The year 2023 ended on a positive note with the stock market, as gauged by the S&P 500 index, experiencing a nearly 5% increase in December.
The impressive two-month rally in November and December, with the SPDR S&P 500 ETF Trust SPY surging by 14%, not only indicated a strong and healthy market but also raised an important question about the potential trajectory for January and the entire year ahead.
As the New Year begins, George Smith, a seasoned portfolio strategist at LPL Financials, offered valuable insights into the seasonal trends that might influence stock market dynamics in the upcoming month.
January’s Ambiguous Position In Stock Market Seasonality
Historically, January stands as a “middle-of-the-road performer.” While the month has seen positive returns, its ranking is seventh among all months over the past five years, Smith explained.
The expert highlighted that more than the past 10 and 20 years, January’s returns have been relatively stagnant for the S&P 500, placing them in the eighth position among all months throughout these periods.
Smith’s analysis extends to the January-February window, which tends to show weaker performance compared to other two-month intervals. “Much of this is due to a weak February dragging down the two-month return,” he added.
February ranked as the second-lowest performing month for U.S. stocks, trailing only behind September, when considering the past 5- and 10-year periods, as well as historically since 1950.
Post-Holiday Surge: A Predictor for January?
Interestingly, Smith pointed out that when the market experiences a surge exceeding 10% in the November-December period, January tends to follow suit with strong gains.
“When stocks gain more than 10% during the November–December period, January has historically been quite strong, with gains of 2.3% on average during the six times this has occurred,” he stated. However, this trend seems diluted when only December’s performance is considered, bringing January’s average gain closer to 1%.
Long-Term Implications
The implications of a strong finish to the previous year extend beyond immediate returns.
Smith’s analysis revealed periods following a 14% rise in a two-month stretch generally precede impressive annual gains, averaging over 20%. This data is a beacon of hope for investors looking at the bigger picture for 2024.
| Criteria | Occurrences | S&P 500 Return Forward 1 Yr. (Average) | S&P 500 Return Forward 1 Yr. (Median) | % Positive |
|---|---|---|---|---|
| S&P 500 Two-Month Return >14% | 12 | 20.5% | 20.1% | 90.9% |
| S&P 500 Two-Month Return <14% | 876 | 8.8% | 10.0% | 73.4% |
In light of these insights, LPL Financial maintains a cautious yet optimistic outlook for the stock market.
While acknowledging the potential for continued equity growth, the firm suggested a slight preference for fixed income in its tactical asset allocation.
This stance is influenced by the attractive yields and relative valuations in fixed income, rather than a lack of confidence in equities.
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