As the calendar rolls over, we are now moving into the Presidential Election Year market pattern. We will have more information about what to expect this year in our client-only 2024 Outlook which should be out early next week.
Review and Preview of Price Targets
It is always fascinating to look back at the Wall Street ‘big boys’ expected year-end price targets for the S&P 500, and how close they came to correctly forecasting the final S&P price. Here is a quick hint, their calls are usually horrible. Below is the initial 2023 S&P year-end price forecast from 11 of the largest Wall Street Banks & Brokerage, as well as their 5-year average forecast results:
Outside of Deutsche Bank, no other bank or brokerage’s year end expectations were even remotely close to the S&P’s close price of 4,769.83 for 2023. The average forecast was off by more than --18%, but then again looking at the average forecast results over the last five years, this should be expected. Over the last 5 years, Wells Fargo’s year-end forecasts have been the ‘closest’ to the actual S&P closing price, but on average their expectations still missed by more than -11%. Below are the 2024 S&P year-end price expectations of these banks and brokers minus Credit Suisse, which was taken over by UBS last year for the hearty sum of $3.2 billion to prevent the collapse of the bank:
January Expectations
Extremely Overbought
The S&P 500 ended 2023 with the second strongest November/December rally we have seen since 1970. Over the last eight weeks of the year, the S&P returned 13.34%, only trailing 2020 when the S&P rocketed 14.47% over the same period. While always welcomed, these excellent returns in such a short period of time have placed the market in an extremely overbought condition as we move into 2024. So, we start off the new year with a much higher risk profile in the market and the overbought condition needs to be worked through, but that does not necessarily mean we should expect a pullback or correction in the near term.
Since 1970, the combined average return for the S&P 500 during the months of November and December is around 3.20%, again usually the best two-month period for the market on an annual basis. While the month of January has returned around 1.20% on average over the last 53 years, when the month is preceded by an above-average performance in November/December, the expected return for the month typically is rather muted at 0.25%. Now a quarter of a percentage point return might not be that exciting, but it would be a "win" since it would show how efficient the month of January has been in working through overbought conditions while maintaining value.
January Barometer
The January Barometer is a set of three market conditions that can occur during the month which often provide an early indicator for the rest of the year. These conditions are as follows:
1. Santa Claus Rally- the condition is based on the performance of the S&P 500 over the last five trading days of the previous year and the first two trading days of the new year. The belief is that if there is not a positive return in the market over this period, the market will see more volatility earlier in the year. For the start of 2024, the Santa Claus Rally did not appear as the S&P dropped -0.88% over the expected rally period.
2. First Five Days- this is a condition that is based on the positive performance of the S&P 500 over the first five trading days of January. The belief is that if the first five trading days are positive, there is about an 80% chance that the S&P will be positive for the year. If the first five days are negative, the chance for a positive return for the S&P is reduced to 50%. To start 2024 the First Five Days produced a loss of -6.29 S&P points or -0.12%.
3. January Return- this is the simple belief, as January goes, so goes the year. Much like the First Five Days, a negative return for the S&P in January leads to a negative year for the S&P around 50% of the time.
While meeting all three of these conditions does not mean we are going to have a raging bull market over the next eleven months, not meeting these conditions does not mean we should expect a bear market. These conditions, especially when combined, offer us a probability of what might happen in the market moving forward. Granted we will always keep an open mind and trade the market as it comes to us, we will keep in mind the historical expectations of the January Barometer, especially if the S&P ends lower for the month.
What We Expect
Although we have started the year in an extremely overbought position, we still believe that the market momentum from the end of 2023 will spill over into the start of 2024. The first few weeks of the month may be a consolidation period as investors lock in capital gains they did not want to incur last year, but the second half of the month should offer some strength.
Based on our Fed Futures indicator, if we do experience any weakness during the month, there should be a bottom around January 22nd that the market can rally out of. This indicator is also showing us that the market should be able to maintain its positive trend until late March or early April.
While we do not expect January to offer the exciting returns of the last two months, we do expect the market to trade slightly higher to the positive side. However, we believe there are higher probabilities for larger gains ahead in February and March.