Will investors have a fab February after January blues?

31st January 2022 08:35

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It’s been a January that most investors will want to forget, but it’s often darkest before the light. We look at what’s driving share prices right now, and how stock markets might behave in the month ahead.

Headlines in the financial press are full of doom and gloom as global stock markets turn sharply lower. US tech stocks have been especially hard hit as the spectre of higher US interest rates looms.

Higher interest rates typically affect growth stocks more than others, and the Federal Reserve’s latest meeting on Wednesday did nothing to soothe concerns about the scale of increase in borrowing costs.

So worried are professional investors on Wall Street that the Nasdaq index, made up of high-growth technology shares, is down over 14% as the month nears an end. Major constituents like Moderna (NASDAQ:MRNA) have really struggled, losing 41% of its value in just a few weeks. Netflix (NASDAQ:NFLX) is down over 35%, Tesla (NASDAQ:TSLA) 21% and Amazon 16%.

It’s not just interest rates that worry traders. The quarterly results season has been mixed, with outlook and guidance statements leaving investors underwhelmed. Supply chain issues and shortages remain a concern, too, although some companies, like Apple, have managed to avoid that particular banana skin. Tesla has not.

In a nutshell, investors must decide whether companies can justify their current stock market valuation which, even after the sharp declines we’ve seen this month, are high by historical standards.

The chance of success increases significantly if you look for sensibly valued companies with solid fundamentals like revenue, profits and dividends.

Cold UK has its day in the sun

It’s definitely gloves and scarf weather in the UK, but the local indices have turned the heating up in recent months. Indeed, while overseas markets nurse significant losses, the FTSE 100 is the second best-performing major stock market in January, up 2.3% with just one trading session of the month to go. The FTSE All-Share index is up 0.5%.

London-listed blue-chips have become increasingly attractive, especially the banks as investors anticipate further interest rates rises by the Bank of England. Higher rates are typically good for lenders who pass on higher borrowing costs faster than they increase savings rates. Most of the UK banks are up 9% or more in January. Far East-focused HSBC (LSE:HSBA) and Standard Chartered (LSE:STAN) added 20%.

High oil prices have ignited interest in BP (LSE:BP.) and Shell (LSE:RDSB), while defensive stocks with high dividend yields like tobacco giants British American Tobacco (LSE:BATS) and Imperial Brands (LSE:IMB) are in favour. Even British Airways owner International Consolidated Airlines (LSE:IAG) has attracted bargain hunters.

However, the FTSE 250 index, which has greater exposure to the UK economy and some more growth-oriented sectors, is down almost 7%. It means all of December’s hard-won gains, and more, are wiped out.

If you’re looking for someone to blame, look no further than stocks like Trustpilot (LSE:TRST), down 42% in January, and multi-billion-pound companies like Dr Martens (LSE:DOCS) and Countryside Properties (LSE:CSP), both down over 30%.

The outlook for shares in February?

After a gloomy January, there could be reason for optimism in the month ahead, at least if the statistics are to be believed. In the past 31 years since 1991, the FTSE 100 has had a good track record of positive stock market returns, falling just eight times.

Last year, the FTSE 100 added almost 1.2%. The FTSE 250 did even better, rallying 3.3%. 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.

It’s worth noting too that when the Footsie does fall, the scale of reversal tends to be significant, as we saw in 2001, 2009, 2018 and the near-10% slump in February 2020.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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