January Barometer: Wall Street Trends to Watch

Those who believe in Wall Street's "January barometer" expect performance that month to set direction for the year. Like many such "rules," correlation is questionable and skepticism is probably warranted.

This coming January, however, could tell investors more than usual because it coincides with a new administration taking power in Washington, D.C. That might reinforce some common January trading trends, such as buying last year's losers and liquidating winners, but also bring new caution after two straight years of roaring U.S. rallies. 

When power changes in Washington, there's often additional complexity and market volatility to start the year. That's magnified in 2025 by the Trump administration's plans, some of which could take effect soon after the transition. Trump doesn't need Congress to slap additional or higher tariffs on imports from China, for instance. Like President Biden and the previous Trump administration before that, the new president has lots of latitude over trade policy, which is one reason Treasury yields now have built in a large "term premium" as investors prepare for possible inflation associated with trade barriers.

But trade is only one question mark approaching January. There's also tax policy, the need to keep the government open when funding begins to run out, and the coming battle over the debt ceiling. Major firms may be putting off spending and product decisions until they better understand the rules from Washington.

"Uncertainty is a terribly overused word, but in this moment in time, I would say it's at a very high level because you have everything in play, and it can go many, many different directions," said Kathy Jones, chief fixed income strategist at Schwab. "If you're a business leader, and you're trying to plan, you've got to be in wait-and-see mode in terms of those policies like immigration and tariffs. So, we may be at a stall point in that cyclical activity while businesses wait to see what policy proposals become actual policy."

Before January even begins, investors need to be ready now for one market trend that often occurs in mid-to-late December.

Typically, tax-loss harvesting picks up in the third week of December, meaning it's probably already underway. The term means investors selling both winning and losing stocks to blunt the impact of capital gains taxes. Assuming this occurs, it could raise volatility ahead of the new year. 

After the calendar page turns, there are some trends to monitor in what may be a fast-moving, newsworthy month of January.

Investors sometimes begin the new year by liquidating shares of companies that rallied the prior year, putting off these sales until January so they don't take the capital gains hit for another 12 months. This coming year, such activity could surge because of hopes that the Trump team will make tax policy even more favorable—meaning that selling in January 2025 might be more fruitful than selling in December 2024 and having to apply the current tax laws. Liquidating winners is sometimes a drag on stocks in January, and with some of the largest stocks like Nvidia (NVDA) and Apple (AAPL) rising most in 2024, the impact of such sales could be more of a brake on the market-capitalization-weighted indexes.

Even as investors take profit on winners, they may scoop up stocks that underperformed or were in underperforming sectors. This is common in January, going back to the days of the old "Dogs of the Dow" theory about the previous year's Dow Jones Industrial Average^® ($DJI) laggards getting traction the following year. Like the January Barometer, the Dogs of the Dow approach has an uneven history, to say the least—ask anyone who picked up shares of Walgreens Boots Alliance (WBA) in January 2024. Still, if this type of trading picks up in January, sector underperformers of 2024 that may be worth watching include real estate, materials, and health care. Those three were the only S&P 500 sectors through early December not posting double-digit gains in the current year.

Cyclicals, or sectors like financials and industrials that often track the U.S. economy, began to climb last September when election odds favored a Republican victory. The trend picked up steam following the election and even into late November, keeping money rotating out of the so-called mega caps and shifting attention to big banks, retailers, manufacturers, and travel firms that would potentially do better in a less-regulated, lighter-tax economy. While there's no guarantee that's where policy will head, the idea of it has worked to cyclicals' advantage and may continue to, while worries about rising tariffs and changed immigration law under a Republican administration and Congress could hurt sectors like info tech, health care, and materials.

Investors are preparing for the new administration— so are businesses. Even before 2025 begins, data released in November by S&P Global highlighted growing U.S. domestic investment and new purchases from abroad ahead of any new trade barriers. "The promise of greater protectionism and tariffs has helped lift confidence in the United States' goods producing sector, which is already feeding through to higher factory employment," said Chris Williamson, chief business economist at S&P Global Market Intelligence in a November 22 press release. "Factories are meanwhile stepping up their purchases of imported inputs as they seek to front-run tariffs, putting pressure on supply chains to a degree not seen for over two years. Any further stretching of these supply lines could see prices move higher as demand outstrips supply."

Factories aren't the only ones trying to get ahead of future policy now and perhaps early in the new year. Electric vehicle (EV) sales could get a boost this month and next following word that Trump wants to end the $7,500 tax credit for EVs. Trump campaigned on that promise, and even his big supporter Elon Musk, CEO of EV firm Tesla (TSLA), supposedly isn't a fan of the credit. Tesla shares spiked after the election for many reasons, and one of them might have been the hope of stronger EV sales before the credit goes away and the disadvantage this might cause its competitors, which are smaller and perhaps less able to handle the impact. Other EV-related shares haven't seen much traction, however.

Seasonal strength often flashes during presidential transitions. History shows that the broader U.S. market tends to climb in periods between the November election and the January 20 inauguration, with the notable exceptions of 2001 and 2009. Both of those were recession years. That doesn't guarantee a January rally, naturally, but sometimes, seasonal factors can be self-fulfilling. 

If you're a long-term investor, all of this is likely going to be interesting noise that there's no need to act on. For those making changes, December is when you might want to consider whether your current investment plan remains relevant for your future goals and make adjustments accordingly. Doing so ahead of time can help you resist temptation to make sudden moves based on any volatility associated with January's events.

Also, keep in mind, just because the new administration wants tariffs and tax cuts, that's no guarantee they'll happen. Trump wants to reduce corporate taxes, but that's not a given considering the tight Republican majority in next year's House and the fact that "some Republican representatives have concerns about how tax cuts and other policy proposals could impact the deficit," said Michael Townsend, Schwab's managing director for legislative and regulatory affairs.