The S&P 500 rallied aggressively in January, posting its strongest performance since 1987. There are several reasons for this and we will give a brief on exactly how this took place. Our latest audiovisual package showed the massive amount of cash, about $140 billion dollars, being taking out of markets. Investors sold stocks in December and forced the market to drop hard, with some stocks falling over 25%. Note that investors sold long positions and some even sold short – selling short means one sells a stock at, let`s say 100 dollars, then buys it back at 80 dollars, making a 20 dollar profit.
However, if the shorts are overdone, investors will be forced to buy back positions, triggering a snap-back rally. This is what happened with many stocks in January. But another key driver was involved. Note that the Fed hikes triggered the sell-off in November and December – at least the threat of aggressive Fed hikes. However with the slowing US and Chinese economies and Brexit, the US Fed decided to pause hikes, or at least indicating this slow down in hikes.
The idea of fewer hikes in 2019 encourages investors to buy stocks – and this is the rally. Another factor in the January rally was a report that the US and China could reach a solution on trade talks. This was a driving factor as investors started buying stocks as they thought the stress on economies caused by fear of a trade war was fading.
To Sum Up. Equity positive factors were a more dovish Fed that hikes rates more slowly/fewer hikes in 2019, short cover rally as shorts from December buy back underweight positions, US and China possibly reach a trade deal and a general view that too much gloom and doom were already factored into markets.
Hence the powerful rally in January, the most powerful in 3 decades.