January Gains a Predictor of Bullish 2024?

The major US stock indices finished January in positive territory, prompting traders to consider whether this portends further gains over the remainder of the year.

Historical Precedent Points to a Good Year

The S&P 500 set five consecutive record highs towards the end of January, with the Nasdaq also advancing, although it has a long way to go. Moreover, the DJIA matched the technology-led rises to reach new peaks. In some cases, earnings announcements did not undermine the indices and appeared supportive, signified by the strong post-earnings returns for Nvidia and Meta.

Investors have looked to the adage that "as goes January, so goes the year" in hopes of guidance, underpinning the "January Barometer" concept coined by Yale Hirsch. Looking back 150 years, it shows that the S&P 500 has achieved positive returns approximately 89% of the time after a positive January, averaging 16.8% for the full year. However, some factors merit consideration, such as over 80% of returns so far in 2024 coming from just three companies: Microsoft, Nvidia and Meta. Additionally, some analysts note the January effect has recently lost some of its predictive power, with most years proving positive regardless. One possible explanation for this phenomenon is the prolonged period of low interest rates, which may have insulated the markets over the past fifteen years. But, the situation could change due to the Fed's commitment to higher rates.

Market Corrected Following Hawkish Signals

The market saw a pullback following the Fed's adoption of a more hawkish stance during its first 2024 meeting. However, a recovery was seen the following day, followed by another downturn caused by unexpected non-farm payroll (NFP) data. Despite the temporary setbacks, positive indicators are pointing towards potential market momentum in the long run. For instance, election years often see stronger growth during the summer months, accompanied by increased certainty after November. Additionally, the Fed has expressed its willingness to cut interest rates this year, although not to the extent initially expected by the markets.

Historically, February has been known as a relatively weak month for markets. However, when January has yielded gains, around three-quarters of the years have seen further bumps during the second month. Notably, positive trends in February have typically been sustained throughout the remainder of the year. Despite the encouraging pattern, analysts remain sceptical due to the lack of breadth across various market sectors. Corporate earnings reported so far have been disappointingly average, reflecting a decline of 1.4% and stretching valuations. Nevertheless, investors hold a more optimistic view, expecting earnings growth to pick up later in the year. This aligns with the notion that January's market activity may indicate the general direction for the rest of the year.

S&P 500 Accelerates Closer to 5K

The S&P 500 index has entered a price discovery phase, making round levels more significant. Having formed a  "rising flag" around the 4,100 level, the "measured move" suggests the index may progress towards 5,120 in the coming sessions. The recent sharp upward movement indicates the potential for the underlying trend to stay accelerated beyond the trend's slope; however, in the short term, it remains uncertain if momentum can be sustained given the proximity to the 5,000 mark. Should prices retreat back within the base trend, breakdowns below 4,800 and 4,660 could expose the index to retesting 4,600.

Source: SpreadX / SPX 500

Key Takeaways

The major US stock indices finished January 2024 on a high note, suggesting that gains may continue for the rest of the year. However, there are some factors of uncertainty, such as disappointing earnings announcements and over 80% of returns so far coming from just three companies. Positive signs, like typically stronger summer growth in election years and the Fed's willingness to cut rates if needed, still exist. Although historically February sees further growth sustaining the remainder of the year if January is up, sector breadth is lacking and earnings are average. So, investors remain optimistic about growth picking up later in the year, aligning with January's performance.