The U.S. stock market is doing exactly what investors hoped it would to start the new year.
As the month drew to a close, the stock market finished the first month of 2023 with healthy gains despite widespread concern that the economy might be on the brink of a recession.
The stock market hit the “January Indicator Trifecta,” which means all three seasonal indicators — the Santa Claus rally, the First Five Days Early Warning System and the January Barometer — logged S&P 500 gains after the closing bell on Tuesday.
The Santa Claus rally, the First Five Days Early Warning System and the January Barometer are three seasonal indicators recorded by Yale Hirsch in his Stock Trader’s Almanac in 1972. They constitute a trifecta of seasonal indicators in January and can predict the market’s direction for the rest of the year.
MarketWatch reported earlier this month that the S&P 500 gained 0.8% during the most recent Santa rally period which includes the final five trading days of December and the first two of January. The index was also higher in the first five trading days of the month, which theoretically points to continued bullishness for the remainder of 2023. The “January Barometer” or “as goes January, so goes the year”, means if the S&P 500 rises between Jan. 1 and Jan. 31, this may foretell positive returns for the next 11 months.
The large-cap index rose 6.2% so far this year, booking its best January since 2019, according to Dow Jones Market Data.
“The trifecta accomplished this month has historically led to some very strong returns,” wrote Adam Turnquist, chief technical strategist, and Jeffrey Buchbinder, chief equity strategist of LPL Financial, in a Monday note. “The S&P 500 has on average added 12.3% to a 4.6% January gain between February and December, bringing the average gain for these years to over 17%.”
Moreover, according to the Stock Trader’s Almanac, the bullish trifecta is even better when the previous year saw stocks in the red. The S&P 500 closed out a particularly painful 2022 for Wall Street with an approximately 20% decline, its worst annual showing since the financial crisis in 2008. That’s why a full-month January gain is all that remains to satisfy the even more bullish trifecta.
However, analysts have questioned whether the first month of the year could set the tone for how Wall Street will perform throughout 2023, as the Federal Reserve’s determination to lift interest rates further and a potential economic downturn remain headwinds for stocks.
The 20% slump for the S&P 500 in 2022 means that the January rally will not get the market back to the 2022 high set on January 3. And while the seasonality message is clear, the market still needs catalysts to climb higher. “[We] believe the end of the Fed’s monetary policy tightening will be a key driver for stocks this year,” said Turnquist and Buchbinder.
The Federal Reserve is expected to raise its benchmark interest rate by a smaller one-quarter of percentage point at the conclusion of a two-day gathering Wednesday. Traders are also anticipating one more quarter-point hike in March, followed by a pause and then one or two cuts before the end of the year, according to CME FedWatch Tool. However, Fed policy makers, as of December at least, all see no rate cuts until 2024.
“The Fed has been in a quiet period last week which allowed a great week for the bulls. But they will raise rates 25 bps this week, and stock performance will depend on how hard Powell pushes back on the stock market easing,” said Rhys Williams, chief strategist at Spouting Rock Asset Management.
“If he pushes back hard on this January rally, and continues with the theme that Fed is not close to done, the low growth soft-landing camp will drift back toward recession, and the big January bounce will give back some of its gains.”
U.S. stocks finished higher on Tuesday to close out January with strong gains. The Dow Jones Industrial Average jumped 2.8% for the month, while the Nasdaq Composite advanced 10.7%, posting its best January performance since it notched a 12.2% gain in 2001, according to Dow Jones Market Data.