The US stock market is doing precisely what investors expected it to do to begin the new year.
The stock market concluded the first month of 2023 with substantial gains, despite widespread concern that the economy was on the verge of a recession.
The stock market achieved the “January Indicator Trifecta” which indicates that all three seasonal indicators — the Santa Claus rally, the First Five Days Early Warning System, and the January Barometer — posted advances in the S&P 500, after the close on Tuesday.
Yale Hirsch noted three seasonal indications in his Stock Trader’s Almanac in 1972: the Santa Claus rally, the First Five Days Early Warning System, and the January Barometer. In January, they form a trifecta of seasonal indications that can forecast the market’s trajectory for the remainder of the year.
According to reports, the S&P 500 gained 0.8% during the most recent Santa rally, which included 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, implying that the bullish trend will continue for the rest of 2023.
According to the “January Barometer,” or “as goes January, so goes the year,” if the S&P 500 increases between January 1 and January 31, it may predict favorable returns for the next 11 months.
According to Dow Jones Market Data, the Large-Cap Index has Gained 6.2% This Year, Making it the Best January Since 2019.
“The trifecta achieved this month has historically resulted in some very significant returns,” noted LPL Financial’s Adam Turnquist, chief technical strategist, and Jeffrey Buchbinder, chief equities strategist, in a Monday note.
“The S&P 500 has added 12.3% on average, to a 4.6% January gain, between February and December, increasing the average gain for these years to more than 17%.“
Furthermore, the bullish trifecta is much greater when compared to the prior year, according to the Stock Trader’s Almanac. The S&P 500 ended a particularly unpleasant 2022 for Wall Street with a 20% drop, its worst annual performance since the 2008 financial crisis. As a result, a full-month January rise is all that is required to complete the even more bullish trifecta.
Analysts have questioned if the first month of the year will set the tone for how Wall Street will perform throughout 2023, given the Federal Reserve’s determination to raise interest rates further and the risk of an economic downturn.
The S&P 500’s 20% drop in 2022 suggests that the January bounce will not return the market to its January 3 high. Even while the seasonality message is obvious, the market still requires triggers to move higher. “[We] expect the Fed’s monetary policy tightening will be a key driver for stocks this year,” Turnquist and Buchbinder said.
Fed Expected to Lessen the Pace of Rate Increase
The Federal Reserve is expected to raise its benchmark interest rate by a quarter-point at the end of a two-day meeting on Wednesday. According to the CME FedWatch Tool, traders expect one more quarter-point hike in March, followed by a pause and one or two cuts before the end of the year. However, as of December, all Fed policymakers expected no rate decreases until 2024.
“The Fed was quiet last week, which allowed the bulls to have a terrific week. However, interest rates will be raised by 25 basis points this week, and stock performance will be determined by how strongly Powell pushes back on stock market easing,” said Rhys Williams, chief strategist at Spouting Rock Asset Management.
“If he pushes back hard on this January rise and sticks to the idea that the Fed isn’t close to being done, the low growth soft-landing camp will drift back into recession, and the large January rebound will give back some of its gains.“
US equities finished higher on Tuesday, capping off a good January. According to Dow Jones Market Data, the Dow Jones Industrial Average gained 2.8% for the month, while the Nasdaq Composite gained 10.7%, it’s highest January performance since it gained 12.2% in 2001.
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