January’s stock market turnaround could be a good omen for the year

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New York (CNN) — US stocks rallied powerfully last week after a topsy-turvy start to the month. History indicates that if the market can cling to those gains, that could bode well for the rest of the year.

The major Wall Street indexes started the year by breaking a nine-week streak of gains that was powered by rising optimism the Federal Reserve will nail a soft landing, or bring down inflation without triggering mass unemployment.

But last week, all three major indexes turned positive for the year as tech stocks led the broader market higher. The benchmark S&P 500 and the Dow Jones Industrial Average indexes, which both notched record high closes on Friday, are up 1.2% and 1.1% this month, respectively. The Nasdaq Composite has added 1.7%.

One seasonal indicator suggest that’s a positive sign for the rally’s longevity. The January barometer, introduced in the Stock Trader’s Almanac, states that however stocks perform during January, their year-end performance will follow suit.

But a separate trend, the First Five Days of January indicator, suggests that the market’s performance during just the first five trading days of January is prophetic for the whole year. Narrowing the scope as such suggests investors could have reason to worry.

The S&P 500 fell 0.1% during the first five trading days of 2024. 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, according to LPL Financial.

In contrast, when the index has gained during the first five trading sessions, it has logged a 14.2% annual gain on average and risen for the year about 83% of the time.

With these two January market indicators at odds — at least, so far this month — should investors pay attention to them at all?

Before the Bell spoke with Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, to discuss.

This interview has been edited for length and clarity.

Before the Bell: What was behind this month’s bumpy beginning for stocks?

Anna Rathbun: Part of this [was] regaining some sobriety from a really great December where everything seemed to go up, stocks and bonds included. It’s hard to trust the trading in the last week of December because the volume isn’t very high, but then people come back from vacation in January and sometimes when too much excitement or too much optimism has built in, you do see some selling. So, we’re not surprised by this.

Do you still see soft-landing optimism in the market?

As we begin 2024, I’m hearing the soft landing narrative be questioned. And I think we’re right to question it. I think it was way too early in 2023 to call any kind of victory to the hiking cycle because frankly, the rate hikes haven’t really made their way through the mainstream economy. So this is still a wait-and-see. And there’s a lot more skepticism coming out right now.

It sort of doesn’t make sense that the Fed would cut rates as drastically if the economy were super strong, if we achieve a soft landing. Maybe they would normalize rates, but to me, a scenario where the Fed would cut six times in 2024 means that we’re in trouble. It means that the economy needs that kind of stimulus in order to maybe not have a hard landing.

So, the two narratives just didn’t jive in my mind. And now, I think we’re sort of coming to a realization that maybe we need to have our story straight, which is that we may not be in a soft landing scenario. It is to be seen, and the markets are still pricing in a pretty dovish Fed. And to me, that is more in alignment than what we saw last year.

Considering seasonal technical indicators, are you concerned about what the rest of the year will be like?

If I’m concerned about the rest of the year, it’s not because of [seasonal indicators]. Sometimes, it looks like it foretells what may happen in the rest of the year, but it may also very much be a coincidence. What would make me a little bit cautious for the rest of the year would more be on the lines of, what is already priced in the markets versus what could potentially happen.

If we have an inflation surprise or an unemployment surprise, strong jobs market data, as we’ve had all 2023, at least in the headline component of it, there’s a lot of room for negative surprises that could actually rock the markets.

Are there other top-of-mind factors that could impact markets this year?

What I’m looking at is, what are the risks that have been built into the system? And by system, I mean both the economy and the economy that feeds corporate profits. So far, what we’re hearing from a lot of companies that have reported [earnings] is increased expenses. So, is there going to be a continued margin pressure? I mean, we’ve talked about how inflation is coming down, and yet we’re hearing about increased expenses.

So, the question is, is there a discrepancy? Are we missing something? Is that going to be a surprise that we don’t expect throughout the year? If that remains, then you’re going to have margin pressure and there’s going to be price pressure.

Americans’ attitudes on the economy are improving substantially as inflation slows, reports my colleague Bryan Mena.

The University of Michigan’s latest consumer survey showed that sentiment improved greatly this month, soaring 13% from December, according to a preliminary reading released Friday. Sentiment reached its highest level since July 2021.

“Consumer views were supported by confidence that inflation has turned a corner and strengthening income expectations,” Joanne Hsu, the university’s surveys of consumers director, said in a release. “Over the last two months, sentiment has climbed a cumulative 29%, the largest two-month increase since 1991 as a recession ended.”

Inflation eased markedly throughout 2023 without a sharp rise in unemployment, which has helped perk up moods among US consumers in recent months. It remains to be seen whether inflation could drift all the way to the Federal Reserve’s 2% target without interest rates staying higher for longer or triggering massive job losses.

But for now, Americans are rejoicing in the steady progress on the inflation front.