My 3 Biggest Stock Market Predictions for January

The past two years have been pretty crazy in the stock market, and there's no reason to think that will change in 2022. The Federal Reserve is aggressively tapering to fight inflation, many stocks are still near all-time-high valuations, the stay-at-home stocks are tumbling, cryptocurrency volatility is leaking into equity markets, and the ongoing pandemic is still creating uncertainty for public health and the global economy.

As we try to make sense of all these factors, here are the important trends that should drive the stock market in January.

Image source: Getty Images.

1. Value stocks will keep up the momentum

As this chart shows, value stocks generated better returns than growth stocks in December, and it seems that the Fed's latest announcement played a big role in that.

VTV and VUG data by YCharts

Last month, the Fed announced its plans to accelerate its timeline for interest rate hikes. Low rates are considered expansionary. They encourage investors to take risk, which tends to move capital into the stock market, disproportionately toward growth stocks. In the past, we've seen monetary tightening cause “taper tantrums” — higher interest rates cause capital to flow out of the stock market. This drives prices lower, with growth stocks being hit the hardest.

Eventual rate hikes were inevitable, but we had no idea if they were going to come this year, next year, or sometime even later. Persistent high inflation forced the Fed into a shortened timeline, so the stock market will lose monetary support more quickly than most investors expected. This should have an impact in the short term, and it's probably going to cause volatility.

Investors aren't giving up on the stock market, but it looks like they're preparing for rough conditions. Growth stocks will struggle to find momentum while rates climb, a process that could take multiple years. Investors are likely to favor cheaper, more stable investments in the form of value stocks.

2. Dividend yields will drop — for now

I expect dividend yields to rise eventually as interest rates tick upward. Before that happens, the move into value stocks should drive up prices of stable dividend payers. There's nothing changing about their profits or payouts, so that should translate to lower yields.

This is already happening. As this chart shows, dividend stocks outpaced the market in general.

VOO and VYM Total Return Level data by YCharts.

This drove dividend yields lower to close out the year.

SPY and VYM Dividend Yield data by YCharts.

This trend is relevant to any investor who's relying on yields in the short term. If you're thinking about adjusting to a more defensive allocation, this will reduce your short-term returns. If you're a retiree who is actively allocating to dividend stocks, this will cause lower investment income.

I expect dividend yield to eventually rise along with interest rates, but I don't think that will happen in January.

3. Retail sales results will be mixed

Consumers drive the American economy, so retail sales and consumer sentiment are always under heavy scrutiny. The holiday period is crucial for quantifying the state of consumers, but the data through mid-December was mixed.

The University of Michigan Consumer Sentiment metric dipped in November, but the Conference Board Consumer Confidence survey indicated a moderate improvement over the previous month.

Early holiday sales painted a messy, uninspiring picture. In-store sales improved dramatically on Black Friday, but digital sales dropped from the prior year. Supply-chain issues and labor shortages complicated the situation, so promotional activity and discounted prices were less common. Analysts expect that to spread holiday spending across more days, shifting some activity away from Black Friday and Cyber Week.

The Census Bureau will publish holiday season retail sales data in January, and the whole picture will probably remain complicated. None of the challenges have really cleared up. Inflation is still high for now, and supply chains are still disrupted. Shoppers are returning to stores, but the pandemic accelerated an existing migration to online channels. It's hard to tell how much has been changed permanently and how much is just a temporary disruption.

Ultimately, it seems unlikely that we'll have blowout holiday season retail figures that indicate strong economic recovery. It's going to take years for things to normalize after the COVID-19 pandemic changed the world. Don't expect the market to get a massive, sustainable boost from great retail numbers.

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