An opposition party in Parliament tried and failed to postpone the March 29 exit date, so that is still the day to circle on the calendar.

Growth for the EU has slowed from 2.6% in January 2018 to 1.6% this January.

On Jan. 31, Italy officially fell into a recession, mired in high unemployment and high debt. Italy is the fourth-biggest economy inside the European Union, but it's facing $2.6 trillion in debt. France and Greece are also facing sluggish growth and political unrest – especially in France.

The Trade War

The U.S. and China are in the middle of a peace treaty of sorts as the two economic powerhouses attempt to head off an all-out trade war. The countries have levied hundreds of billions of dollars of fines on imported goods from one another, which has punished manufacturers and farmers in both nations as well as those that both buy and sell from each of them. From soybeans to steel, there are thousands of products impacted by the increase in tariffs, and the costs are being passed right down to the consumer.

Keep an eye on the China Manufacturing Purchasing Managers Index, according to our investing expert, John Jagerson. Here's his take on what to watch:

"... January’s manufacturing data was less-bad than expected but still in contraction territory. In order to avoid another economic debacle like the market experienced in 2015, Chinese economic data needs to improve. As you can see in the following chart, the Manufacturing Purchasing Managers Index (PMI) for China has been in decline for months now. PMI readings below 50 indicate contraction. Because of the holiday, the next industrial production data is unscheduled, and PMI won’t be out again until the end of February. Signs of recovery or weakness in China’s trade balance, industrial production, or PMI numbers will be a key for understanding the potential for a repeat of 2015 so investors must stay alert for unexpected news. "

No Surprise on Corporate Earnings

We are about halfway through corporate earnings season and the results are as expected. We knew they would be weaker given that the tailwind of the 2017 tax breaks had faded, the global economy is slowing and the uncertainty around the trade war is pervasive. As of Jan. 30, 49.7% of the S&P 500's market cap has reported for the last quarter of 2018. Earnings are beating expectations by 2.3%, with 65% of companies exceeding their bottom-line estimates. This compares to 4.9% and 70% over the past three years, according to Credit Suisse. We’ll hear earnings results from Amazon.com, General Motors, Goodyear Tires and YUM Brands, to name but a few of the companies due to report next week. While their results from the prior quarter are important, it’s their outlooks for 2019 that we care about most. Are they cautious given political and economic uncertainty, or are they confident given the Fed’s latest stance and good signs from the trade talks?

Stocks in February

History has not been so kind to the second month of the year, which is also the shortest. There is no rhyme or reason for that, but over the past 50 years, February has typically been a flat month for U.S. stocks. Only June and September have been historically worse, according to LPL Financial.

LPL Financial.

Ryan Detrick, senior market strategist for LPL puts it this way:

 “We like to say that the easy 10% has been made off the lows and the next 10% will be much tougher...Things like Fed policy, China uncertainty, and overall global growth concerns all will play a part in where equity markets go from here.”

 At Investopedia, we also like to look at the technical indicators for stocks. Luckily we have James Chen, CMT, on our team.

Here is his take on what to watch for the S&P 500 in February:

A quick look at the S&P 500 (SPX) daily chart above tells the whole story of December's sharp plunge and January's equally sharp rebound. As we look towards February, this rebound has just reached up to approach a relatively strong resistance point around the 2,710-2,715 range, which is right around the 100-day moving average and a key 61.8% Fibonacci level (measured from September's all-time high down to the late December low).

Will February's market have enough juice to break through resistance and extend the rebound further? Strong corporate earnings and an increasingly dovish and accommodative Federal Reserve have been the primary drivers of the market rally in January. These are both strong fundamental drivers, but upside technical resistance is also strong. In February, the market move to watch will be whether or not the S&P 500 can surmount this resistance and potentially set the stage for a sustained move back up to resume the long-term bull trend. Or, a much less appealing scenario would be a February turn back down at or near resistance towards bear market territory once again.

We packed a lot into this outlook for the month, but the goal is to give you a comprehensive look at the complicated world of investing.

We hope it helps.