The start of the year has been a rollercoaster, with tech stocks fueling a significant rally on Monday, pushing the S&P 500 up by 1.4%. This upswing, however, proved fleeting as stocks retreated on Tuesday, echoing the year’s earlier challenges.
Beyond the transient glimmer of hope, a concerning picture has emerged: two critical seasonal indicators are now signaling caution, casting a shadow of doubt and urging investors to take a step back for a more careful evaluation of the market’s 2024 outlook.
The Santa Claus Rally’s Missed Cue
Typically, the Santa Claus Rally, which spans the last five days of the old year and the first two of the new year, is expected to bring an average gain of 1.3% in the S&P 500. This year, however, the rally failed to materialize, resulting in a 0.9% decline. Historically, the absence of this rally has often been a precursor to bear markets or periods where stocks could be bought at lower prices later in the year.
The First Five Days: A Mixed Signal
Adding to the complexity, the First Five Days indicator, another seasonal market predictor, is also showing negative signs. The S&P 500 is down 0.1% in the first five trading days of the year. Jeff Hirsch from the Stock Trader’s Almanac points out that this indicator has a respectable track record, especially in presidential election years. In the last 18 such years, 15 have followed the direction indicated by the first five days.
The January Indicator: A Pending Verdict
The third part of this seasonal trifecta, the January indicator (“as goes January, so goes the year”), is still in play. However, its record in election years has been inconsistent, with only 12 of the last 18 full years following January’s direction.
A Historical Perspective
Despite these warning signals, it’s important not to veer into pessimism. Since 1969, there have been nine instances where both the Santa Claus Rally and the First Five Days indicator failed. Out of these, the S&P 500 ended the full year in the negative only twice – in 2000 and 2008, both notably challenging years for the market.
What This Means for Investors
As we continue through January, investors should keep a watchful eye on these indicators while also considering the broader economic and political context. While the early signals from 2024’s market indicators suggest caution, they are not definitive predictors of the year’s outcome. Investors should stay informed, remain adaptable, and be ready to adjust their strategies in response to evolving market dynamics.
