For background, market seasonality is premised on the adage of ‘history doesn’t repeat, but it often rhymes.’ The embedded assumption is the market exhibits seasonal patterns or cycles that ‘rhyme’ throughout history, or more specifically, when prices move in a recognizable pattern that occurs with some degree of consistency over a specific timeframe. These patterns can last anywhere from several days to several years, each having its own tendencies unique to that period. For example, we are now in year three of the presidential cycle, historically the best performing year for stocks across the four-year cycle. By no means is seasonality flawless, as pricing patterns are historical tendencies and not a guarantee of future results. LPL Research views seasonal data as one input, among many, into their decision-making process. When various seasonal indicators tell the same story, the message becomes more powerful. The market has now received one of these ‘messages’ by hitting a trifecta of seasonal indicators this month.
What Are the Components of the Trifecta?
1) Santa Claus Rally: This seasonal pattern was first discovered by Yale Hirsch in 1972. Hirsch, the creator of the popular Stock Trader’s Almanac, defined the period as the last five trading days of the year plus the first two trading days of the new year. A positive Santa Claus rally signal occurs when the S&P 500 posts a positive return during this timeframe. For 2023, the S&P 500 was up 0.8% during this period, checking the box for a positive signal.
2) First Five Days: Hirsch also created the First Five Days indicator. This indicator is considered a warning system for the year ahead when the first five days of the year are negative. The S&P 500 finished the first five days of 2023 up 1.4%, checking the box for a positive First Five Days signal.
3) January Barometer: Last but not least, Hirsch also created the January Barometer indicator and its popular tagline of ‘As goes January, so goes this year’ (positive January returns are historically associated with positive annual returns). A positive January Barometer indicator occurs when the S&P 500 posts a positive return in January. With the S&P 500 up approximately 5% last month (January), a positive signal has occurred.
Stocks continue to climb the wall of worry despite mixed messages between technicals and fundamentals. Seasonality indicators, including the trifecta indicator, suggest the path of least resistance for the broader market is likely higher for the year ahead. And while the seasonality message is clear, the market still needs catalysts to climb higher. LPL Research believes the end of the Fed’s monetary policy tightening will be a key driver for stocks this year. Cooling inflation data will not only underpin a policy change, but also reduce headwinds for companies battling ongoing pricing pressures. The end of a rate hike cycle could also mean interest rate stabilization or even lower interest rates, another potential driver of equity market gains. Finally, while LPL Research believes recession risk remains high, there is the chance the U.S. economy is only facing a growth scare and muddles through on the back of a resilient consumer.
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