As goes January? – Damien’s Market Update – January 2023

Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. This month I ponder whether the adage 'As goes January, so goes the year...' will ring true this year.

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Abridged transcript - Damien's Market Update - January 2023

In last month’s market update we were left pondering whether the Santa Claus rally would turn up or not. In fact, the title of the show was “Santa rally or the 2018 Grinch?” As it turned out, 2022 was one of those rare occasions when the Santa Rally didn’t arrive, if you are looking at December as a whole. But if you use the strictest definition of a Santa Rally, which covers the last five trading days of 2022 and the first two trading days of 2023, then Santa did technically arrive. It feels oddly like the Met Office announcement that 2022 was technically a white Christmas in the UK because five weather stations across Scotland and Northern Ireland recorded sleet or snowfall on Christmas Day. In any event the late technical Santa rally did produce a return of approximately 1% over the 7 days, which is still significantly higher than the historical returns of other 7 day periods during the year. But put into the wider context of December’s equity market moves and those of 2022 as a whole, it was hardly cause to celebrate.

In December, global stock markets as measured by the MSCI ACWI fell -4.85% for the month but there were significant geographical variances. For example, the MSCI Asia ex Japan Index was one of the best performing main stock market indices falling just -1.08%, alongside the FTSE 100 which returned -1.6%. Then we had the MSCI Emerging market Index which fell -2.23% followed by European equities which fell -3.63% as measured by the FTSE Eurofirst 300. US equities were among the worst performers with the S&P 500 falling -5.9% and the Nasdaq 100 falling more than 9% in a single month. But much of the divergence in fortunes occurred during the last two weeks of December when Asian, emerging market, UK, European and value stocks outperformed their US peers.

Ultimately December 2022 resembled 2018, a potential parallel that I drew in last month’s show. In terms of the whole of 2022, it will be put down as a disaster for most investors, be they professional or armchair. I won’t go into full details of the performance of various assets and stock markets in 2022, but the top performing unit trust sector was Commodities, while others of note included UK and Global Equity Income funds (which tend to favour defensive sectors with good dividend payers) and also targeted absolute returns funds. At the other end of the scale was UK Gilts, especially Index-Link Glts where the average fund lost over 30% in 2022. 

As we know, 2022 was a bad year for most equity markets but also one of the worst years on record for bond markets. It’s why the typical 60/40 bond/equity portfolio lost between 10% and 12% during last year. A good way of seeing this is if you look at the Vanguard Lifestrategy 60% Equity fund, a popular passive fund, which fell 11.22% during 2022. By comparison my own £50k portfolio which I run on 80-20 Investor lost just 5.28% which I am more than happy with. One key to successful investing is limiting drawdowns as much as possible. I favoured commodities and alternative assets while avoiding bonds and tech stocks.

Another interesting parallel between December 2022 and December 2018 is that December 2018 was one of the few times that the 10 month moving average indicator sounded the all-clear (as it also did at the start December 2022) only for the market to then slump into the year end. As an aside, at the end of 2022, the S&P 500 fell back below its 200 day moving average, a negative sign, having finally closed back above it at the start of December. It just highlights the sudden souring of mood into the year end.

But January has started positively. Asian equities have been buoyed by China’s relaxation of covid restrictions but concerns remain about the country’s latest outbreak of the virus. Unlike 2022 where covid concerns were global in nature, in 2023 they are mostly focused on China and its subsequent ability to rebound economically to finally emerge from the pandemic’s shadow. In Europe, positive economic data along with new inflation numbers suggesting that price rises may have peaked in the eurozone have been helping European equities to outperform in the first few days of 2023. The FTSE 100 has also broken above 7700, its highest level in 3 years. In addition, bond yields have tumbled, as a result of an expected fall in inflation and the increasing likelihood of recession. It means that bond funds have surged in value into 2023. It means that markets are now at a critical juncture, once again - can the US stock market in particular break out of its downtrend and recover in 2023? Investors are always keen to try and predict what will happen during the rest of the year, based upon how markets perform in January. At this time of year you will often hear the old investment adage “as goes January so goes the year”. The interpretation of the adage takes various forms. One version claims that the first five days of January statistically influence how the rest of the year will pan out while another version, known as the January Barometer, claims that positive stock market returns over the whole month of January are a strong indicator of positive stock market returns for the rest of the year. 

While we will have to wait until February to be able to ponder what the January Barometer might be suggesting, after the first five trading days of 2023 the S&P 500 closed up 1.3%. According to the Stock market Almanac that bodes well for the rest of 2023 because the last 47 up First Five Days were followed by full-year gains 83% of the time with an average annual gain of 14%. Even after the terrible December of 2018, the S&P 500 bottomed and rebounded at the start of January. By the end of 2019 the index finished up over 30%. But if you buy into market seasonality it’s worth bearing in mind that January often starts with a bang before seasonal weakness sets in as the month progresses. So even if the market does continue to move higher it’s likely to still be a bumpy ride.

Before I finish it’s worth watching out for a potential catalyst for the market to break higher or lower is the US when inflation data is published on 12th January, which is tomorrow as I record this. In recent months, the release of inflation data has marked a pivot point for markets which lead to large intraday swings in stock markets and usually dictated the direction of travel until the next US Federal Reserve policy meeting (which is the 1st of Feb) or the next US inflation data release. But setting inflation aside, keep an eye on the latest corporate earnings season in the coming weeks as this also has the ability to dictate the market narrative, especially if we get some shock results.