The Stock Market “As Goes January, So Goes the Rest of the Year”

In my column on the stock market a year ago, I referenced the above long-quoted observation that I had come to know from my earliest days as a neophyte on Wall Street. That epigram, commonly called the “January Barometer,” refers to the year’s direction of the S&P500 stock index. The measure has been uncannily accurate, correctly forecasting nearly 90% of the time since 1950. It worked in spades last year, and with a strong stock market now behind us in January this year, one could anticipate that 2024 might well be another positive year for stock market returns.
 
Skeptics will rightly point out that the “Magnificent Seven”—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla—have accounted for much of the performance of the S&P500 in both 2023 and so far in 2024, and that is true. However, it’s also true that the equi-weighted index of the S&P500 was up in both 2023 and again this year so far. For the full year of 2023, that equi-weighted index had a total return of nearly 12%.       

Numerous market prognosticators called for a recession in the U.S. during 2023, one that never materialized. Now many of them have simply pushed out their recession forecast to later this year. Their primary reason is based on the aggressive action by the Federal Reserve, over the course of 16 months from February 2022 to July 2023, during which it raised the interest rate on the Fed funds by 500 basis points, in response to the rapid increase in inflation commencing in March 2022.

Under ordinary circumstances, it would have been logical to anticipate a follow-on recession. Notably, the inverted yield curve—meaning higher short term interest rates than long term interest rates—can be a harbinger of recession. However, while most recessions follow a period of an inverted yield curve, not all inverted yield curves forecast a recession. The rising rate of inflation, which began to gather steam in mid-2021 and reached a 40-year high of 9.1% by June of 2022, has now retreated dramatically, averaging between 3% and 4% for the last half of 2023.  Throughout the recent period of increasing rates, the Federal Reserve was shrinking its balance sheet—by reducing its holdings of Treasury debt. This was in sharp contrast to the massive purchases it was making during the first phase of COVID 19.

From my point of view, and obviously barring some black swan type of event—which events nearly always come out of the blue—the time for recession in the U.S. has come and gone. Each economic cycle has its own “variations on a theme,” and 2023 was no different.

Most notable was the exceedingly low unemployment rate. Throughout the sixteen months of Federal Reserve rate hikes, unemployment never exceeded 3.8%. While there were layoffs within certain industries and companies, overall on a national basis, there was a steady demand for workers. As wages increased, so did the supply of workers—many of whom had chosen to exit the workforce during COVID. Even with the return of “early retirees” to the job market, the numbers were not sufficient to increase the rate of unemployment.

It’s true that unemployment tends to be a lagging, rather than a leading indicator of economic activity, so the current full employment enjoyed in the U. S. is not a guarantee that no recession is possible, but with inflation having declined so rapidly and with the Federal Reserve likely to make anywhere between one and three interest rate cuts over the next twelve months, the likelihood of a recession is fading.  

The swift and steady decline in inflation from its peak at 9% in June of 2022 to 3% just 12 months later was an indicator, to me at least, that the culprit for inflation was in large measure the COVID induced global supply chain disruptions. While some prices remain elevated, there is ample evidence of stable to even deflationary pricing in many non-perishable products.

Another factor that has been keeping the U.S. economy moving forward is the capital being spent for “onshoring”—the effort by U.S. companies to produce products in this country, rather than face the supply disruptions from overseas production facilities that came with COVID. In addition, there has been a sharp increase in spending on infrastructure by federal, state and local governments over the past year. That much needed capital infusion is unlikely to reverse any time soon.

Other favorable indicators that make a U.S. recession decreasingly likely in the near future include: (1) the continuation of strong job growth; (2) an easing in global supply chain issues; (3) the rise of hourly wages, most particularly for the lowest paid workers; (4) the stability in the price of oil. Wage growth is not inflationary if it does not exceed increases in labor productivity, and the most recent reports have been very favorable. Nonfarm labor productivity during the fourth quarter of 2023 was 3.2%.

All that being said, there are some pockets of distress in sectors of the economy. Most notable is real estate, both commercial and residential. In the commercial market, COVID cast a huge shadow over the value of office and retail space, as the restructuring of the workforce dynamics reduced the amount of office space needed. The follow-on significant rise in interest rates only exacerbated the problems facing that market.

In the residential real estate market, mortgage rates during 2023 reached a level that had not been seen in over twenty years, putting a serious damper on housing turnover. Potential buyers, many of whom were homeowners with low cost mortgages, were reluctant to sell and take on a more costly mortgage. New buyers were hit with sticker price shock, as the interest rate on mortgages sky-rocketed (in relative terms). The result was a sharp decline in existing home sales in 2023. From an annualized rate of 6.5 million in January 2022, the rate in December 2023 was 3.8 million.

But there is “light at the end of the tunnel.” As interest rates begin to fall, in response to subdued inflation, so will mortgage rates, and there should be a gradual turnaround in the housing market in 2024 and beyond.

The outlook for corporate earnings this year is favorable, with the consensus of estimates coming in around 10%. The stock market is itself a leading indicator—the past is of no interest to it. As the year progresses, stocks will keep a sharp eye on the actions of the Federal Reserve, and by mid-year will already be discounting the economic outlook for 2025. With any help from the Fed, the "January Barometer” should prove accurate once again.
 

Federal Funds Rate - 62 Year Historical Chart

Afterword: Please note - My new book,Breaking Glass: Tales from the Witch of Wall Street,is at the publisher and will be out in May of next year.