SLOWER: Global equities had one of their best starts to the year ever, confounding consensus. Both history and the fundamentals remain on your side, but the returns pace will slow. January often sets the tone for the year, with back-to-back down years very rare. The fundamentals have become less bad, from China’s reopening to falling US inflation. This was all that was needed with market pessimism and cash levels so high. These remain big supports but the returns pace will inevitably slow. There will be fundamental bumps ahead. This is a transition year to the next bull market. Stay positive, but ready for lower returns and more cross-asset divergence ahead.
HISTORY: January’s 6.2% S&P 500 gain was the second best of the past three decades (see chart), only higher in 2019. Encouragingly, ‘as goes January, goes the year’ works over 70% of the time. Whilst the NASDAQ saw its best start since 2001. But the pace will slow sharply. January’s S&P 500 price return annualizes at near 100%. This is ten times its long-term average annual return and a level never seen before. Closest were the c45% returns of 1933 and 1954. This is even more the case now with EPS forecasts falling and the market on a punchy 17x P/E.
‘FOMO’: The ‘January effect’ typically see’s positive performance, led by the prior year’s losers. This has been supercharged now by the cocktail of less-bad fundamentals, lower bond yields, and skewed positioning. Crypto assets, China, and tech led up, whilst dollar and commodities lagged. The rally breadth and ‘fear of missing out’ has further to run if the fundamentals of lower inflation and resilient earnings stay. Recent fund inflows have been small vs the backdrop of 2022’s big $180 billion net equity outflows, and $170 billion of money market inflows. The latest BAML fund managers’ survey shows very big underweights in US equities and high cash levels.
All data, figures & charts are valid as of 01/02/2023