Stock Market Outlook: January 2024
Source: NerdWallet Canada
Author: Sam Taube
It’s a new year, a new you — and a new economy. Markets seem to have bottomed out in 2023, while interest rates seem to have peaked.
Americans will go to the polls later this year to choose a president. The downstream effects of that decision could have an impact on your portfolio, especially when it comes to renewable energy stocks.
Meanwhile, some stock indexes are hitting all-time highs, marking a new bull market. And a Federal Reserve meeting at the end of the month could mark the long-awaited transition from interest rate increases to interest rate cuts.
In this issue
Dow Jones Industrial Average hits an all-time high — what’s next?
Fed decisions, full-year earnings and other key January events.
Investing in an election year
On Nov. 5, Americans will pick a winner in what is likely to be a rematch between President Joe Biden and former President Donald Trump. It would be the first election between two former presidents since 1892, and it could have myriad implications for America’s future.
But what about its implications for the stock market?
How have elections affected stocks in the past?
Researchers have studied extensively the effects of presidential elections on the stock market. Although they generally stop short of saying one party is better for the market than the other, they have found several patterns in market reactions to recent elections:
A 2021 study in the journal Finance Research Letters examined market behavior after each U.S. presidential election from 1992 to 2016. It found that stock market volatility tends to increase significantly when the incumbent candidate loses, as investors expect a change in economic policy under a new president from a different party. This finding suggests that any volatility stemming from a Trump victory could increase the risk — but also the potential reward — of options trading and day trading in the days after the election.
A 2023 study in the Journal of Economic Forecasting examined the returns of different stock market sectors following the 2016 and 2020 elections. It found that stocks in the defense, financial services and energy sectors had positive returns when Trump won in 2016 and negative returns when Biden won in 2020.
Mike Winterfield, the founder and managing partner of Active Impact Investments, a Vancouver-based venture capital firm, says that there’s another industry of the U.S. stock market for which the election is a big deal: clean energy.
What might a second Biden term mean for clean energy stocks?
Winterfield says Biden has been “friendly” to the clean energy industry — citing the massive climate spending bill he signed as an example.
“The Inflation Reduction Act was the largest climate bill ever passed. It immediately got almost $400 billion targeted toward climate tech,” Winterfield says, adding that the expenditure could rise to almost $1 trillion within the next decade.
In recent months, the Biden administration has doubled down on its commitment to climate spending through the launch of the American Climate Corps, a new federal program that will devote $2 billion to vocational training for clean energy jobs.
How about a second Trump term?
“Trump definitely had a history of rolling back certain environmental commitments, from a funding, tax relief and regulatory standpoint,” Winterfield says, referring to Trump-era policies such as withdrawing from the Paris Climate Accords.
Winterfield notes, however, that clean energy-related tax breaks in recent years have largely benefitted states that tend to vote Republican in presidential elections. He says that Republican attitudes toward clean energy policy could soften in the near future, depending on “how it is packaged, and how big business can take advantage of it.”
How should investors prepare for the election?
A decisive Democratic or Republican victory isn’t the only possible outcome investors should be ready for in November.
Liz Ann Sonders, the chief investment strategist at Charles Schwab, added in an email interview that the new administration — whosever it is — will likely have a limited ability to pass new economic policies because Congress is likely to be narrowly divided, as well as due to the elevated national debt.
She also advised against trying to time the market based on a presidential election — no matter your opinion of the candidates.
“I would never tie a long-term market return to who is president,” Sonders said.
» MORE: Best-performing clean energy ETFs
Term of the month: All-time highs
On Dec. 13, 2023, the Dow Jones Industrial Average rose about 1.3% and closed at 37,090.24 points — the index’s first record-breaking close in nearly two years.
What do all-time highs mean for stocks?
During a prolonged bull market, all-time highs are nothing special; a stock index might hit several new all-time highs each week. But the first all-time high after a bear market often has special psychological significance for investors because it’s a strong signal that the bad times are behind us, at least for now.
The Dow hit its previous all-time high in January 2022 and then entered a prolonged decline due to concerns about excessive inflation and rapid interest rate increases. It officially crossed the bear market line (meaning a 20% drop from a previous high) in September 2022.
The question of what exactly marks the official end of that bear market has been contentious among financial advisors.
By one definition, a new bull market begins as soon as a major index rises at least 20% from its low — and the Dow crossed that milestone in late November 2022. But other definitions say that a new bull market isn’t underway until an index notches a fresh all-time high.
In other words, the record Dow close on Dec. 13 definitively indicated a new bull market even according to the most conservative standards.