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Stock market predictions are flooding Wall Street as analysts and investors everywhere ponder whether January’s red-hot gains are just the beginning. Indeed, stocks enjoyed one of their strongest months ever this January, lifting hopes for many that equity markets are making a turn for the green. Just how well did stocks perform last month? And what does that mean for full-year 2023?
Well, to say that the market entered the new year with a bang would be a gross understatement. Through January, the tech-centric Nasdaq Composite index climbed a staggering 10.7%, representing its best January in more than 20 years. Likewise, the S&P 500 enjoyed a 6.2% jump while the industrial-heavy Dow Jones saw a nearly 3% uptick. Even crypto enjoyed a red-hot start to the year, with Bitcoin (BTC-USD) and Ethereum (ETH-USD) enjoying climbs of more than 30%.
Those numbers would be good ordinarily. But there are several variables at play making them especially promising bellwethers for the year to come.
First, it’s hard not to mention the elephant in the room: 2022 was one of the worst years for stocks ever. Nearly every major market index closed last year in the red — and some by truly depressing margins. The S&P 500 slid nearly 20% and the Nasdaq sunk an eye-popping 33.1%. Even the historically steady Dow lost about 9% in 2022.
“We’ve had everything from Covid problems in China to the invasion of Ukraine. They’ve all been very serious. But for investors, it is what the Fed is doing,” said Art Cashin, Director of Floor Operations for UBS. With global supply constraints, stubborn inflation, aggressive rate hikes and more, 2022 had plenty of black swans.
So, what are stock market predictions for the rest of the year?
Stock Market Predictions: If the January Barometer Holds True, 2023 Could Be Monumental for Stocks
The month of January holds something of a special place in the world of stocks. Frequently, the month serves as a predictor for the rest of the year. The saying “as goes January, so goes the year” has historically held true for stocks. In fact, the January barometer has held true about 75% of the time since 1945.
Per Yale Hirsch’s Stock Trader’s Almanac, the Santa Claus rally, the First Five Days Early Warning System and the January Barometer represent the “trifecta of seasonal indicators in January,” capable of predicting the next 11 months.
According to many analysts, this “trifecta” is a strong signal that stocks are headed upward this year. LPL Financial Chief Technical Strategist Adam Turnquist and Chief Equity Strategist Jeffrey Buchbinder said the following in a recent note:
“The trifecta accomplished this month has historically led to some very strong returns […] The S&P 500 has on average added 12.3% to a 4.6% January gain between February and December, bringing the average gain for these years to over 17%.”
According to the almanac, these signals are even more meaningful following a down-year, something that 2022 more than qualifies as. Interestingly, the sectors that perform best in January also tend to top the charts in the year ahead. The top sectors last month were communications services, consumer discretionary, real estate and technology.
Despite the glowing sentiments around the January barometer, though, some analysts remain cautious about becoming too overzealous on the market. Especially in the face of so many frightening economic phenomena.
Fed Tightening Threatens the January Barometer
The Federal Reserve will likely prove the single greatest barrier to a 2023 bull run. The central bank raised the federal funds rate seven times last year and already passed a quarter-point hike just this week. As much as analysts love to meme-ify notions of a “soft landing,” expectations are still laid out for a Fed-induced recession at some point this year. The cost of lower inflation is widespread economic slowdown, the effects of which have yet to be fully priced in by the markets.
That isn’t to say the stock market is always reflective of the greater economy. But it will be hard to keep earnings propped up when people stop buying things.
Ahead of the first rate hike decision of the year earlier this week, Rhys Williams, Chief Strategist at Spouting Rock Asset Management, informed MarketWatch just how much Fed Chair Jerome Powell controls the narrative going forward:
“If [Powell] pushes back hard on this January rally, and continues with the theme that Fed is not close to done, the low growth soft-landing camp will drift back toward recession, and the big January bounce will give back some of its gains.”
This is a relatively insightful conclusion, especially when you look at Powell’s undoubtedly hawkish commentary this week. In the Fed’s first Federal Open Market Committee (FOMC) meeting this year, Powell maintained that it was “premature” to declare a win against inflation. He laid out rate hike expectations for the year coming:
“I would say that our focus is not on short term moves but on sustained changes to broader financial conditions […] And it’s our judgment that we’re not yet at a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes.”
With the recent jobs report showing almost startlingly strong unemployment, rate hikes are a nigh certainty at least for part of the year. Whether that puts a damper on the January barometer — and investors’ bullish dreams — remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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