Let’s review the years in which January failed to carry through from the “Santa Rally.”
The first two examples, 2001 and 2002, were in the midst of the “Dot.Com” crash, so that we can write those off to a bear market. The same goes for 2009.
However, 2010 is a bit different as the economy had started a recovery, earnings growth was strong, and the Federal Reserve was amid QE-1. Yet, January had a -3.7% rate of return following the “Santa Rally.” Other than the “Haiti Tsunami,” there was no other major event causing stocks to decline except “exhaustion” after a 10-month uninterrupted advance.
In 2013, January also posted a negative return. The concern of the “fiscal cliff,” as the comprise to lift the “debt ceiling,” required a bipartisan group of Congressman to find $1 Trillion in budget cuts. Their failure to find cuts triggered an automatic set of cuts across agencies. Fed Chairman Ben Bernanke launched QE3 a month before to offset the impact of the “fiscal cliff.” However, given the cuts never materialized, the Fed’s flood of liquidity caused a surge in stocks over the rest of the year.
The beginning of 2020 also posted a negative January return following an incredible rally in 2019. More like 2013, the market’s extension was extreme with a near-record number of stocks above their 200-dma. The market needed to correct before continuing its advance to all-time highs in February.
January 2021 has a lot of similarities to both 2013 and 2019. With the Federal Reserve continuing QE and a near-record number of stocks above their 200-dma, and an extreme bullish bias, the risk of a correction exists. A government shutdown, stalled stimulus bill, or a surge in virus cases could do the trick.