Stock markets hit reverse as January turns sour

After a bright start, January is ending on a gloomy note. We examine why and what February might bring.

While most of us were happy to see the back of 2020, many investors might have been surprised to find their portfolios in such good health. Many stock markets had recovered all the losses sustained during the market crash last March, and more had gone onto reach new highs. And 2021 began as the previous year had ended.

Every major global stock market index was in positive territory for 2021 after the first week of the year. The FTSE 100 index, having lagged many other markets through 2020 with a 14.3% decline, played catch-up as the Brexit trade deal removed uncertainty around trade relations between Britain and the EU. The UK’s premier index was up 6.4% in quick time, the broader FTSE All-Share index was up 5.6% and the FTSE 250 2.8%. The AIM All-Share rose 2%.

Elsewhere, there were strong returns in Europe and the Far East, while the unstoppable US markets extended their incredible bull run.

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However, after 8 January, many markets turned tail. The FTSE 100 went from hero to zero, losing 5% in the past three weeks, while other UK indices dominated the list of worst performers. Even the US powerhouses struggled, the Dow Jones losing 2.6% and the much broader S&P 500 down 1.9%. Gains for American tech stocks were more modest, too, adding only 0.5% in recent weeks.

For 2021 so far, up to 28 January, the S&P 500, Dow Jones, FTSE 250, German Dax, French Cac and AIM 100 are all in negative territory.

And selling gathered pace in recent days as investors digested results during US earnings season. There have been some great figures, including from US tech giants, but social media king Facebook (NASDAQ:FB) had some cautious words. Disappointing numbers from Tesla (NASDAQ:TSLA), Elon Musk’s electric vehicle goliath, also persuaded some shareholders to take money off the table following incredible gains in recent months.

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Clearly, there is optimism around the vaccination programme, which initially fed through to share price gains. But traders, analysts, fund managers and other market participants typically price in events many months ahead, so that is reflected in share prices today. And there is concern about supply of the vaccine, how it is distributed globally and its effectiveness against other Covid variants. 

There are also worries about ongoing lockdowns, both in the UK and overseas. While there is light at the end of the tunnel, daily news will likely continue to affect stock market performance in the near term.

In the US, a new president was largely welcomed by financial markets. His inauguration having passed without any trouble, Joe Biden has quickly set about his plans for a more rapid vaccine rollout, economic rescue package and putting environmental policies to work. There will be positive repercussions for many stocks, but a lot of good news is priced in, so it is unsurprising that we’re experiencing a pause, or slight pullback currently.

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So, what to look forward to in February? 

February has a pretty decent track record of positive stock market returns in the UK. In the past 30 years since 1991, the FTSE 100 has fallen just eight times.

However, when it does fall, the declines tend to be significant as we saw in 2001, 2009, 2018 and the near-10% slump in February 2020. One explanation might be that a weak January, of which there have been many in more recent years, are followed by bargain hunting or fresh buying the month after.