January Barometer positive
Stocks strong start portends a volatile but positive year.
Bottom Line
Equity investors shrugged off a choppy start to 2024 that included negative readings for the S&P 500 in the Santa Claus Rally indicator (down 0.88%) and the Early January Barometer indicator (down 0.13%), to post a solid 1.6% price-only gain for the full month of January.
The rally would have been twice as strong (up 3.3%) if January had ended a day earlier. But Jan. 31 was decision day for the Federal Reserve’s first policy-setting meeting of the year. While the central bank’s decision to hold interest rates unchanged was widely anticipated, the fireworks started when Chair Jerome Powell took to the podium for his post-meeting press conference. He explained that the committee was unlikely to begin cutting interest rates at the next Federal Open Market Committee (FOMC) meeting on March 20, which was the consensus view last week. His remark took place around 3 p.m.; the S&P plummeted over the next 60 minutes, closing the day down 1.6%. Stocks have since recovered, with the index rebounding by around 3.0% to 4,994 today.
In our view, the market was overly optimistic in its consensus view the Fed would cut interest rates six times this year, with the first coming in March. Economic growth has been relatively solid, the labor market remains robust, consumer spending is slowing but remains positive, and core PCE inflation—while grinding lower—is not at the Fed’s 2% target. In sharp contrast, we at Federated Hermes continue to believe officials will cut interest rates only three times this year, starting over the summer months.
January Barometer positive in 2024 According to the January Barometer, one of the stock market’s most popular and widely followed rules of thumb, as the month of January goes, so goes the full year. Since 1950, Jeffrey and Yale Hirsch at the Stock Trader’s Almanac report that the performance of the S&P 500 in the month of January—positive or negative—is an accurate directional signal for the full-year performance of the stock market 73% of the time (in 54 out of 74 observations). But when January is a positive month, as it is this year, the odds of a positive full year rise to more than 89% (39 out of 44 instances).
Powerful start to the year The S&P's solid 1.6% price-only gain in January places it in the top half of the historical performance distribution for this month. In the 40 instances in that period in which it was positive (ranging from 0.2% to 13.2%), the index finished the full year in positive territory 90% of the time (36 out of 40 instances), with an average full-year return of 18.1%. Looking at a narrower distribution centered around the S&P’s 1.6% price-only return during January 2024, in which the index rose within a range of 0.2% to 1.8% over the past 74 years, the index finished the full year in positive territory 92% of the time (11 out of 12 instances), with an average full-year return for the S&P 500 of 12.6%.
Presidential election year Although we’re expecting a contentious election this year—with the potential for volatile stock market performance—history suggests election years have been favorable for the S&P, with an average return of 7.3%. In the 18 presidential elections since 1950, it has ended the year in the same direction in which it started—positive or negative—in every instance (12 out of 12 observations). When January is a positive month in a presidential election year (as it was this year), the odds of a positive full year was nine for nine, with an average return of 15.6%.
Fundamentals still matter Despite this rosy history, we’re expecting a relatively moderate performance this year. After last year’s powerful 24.2% price-only appreciation (26.3% on a total-return basis) for the S&P, our target this year is for a more muted 8-9% price-only gain to 5,200.
We continue to believe that the cumulative weight of the Federal Reserve’s monetary policy tightening efforts over the past two years will begin to slow economic growth over the course of 2024 into a possible soft landing, rather than an outright recession.
We’re expecting a barbell-shaped year, and the first quarter has started strong. We envision increased volatility during the summer and fall months, as the Fed begins to cut interest rates in response to a slowing economy and due to the uncertainty surrounding the presidential election. Finally, we’re expecting a powerful post-election, sigh-of-relief rally to end the year on a high note.
Rally should broaden Last year’s 24% rally in the S&P was largely driven by the performance of the Magnificent Seven technology stocks, which surged nearly 76%. How did the other 493 stocks perform? They rose a more pedestrian 12%. So, we’re expecting a reversion to the mean in 2024, in which the froth from the Mag 7 is spread among those sectors that were largely left for dead last year. That includes domestic small-cap growth stocks, domestic large-cap value, and international, with an emphasis on both developed and emerging markets.
However, during January 2024, while the S&P rose 1.6%, the Mag 7 stocks collectively surged by 2.5% on a total-return basis, while the other 493 stocks lagged with a 1.3% total return. So, we’re not there quite yet.
The potential best sectors to own in 2024 The January Barometer Portfolio indicator also holds that the best- and worst-performing S&P sectors in January tend to follow that performance trend the rest of the year (sorted below by total-return performance from Dec. 29, 2023 through Jan. 31, 2024).
- Communication Services: 5.02%
- Information Technology: 3.95%
- Financials: 3.04%
- Health Care: 3.01%
- S&P 500: 1.68%
- Consumer Staples: 1.54%
- Energy: -0.38%
- Industrials: -0.88%
- Utilities: -3.01%
- Consumer Discretionary: -3.53%
- Materials: -3.91%
- REITs: -4.74%
Results a mixed bag The top two categories (Communication Services and Information Tech) clearly indicate the continuation of the risk-on mentality embedded in the Mag 7 stocks. But the next two (Financials and Health Care) are among our favorite large-cap domestic value names, which dramatically underperformed last year.