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“As goes January, so goes the year” is a well-known Wall Street maxim that, like most Wall Street maxims, is sometimes true and sometimes, well, not true. As of today, we are very much hoping it does turn out to be true this year. January has been a very good month so far, with a significant bounce back from the terrible results of 2022. It would be nice to see that bounce continue. The good news is that—while still expecting volatility—we can expect the market to continue doing well this year. Let’s walk through the reasons, starting with history.
What Does History Tell Us?
Bespoke Investment Group put together a detailed analysis of how markets performed since World War II, looking at what happened after an up January. On average, markets gained in February, the first half of the year overall, and the second half of the year. In all time periods, the average for an up January was well above what was seen after a down January. This is a good sign in itself, although averages conceal a good deal of variation.
Bespoke also looked at the two cases of extremes, like we have now, where January was up by 5 percent or more after a double-digit decline in the previous year. Here, the results are even more encouraging. Looking at the historic numbers, we could reasonably expect double-digit returns for the rest of the year—if, of course, this year is similar, on average, to prior years.
What Drives Market Performance?
Here, we need to think about what drives market outperformance. Expectations are one thing: when investors are worried or depressed, then expectations tend to be easier to beat. And when markets beat expectations, they rise.
Interest rates are another key element, enshrined in another Wall Street maxim of “don’t fight the Fed.” When interest rates rise, like they did last year, markets drop. And when rates drop, markets rise. When we look at whether markets match prior performance, these are the two things to look at closely.
In both cases, the news is good. When we look at expectations, we see the following:
- First, a potentially catastrophic debt default by the U.S. government
- Second (and this also ties into interest rates), a Fed that is committed to continuing to raise rates indefinitely
- Third, a recession that, depending on whom you talk to, could be deep and long-lasting
Investors have a full plate of significant risks, which certainly helped pull markets down last year. The Fed, with its commitment to keep raising rates, also keeps investors worried who don’t want to fight it. And when you look at all the background problems—Ukraine, energy, and so forth—it is hard to see much reason for optimism.
Yet the markets have bounced. When we look at the next six months, we should get a lot more clarity. By then, we will have some sort of a deal, and the debt ceiling crisis will be behind us. Inflation is likely to be down, with the Fed that much closer (if it is not already there) to at least stopping the increases and maybe cutting rates. A recession, if we get one, will likely be underway and, therefore, closer to its end. In other words, in six months things are likely to look much better than they do now in most ways, giving the markets a boost toward year-end.
What About the Data?
Moreover, the data right now supports that conclusion. Long-term interest rates are well below their peaks and continue to drift lower. Inflation, as noted, is down and likely to keep dropping. Job growth continues to be healthy, and consumer confidence is chugging along. And earnings estimates, despite everything, are surprisingly positive. If we just look at valuations (which should improve with lower interest rates) and earnings (which are expected to rise), we can make a pretty good case for those double-digit gains.
The Real Question
Nothing is guaranteed, of course. But the real question for markets is whether things will be better or worse than they are right now. With all of the worries and things that could go wrong, it is pretty easy to make a case that things will get better. And that will certainly buoy markets even further. Will this strong January lead to a strong 2023? As of right now, both history and the data suggest it will.
