Investing

'Slow growth, but not no growth' and a trade deal — what to watch in the market in January

Twenty/20

Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

The U.S. stock market just capped off its best year since 2013, and a decade that saw the S&P 500 surge nearly 190%.

The start of 2020 brings a new period of comparison for the major U.S. benchmarks. Experts believe the market will continue rising in 2020, though at a more moderate pace. While the S&P ended 2019 up 28%, Wall Street strategists surveyed by CNBC forecast that the benchmark index will end the coming year more than 5% higher than its 2019 closing level, based on their median target.

January is shaping up to be a busy month. Leaders of the U.S. and China are expected to sign the first part of a trade deal; it's the return of the weeks-long period when companies report quarterly results; and the Federal Reserve is scheduled to meet for its first of eight annual meetings.

Here's what you need to know about the month ahead.

Trade deal to be signed in mid-January

What's happening: In mid-December, the U.S. and China agreed to a so-called phase one trade deal. Then this week, President Donald Trump said in a tweet that leaders of the two countries will sign a deal in Washington on January 15.

Under the pact, Washington agreed to cancel some new tariffs set to take effect in December and reduce rates for other duties, and China said it would buy more U.S. agricultural products.

Why it matters: Although there's been a verbal agreement, the two sides have been working in recent weeks to hash out the language in this deal. And Wall Street remains focused on the exact details of what leaders agree upon, says Nela Richardson, investment strategist at Edward Jones. "More important than timing, people will be focused on the terms."

What it means for you: The trade spat between the U.S. and China was a major source of bumpiness for the stock market in 2019, and that could continue in the year ahead. The first steps in a deal should be positive for investors, but traders are so focused on how this deal progresses because any signs of setbacks in the weeks ahead could temporarily derail the recent rally in stock prices.

Will companies point to lower growth ahead?

What's happening: Banks will kick off earnings season during the week of January 13, and you can expect a majority of companies in the S&P 500 to share their results in the weeks to follow. Companies will be reporting profit for the fourth quarter, and Wall Street analysts are currently projecting that members of the S&P 500 will report their fourth straight quarter of year-over-year declines. If so, that will be the first time that's happened since mid-2016, according to FactSet.

Why it matters: While Wall Street isn't expecting a recession in 2020, some experts do believe that the pace of economic growth will slow. That's the case for John Leonard, global head of equities and senior managing director at Macquarie Investment Management.

"The theme I would say is slow growth, but not no growth," Leonard says. "I would push the recession risk back out of 2020 and into 2021."

Publicly traded companies can offer valuable insight about the pace of economic growth to come, along with how confident consumers and businesses are feeling.

What it means for you: If you own individual stocks, earnings often are a key driver behind dramatic swings in performance on a short-term basis. And more broadly, earnings can sway the market as a whole — especially when results are better or worse than analysts expected.

That said, it's important to keep perspective. Wall Street is still betting on modest gains in stock prices, and for the U.S. economy as a whole in the year ahead.

Bottom line

Historically January is one of the best months of the year, with average gains of 1.2%, according to Yardeni Research. And while some experts have said that traders may sell some of their winning stocks once 2020 begins, they expect any resulting market bumpiness to be temporary.

Regardless of what happens in the coming weeks, remember that you don't need to make any changes to your long-term investing strategy based on short-term events. The market's performance this year is a good reminder to take a long-term view and stay the course.

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