January is generally the indicator for the entire year and how stocks will fall. Mike Reeves, financial planning advisor of Strategic Wealth Designers, explains the January Effect and why there may be a market slowdown in 2020.
Reeves explains that, “60% of the time whatever goes on in January creates a trend and the rest of the market year tends to follow that trend. Reeves continues, “However, this year may look a little different because we have the election in the back end of the year. So, we want people to be prepared for volatility. Look at your portfolios, understand how volatility may affect them and prepare for that ahead of time.”
There may be an economic slowdown in 2020 because 2019 was a great year for the stock market and many people were up over 20%. Reeves states, “Most experts are saying 3-5% on the upside for this year however with everything going on stocks are priced for perfection. Any stumble on the economy could create a major pull back. You need to stress test your portfolio before that happens.”
Reeves explains the January Effect to investors by stating, “So, you have a stock that is down, you sell it in December to lock in a tax loss against a gain from that year. So, you turn around and buy that stock back in the month of January.” The first couple of weeks in January typically go well and people believe that is the reason why. In order to prepare for the year ahead, Reeves advises, “to understand your portfolio, look at the fundamentals and make sure you are getting rewarded risk. He continues, “Open your statements, talk to a financial advisor and be thinking about this year as a much more dangerous year than last year.”
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