Contrary to the expectations of most analysts, 2023 turned out to be a good year for US stock markets. The S&P 500 Index ($SPX) rose nearly 24% last year, and is now very close to its all-time highs. Thanks to the stellar tech rally in the first half of 2023, the Nasdaq 100 Index ($IUXX) surged 53% last year, rising to an all-time high.
So, as we enter 2024, let’s analyze what’s ahead for stocks after impressive gains last year.
The “January Effect”
Like many other monthly seasonal trends in the stock market, we have a “January effect” – a hypothesis that suggests that after the tax-loss harvest in December, investors tend to buy back positions in the first month of a new year.
Over the past few months, monthly seasonal trends have developed to near textbook perfection. For example, September held its reputation as the worst month for stocks, while November turned out to be the best month of the year, with the Dow Jones Industrial Average ($DOWI) and S&P 500 up nearly 9% each for the year. month
Between those two big directional moves, October was pretty volatile — as it has been historically — and the S&P 500 officially entered correction territory for the month, having fallen more than 10% from its 2023 highs. Similarly, those hoping for a “Santa” rally in December were rewarded as the S&P 500 added another 4.4% on the month.
Is January a Good Month for Stocks?
According to data compiled by LPL Financial, the S&P 500 rose 1% in January, on average, since 1950. The firm’s number crunching further shows the following:
- When stocks rise above 10% between November and December – as was the case in 2023 – January tends to be quite strong, with average returns of 2.3%.
- If January is preceded only by a strong December (and not November), stocks are up about 1%, on average, for the month.
In short, January is usually a good month for stocks, especially if markets enter the new year on the heels of strong gains in November and December. But will history repeat itself in January 2024, with the seasonal anomaly as neatly as other monthly seasonal stock trends have done since September 2023?
Let’s look at the key factors that could move stocks this month.
Bottom Momentum in US Stocks Looks Positive
The underlying momentum in US stocks looks positive after strong gains in the previous two months. We will enter the Q4 earnings season in the middle of the month, and during the conference calls will look for companies to address the consumer spending environment during the holiday season.
Notably, while Black Friday and Cyber Monday sales hit record highs — in part due to the growing adoption of buy-now-pay-later that helped drive a huge rally in Affirm ( AFRM ) shares — some economists were cautious about the year- end a shopping extravaganza.
Also, companies this earnings season could provide color on how the resumption of student loans has affected their earnings. While the development should be positive for student loan refinancing companies like SoFi ( SOFI ), it could negatively impact sales of others, such as sneaker giant Nike ( NKE ), which already lowered its sales guidance last month.
Watch out for the January Fed Meeting
The Fed’s next meeting will be held on January 30-31. Markets largely expect the US central bank to once again maintain the status quo, with consensus forecasts calling for the benchmark lending rate to remain unchanged. That said, it will be important to watch Fed Chairman Jerome Powell’s comments on the outlook for rate cuts for 2024, after the December dot plot called for 75 basis points worth of rate cuts in 2024.
Meanwhile, after the double-digit returns last year, US equity valuations have expanded, and the 12-month forward PE stands at 21.78, up from 18.59x a year ago. Lower-than-average valuation multiples helped support a rally in US stocks last year, but now markets enter 2024 on the back of a stellar performance in the previous year, which mostly came from PE expansion – leaving little room for the kind of return (over 6% ), which the S&P 500 delivered in January 2023.
That said, the stick will mainly lie with corporate earnings this month. If Corporate America can impress markets with its Q4 financial performance and provide reassuring commentary on its 2024 outlook, US stocks could continue their positive momentum into January as well.
At the date of publication, Mohit Oberoi held positions in: NKE , AFRM , SOFI . All information and data in this article is for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.