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Will January 2024 Be a Good Month for U.S. Stocks?

Barchart - Tue Jan 2, 8:46AM CST

Contrary to most analysts' expectations, 2023 turned out to be a good year for U.S. stock markets. The S&P 500 Index ($SPX) rose almost 24% last year, and is now very close to its all-time highs. Thanks to the stellar tech rally in the first half of 2023, the Nasdaq-100 Index ($IUXX) surged 53% last year, and rose to an all-time high.

So, as we enter 2024, let’s analyze what lies 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 which suggests that after the tax-loss harvesting in December, investors tend to re-buy positions in the first month of a new year. 

Over the last few months, monthly seasonality trends have played out to near-textbook perfection. For instance, September held on to its reputation as the worst month for stocks, while November turned out to be the best month of the year, with both the Dow Jones Industrial Average($DOWI) and S&P 500 rising almost 9% each during the month. 

In between those two big directional moves, October was quite volatile - as it has been historically - and the S&P 500 officially entered correction territory during the month, having fallen more than 10% from its 2023 highs. Similarly, those hoping for a “Santa Claus” rally in December were rewarded, as the S&P 500 added another 4.4% in the month.

Is January a Good Month for Stocks?

According to data compiled by LPL Financial, the S&P 500 has risen 1% in January, on average, since 1950. The firm's number-crunching further shows the following:

  • When stocks rise over 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 rise around 1%, on average, during the month.

To sum it up, January is typically a good month for stocks, particularly if markets enter the new year on the heels of strong gains in both November and December. But will history repeat itself in January 2024, with the seasonal anomaly playing out as neatly as other monthly seasonal stock trends have done since September 2023? 

Let's look at the key factors that could drive stocks this month.

Underlying Momentum in U.S. Stocks Looks Positive

The underlying momentum in U.S. stocks is looking positive after strong gains in the previous two months. We’ll get into the Q4 earnings season towards the middle of the month, and during the conference calls, look for companies to address the consumer spending environment during the holiday season.

Notably, while Black Friday and Cyber Monday sales hit a record high - partially because of the growing adoption of buy-now-pay-later, which helped drive a huge rally in Affirm(AFRM) shares - some economists were circumspect about the year-end shopping extravaganza.

Also, companies this earnings season might provide color on how the resumption of student loan repayments has impacted their revenues. While the development should be positive for student loan refinancing companies like SoFi (SOFI), it could negatively impact sales of others, like sneaker giant Nike (NKE), which already toned down its sales guidance last month.

Watch Out for the January Fed Meeting

The Fed’s next meeting will be held on Jan. 30-31. Markets largely expect the U.S. central bank to maintain the status quo yet again, with consensus forecasts calling for the benchmark lending rate to remain unchanged. That said, it will be crucial to watch Fed Chair Jerome Powell’s commentary on the rate cut outlook 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, the valuations of U.S. stocks 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 U.S. stocks last year, but now markets are entering 2024 on the back of stellar returns in the previous year, which mostly came from PE expansion - leaving little chance for the kind of returns (over 6%) that the S&P 500 delivered in January 2023.

That said, the baton will primarily lie with corporate earnings this month. If Corporate America can impress markets with its Q4 financial performance and provide a reassuring commentary about its 2024 outlook, U.S. stocks could continue their positive momentum into January, as well.

On the date of publication, Mohit Oberoi had a position in: NKE , AFRM , SOFI . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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