Stocks started the year off strong

January was certainly a solid start for stocks, regardless of their shapes and sizes. The month was so good, in fact, that January 2023 has made the S&P 500’s All-Time Top 10 highlight reel.

The NASDAQ led the way for US equities. After a largely sour 2022 for the growth-heavy index, it soared 10.7% higher in January, while the small-cap Russell 2000 also jumped 9.8%. The widely-tracked S&P 500 advanced 6.18%, though January was relatively underwhelming for blue chips, as the Dow Jones Industrial Average rose 2.9%. Nonetheless, equities were off to the races across the board (and world) in January.

Eight of the eleven S&P 500 sectors were higher in January. After an 11.4% decline in December, the Consumer Discretionary sector went from worst to first in January, logging a 15.1% gain. Communication Services was not far behind with a 14.8% increase. At the bottom of the list were the less economically-sensitive sectors of Consumer Staples, Health Care, and Utilities, as investors largely went risk-on.

Taking a closer look at S&P 500 monthly returns since 1951, January 2023 stands as the ninth-best start to any year. It’s quite the rebound from last year, considering 2022 produced the seventh-worst January in the last 70+ years. What a difference a year makes.

January Hit the Seasonality Trifecta

The S&P 500 January 2023 gain of 6.18% completes the trifecta, which includes 1) a positive return for the Santa Claus Rally period, 2) a positive return for the first five days of January, and 3) a positive monthly return in January.

This unique seasonality indicator has only been hit 31 times since 1950. During these periods, the S&P 500 has added, on average, 12.3% to a 4.6% January gain between February and December, bringing the average gain for these years to over 17%. This sounds like a big gain—and it is—but keep in mind the average gain in the third year of the four-year presidential cycle is 16.8%, and the average year following a down year is up 15%.

Furthermore, of the four years that overlapped with a recession, annual returns were all positive and averaged 34.8%. Even years with negative or limited earnings growth yielded positive average annual returns.

By no means is seasonality flawless, as pricing patterns are historical tendencies and not a guarantee of future results, but it is encouraging that we are off to better footing than a year ago.

Source: LPL Research, Bloomberg 1/31/23
Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly.

Economic Data:

Production and Sales

The US ISM Manufacturing PMI fell deeper into contraction territory in January. At 47.4, January’s reading marks the eighth consecutive monthly decline for the indicator, and also its lowest reading since May 2020. Month-over-month (MoM), US Retail and Food Services Sales declined 1.2% in December, though the US Retail Trade Inventory/Sales Ratio rose slightly to 1.24 as of November 2022.

Housing

US New Single-Family Home Sales increased 2.3% MoM in December, three months removed from a plummet of nearly 15%. Existing housing data wasn’t as cheerful, however—MoM US Existing Home Sales declined 1.5% in December, marking the 11th consecutive monthly decline for existing home sales. Slower sales once again translated into lower home prices; the Median Sales Price of Existing Homes also declined by 1.5% to $366,900, falling for a sixth straight month. On a brighter note, 15-Year and 30-Year mortgage rates continued to fall from their November ‘22 highs, down to 5.17% and 6.13% respectively.

Commodities

Gold started the year strong with a 6.0% gain in January, bringing its price to $1,923.10 per ounce as of January 27th. Oil price movement was mixed in January—the price of WTI per barrel declined 2.7% to $77.97 while Brent increased 2.2% to $84.61. Nonetheless, prices for both WTI and Brent are more than 36% lower than their highs set in March of last year. Trips to the pump did get more expensive in January, as the average price of regular gas rose 39 cents (12.2% MoM) to $3.59 per gallon.

Consumers and Inflation

US Inflation cooled down for the sixth straight month, falling 0.66 percentage points to 6.45%. Year-over-year US Core Inflation dipped a quarter of a percentage point to 5.71%. The month-over-month US Consumer Price Index slipped 0.1%, and month-over-month US Personal Spending contracted 0.2%. Lastly, the Federal Reserve raised the Upper Limit Target Federal Funds Rate by 25 points to 4.75% at its February 1st meeting, the first rate hike of just 25 bps since March 2022.

Employment

January payrolls rose by 517,000, showing broad-based gains across most sectors, evidencing a stubbornly resilient labor market.

Unemployment rate was 3.4%, the lowest since 1969, as the labor market is still very tight—too tight for central bankers.
Growth in average hourly earnings continues to slow, easing down to 4.4% year-over-year from an upwardly revised 4.8%.
Government employment rose by 74,000 as state university workers returned from a strike.
Labor force participation and the employment-to-population ratio are still below pre-pandemic levels as many individuals have not yet returned to the workforce.
Business applications are still consistently above pre-pandemic levels, revealing many workers’ interests for alternative employment, and could explain some of the workers still out of the official labor force.

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Monthly Market Recap – January 2023