Last week, there was a strong rebound in US stocks after a turbulent start to the month. Historical data suggests that if these gains can be sustained, it could bode well for the remainder of the year.
The major Wall Street indexes began the year by breaking a nine-week streak of gains driven by growing optimism that the Federal Reserve would successfully navigate a soft landing, curbing inflation without causing widespread unemployment.
However, last week saw all three major indexes turn positive for the year, with technology stocks leading the broader market higher. Both the benchmark S&P 500 and the Dow Jones Industrial Average achieved record high closes on Friday and are up 1.2% and 1.1% respectively for the month. The Nasdaq Composite has also risen by 1.7%.
One seasonal indicator that points to a positive outlook for the rally’s continuation is the January barometer, introduced in the Stock Trader’s Almanac. It suggests that the performance of stocks in January is indicative of their year-end performance.
On the other hand, the First Five Days of January indicator suggests that the market’s performance during the initial five trading days of January predicts the entire year’s performance. This narrower scope could raise concerns for investors.
The S&P 500 declined by 0.1% during the first five trading days of 2024. Historical data from LPL Financial shows that when the benchmark has fallen during this period, it has returned an average of 0.3% for the year and logged an annual gain about 54% of the time since 1950. In contrast, when the index has gained during the first five trading sessions, it has logged an average annual gain of 14.2% and risen for the year approximately 83% of the time.
With these two January market indicators conflicting, should investors give them much attention?
Before the Bell interviewed Anna Rathbun, Chief Investment Officer at CBIZ Investment Advisory Services, to discuss these matters.
Before the Bell: What caused the rocky start for stocks this month?
Anna Rathbun: Part of this was a natural correction following a strong December, where we saw gains in both stocks and bonds. The last week of December typically has lower trading volume due to the holiday season, and when January begins with excessive excitement or optimism, it can lead to some selling. So, the initial turbulence was not unexpected.
Do you still see optimism about a soft landing in the market?
As we enter 2024, there is growing skepticism regarding the soft landing narrative, and I believe it’s warranted. It was premature in 2023 to declare victory for the hiking cycle because the rate hikes have not yet fully impacted the broader economy. We are in a wait-and-see phase, and there’s increasing doubt in this scenario.
It doesn’t make sense for the Fed to cut rates significantly if the economy is robust and a soft landing is achieved. Perhaps they would normalize rates, but a scenario where the Fed cuts rates six times in 2024 suggests underlying economic challenges. This implies that the economy needs such stimulus to avoid a harsh landing.
So, these two narratives don’t align in my view, and it appears we are realizing that a soft landing may not be certain. The markets still anticipate a dovish Fed, which seems more in line with the current situation compared to last year.
Regarding seasonal technical indicators, do you have concerns about the rest of the year?
If I have concerns about the rest of the year, it’s not solely due to these seasonal indicators. While they may sometimes appear to predict future performance, it could also be coincidental. What makes me cautious for the remainder of the year is more related to what is already priced into the markets compared to potential developments.
If we encounter surprises in inflation or unemployment, especially given the strong job market data throughout 2023, there’s room for negative surprises that could disrupt the markets.
Are there other key factors on your radar that could influence the markets this year?
I’m closely monitoring the risks embedded in both the economic system and the corporate profit landscape. Many companies have reported increased expenses, which could potentially lead to continued margin pressure. While inflation is moderating, the persistence of rising expenses could be a surprise factor that affects the market throughout the year, potentially exerting downward pressure on prices.

Americans are feeling much better about the economy

According to Bryan Mena, there has been a significant improvement in Americans’ economic outlook due to a slowdown in inflation. The latest consumer survey from the University of Michigan reveals a substantial increase in sentiment this month, surging by 13% compared to December. This preliminary reading, released on Friday, indicates the highest level of sentiment since July 2021.
Joanne Hsu, the director of consumer surveys at the university, stated that this boost in consumer confidence is attributed to the belief that inflation has taken a positive turn, along with growing expectations of higher incomes. Over the past two months, sentiment has witnessed a cumulative increase of 29%, marking the most substantial two-month rise since 1991, coinciding with the end of a recession.
The year 2023 saw a notable reduction in inflation without a significant spike in unemployment, which has contributed to an improved mood among US consumers in recent months. The question that remains is whether inflation can reach the Federal Reserve’s 2% target without the need for sustained higher interest rates or the risk of significant job losses.
For now, Americans are celebrating the encouraging progress on the inflation front.

Home sales last year dropped to the lowest level

In 2023, the residential real estate market experienced a significant decline, primarily due to the persistent rise in interest rates, which led to a gradual slowdown in sales activity. Nevertheless, there was a remarkable development in the form of record-high home prices, as reported by my colleague Anna Bahney.
Data from the National Association of Realtors, released on Friday, revealed that the median home sale price in 2023 reached an unprecedented $389,800. This marked a modest increase of approximately 1% compared to 2022.
This news was undoubtedly welcomed by the 85 million households that own homes, as it translated into further growth in their housing wealth, as noted by Lawrence Yun, the chief economist at NAR. However, for prospective new homebuyers, the market proved to be exceedingly challenging. They found themselves priced out by the continually rising home prices and had to contend with surging mortgage rates, resulting in the least affordable market in decades for much of the year.
As a consequence of these high prices and the limited availability of homes on the market, home sales plummeted to their lowest levels since 1995. In total, 4.09 million homes were sold in 2023, marking a substantial 19% decline from the previous year. This decline followed an 18% drop in home sales from 2021 to 2022.