Contrary to widespread analyst predictions, 2023 unfolded as a prosperous year for U.S. stock markets. The S&P 500 Index ($SPX) saw a nearly 24% rise, approaching its all-time highs. Bolstered by an impressive tech rally in the first half of 2023, the Nasdaq-100 Index ($IUXX) surged by 53%, reaching an all-time high.
As we step into 2024, let’s examine what lies ahead for stocks following last year’s remarkable gains.
The “January Effect”
Similar to various other monthly seasonal trends in the stock market, we encounter the “January effect.” This hypothesis suggests that after tax-loss harvesting in December, investors tend to repurchase positions in the first month of the new year.
Recent months have witnessed monthly seasonality trends unfolding nearly flawlessly. September maintained its reputation as the worst month for stocks, while November emerged as the best month of the year, with both the Dow Jones Industrial Average ($DOWI) and S&P 500 rising by almost 9% each.
Between these significant moves, October proved to be volatile, as historical trends suggest, with the S&P 500 officially entering correction territory by falling over 10% from its 2023 highs. Those anticipating a “Santa Claus” rally in December were rewarded as the S&P 500 added another 4.4% during the month.
Is January a Favorable Month for Stocks?
According to data compiled by LPL Financial, the S&P 500 has, on average, risen 1% in January since 1950. Their analysis reveals the following:
When stocks rise over 10% between November and December, as seen in 2023, January tends to be robust, with average returns of 2.3%.
If January follows only a strong December (without a strong November), stocks typically rise around 1%, on average, during the month.
In summary, January usually bodes well for stocks, particularly when markets enter the new year on the back of strong gains in both November and December. However, the question remains: Will January 2024 follow historical patterns as neatly as monthly seasonal stock trends since September 2023?
Key Factors to Watch This Month
Positive Underlying Momentum in U.S. Stocks
Following robust gains in the preceding two months, the underlying momentum in U.S. stocks appears positive. The upcoming Q4 earnings season, starting mid-month, will provide insights, especially regarding the consumer spending environment during the holiday season.
Although Black Friday and Cyber Monday sales reached record highs, some economists expressed caution about the year-end shopping frenzy. Additionally, companies reporting earnings may shed light on how the resumption of student loan repayments has impacted their revenues, influencing industries such as student loan refinancing and affecting companies like Nike.
The January Fed Meeting
Scheduled for Jan. 30-31, the Fed’s next meeting is anticipated to maintain the status quo, with expectations of an unchanged benchmark lending rate. Attention will be on Fed Chair Jerome Powell’s commentary regarding the rate cut outlook for 2024, following the December dot plot, which suggested 75 basis points’ worth of rate cuts in 2024.
Market Valuations and Forward PE
After last year’s double-digit returns, U.S. stock valuations have expanded, with the 12-month forward PE standing at 21.78, up from 18.59x a year ago. While lower-than-average valuation multiples supported the rally in U.S. stocks last year, the current scenario, entering 2024 on the back of stellar returns, leaves little room for the kind of returns seen in January 2023.
Corporate Earnings
Corporate earnings will play a pivotal role this month. If Corporate America impresses markets with its Q4 financial performance and provides a positive outlook for 2024, U.S. stocks could continue their upward momentum into January.
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