There’s an old saying in the investment world that goes: As goes January, so goes the rest of the year. The basic meaning is the rest of the year typically will follow suit to January’s performance. So, if January is positive for the market, the rest of the year has a better chance to be positive as well. That’s definitely good news for weary investors. Do you want more good news?
As of the end of January, we hit the seasonality trifecta. This happens when we experience a positive Santa Claus Rally, a positive first five days of January, and a positive return for the month of January. On average, years with a positive trifecta have experienced a 17.4% return, according to LPL Financial. This phenomenon has occurred 31 times since 1950, and only 2 of those times did the S&P 500 ended the year negative. Furthermore, even in years that included recessions, of which there were four, the S&P 500 returned an average of 34.8%. One last piece of data: year 3 of the 4-year presidential cycle is typically the strongest for market returns; especially the first half of the year.
So, what does all of this data mean? While the data I just listed is all positive, it’s just data; it’s not a prediction of the future and doesn’t mean that we can let our guard down. However, the strong performance in January does tell us that the breadth of the market has changed to be more positive than it was in 2022.
There are definitely reasons to be hopeful for a better year than last year. Business valuations have come down, fixed income interest rates have come up, the Federal Reserve should be almost done increasing interest rates, inflation has been normalizing, and the labor market is still very strong. Nevertheless, there are significant headwinds in front of us that will keep us grounded in our investment strategy.
The Federal Reserve just wrapped up their latest FOMC meeting on February 1st, where they raised interest rates by 0.25% to a range of 4.5% to 4.75%. During the press conference that followed, Fed chairman, Jerome Powell, emphasized the need to get the tight labor market under control; going as far as saying that inflation won’t normalize as long as labor markets are out of balance. The Job Openings Survey increased to 11.01 million job openings compared to last month’s 10.44 million. That’s going in the wrong direction. The Fed may want that number to come down toward the long-term average of 6.5 million job openings. Chairman Powell mentioned that survey by name, showing the emphasis he gives it.
Headwind #1: The statement released from the FOMC meeting, said the Fed will continue to raise rates, and that it doesn’t expect to cut rates this year. This is in stark contrast to what the market is pricing in, currently. If the market and the Fed are on different paths to what the Fed Funds rate will be at the end of the year, at some point either the Fed or the market will have to course correct. If the Fed is wrong, that’s good for markets. But, if the market is wrong, then it will have to reprice its valuation and give back some of this year’s gains.
Headwind #2: China has reopened. I mean full-blown reopened, and they are ready to party and travel. After an initial surge in COVID cases after, it looks like they may have hit their peak. As a matter of fact, their domestic air travel is already back to 2019 levels. All that demand for services like air travel and moving about their country is going to increase demand for oil and fuel, which may push up the price of crude oil and transportation fuels. That will likely add to inflation concerns later this year.
Headwind #3: We’re about to hit the debt ceiling. While we’re not overly concerned about this one because congress will eventually get its stuff together and raise the debt ceiling, we must be prepared for the political theatre and the added volatility the circus act will bring the markets. Especially, the bond markets.
Headwind #4: There is still a war in Ukraine! Europe has been extremely lucky that they have had a mild winter, so the energy they stored in fall has been enough to keep them heated for the winter. However, Russia’s economy is really starting to suffer, and they have been spending billions on this military invasion of Ukraine. Russia’s window into some kind of victory is narrowing every day as Ukraine is receiving massive aid from its allies, while Russia’s funds are drying up. This may lead to heightened aggression from Putin and a possible adverse event, maybe one no one has thought of yet, which would affect the markets negatively.
Headwind #4: The economy may slow much more than economists expect and catch the market by surprise. In reality, if this happened the Federal Reserve would probably just move to cut rates quickly to reverse the effects of the recession, but the market volatility in the time it would take for the Fed to respond would be quite the whipsaw, and not pleasant.
These are just a few things that we are aware of. There’s always the chance of black swan events happening that we haven’t even imagined. The point of all this is to say, we believe we are in a much better investment environment than we were at the beginning of 2022, and we look forward to a better year ahead, but no matter how excited the market may get, there are real risks around the corner that we are very aware of and keep us grounded. We will maintain our disciplined approach with our eyes always peeled for what may come.
We hope to see you all at next week’s Finance on Tap!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.