The stock market is closing out a positive January. Coming on the heels of last year’s bear market, and combined with other recent moves, that is a particularly positive signal.
Based on its level near midday on Tuesday, the
will close January up a bit more than 5%. Driving the rally has been a declining rate of inflation, which indicates that the Federal Reserve could be close to ending the series of interest-rate increases it has rolled out in order to limit demand for goods and services.
The sooner the rate increases end, the less damage to corporate earnings and stock prices can be expected.
January rallies, on their own, are generally a good sign for the rest of the year. When the S&P 500 posts a gain for the month, it goes on to rise another 8.6%, on average for the rest of the year, figures dating back to 1929 show, according to Ned Davis Research. It posted further gains in just over three-quarters of the January rally years.
Other moves in the market this year and last are also a positive indicator for the rest of 2023. The S&P 500 is in line to achieve a so-called trifecta: a rally for the final five trading days of a year and the first two of the next, a gain over the first five trading days of the new year, and a rally for January.
When the S&P 500 does all that after a year that saw a bear market, defined as a 20% drop or more from a high, the index’s average gain for the rest of the year is 13.9%. It posted positive returns in almost all of the 17 post-bear market trifecta years.
These may sound like mere statistics, but there’s some wisdom to be taken from them. Trifectas and January rallies are signs of confidence in the market. They indicate that ordinary people and professional money managers are buying stocks at lower, more attractive prices as they hope, or believe, that the conditions that caused the bear market will improve.
Today, that is certainly the hope. Federal Reserve Chairman Jerome Powell likely will reinforce that, or derail it, when he takes the podium to discuss interest rates and the state of the economy on Wednesday following a meeting of the central bank’s monetary-policy committee.
Write to Jacob Sonenshine at email@example.com