It is said “history doesn’t repeat itself but it often rhymes”, so we’ve rummaged through the history books searching for clues about which way share prices might go this month.
2023 already seems like a distant memory given such a busy start to the new year. Most major markets generated positive returns, helped in no small part by a two-month rally through November and December. A more positive take on inflation, interest rates and recession were major drivers, and they remain the hot topics as we start 2024. But the wind has begun to blow in the other direction.
I wrote early last month about the historically strong winter period for stock markets and hopes for a Santa rally.
“The mood seems considerably better this festive period,” I said. “While the threat of economic trouble remains, the data is telling us that a deep recession is unlikely, and interest rates could begin to decline at some point in 2024. Those positives are currently being factored into equity markets.”
Major markets don’t normally fall in December, and most of them didn’t this time. The Nasdaq Composite tech index rose 5.5%, the Dow Jones 4.8% and S&P 500 4.4%. Europe did well too, the German Dax, French Cac and Swiss market all up 3% give or take. The only losers were in the Far East where the Japanese Nikkei and Shanghai index both fell.
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Most surprising was the UK domination at the top of the table. The AIM 100 index jumped 8.4% in December, the AIM All-Share raced 7% higher, followed closely by the FTSE SmallCap index. The FTSE 250 mid-cap index returned 8% last month, the All-Share 4.4% and the FTSE 100 3.8%.
That’s great, but it doesn’t mask the underperformance of UK markets last year and that UK companies, especially smaller ones, remain out of favour with international investors. Whether it’s Brexit, the economy, politics, or any number of investment-specific variables, it’s just not happening, which meant AIM was one of the few losers in 2023, and the larger company indices lagged overseas rivals.
Is Jan down the pan?
Investors hoping that positive momentum would spill over into the new calendar year have been sorely disappointed amid growing scepticism about interest rate cuts. A first reduction in borrowing costs can’t come quick enough, but forecasts have slipped from March to May, which is now being factored into overheated share prices.
As I write, all the major stock markets are in negative territory for January 2024. The Nasdaq leads the retreat, down 3.3%, the Hang Seng is off 3%, the FTSE 250 2.7% and AIM 100 2.7%.
Historically, January is the worst of all months for shares since 2000. And while last year I talked about the FTSE All-Share’s best start to a year in a decade as the index jumped 4.4%, the only other January gains in the past 10 years were in 2015 and 2019; so the omens aren’t great. It will require a herculean effort to turn things around.
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The same things that will trigger a rally this January are pretty much the same as they were early in 2023. Investors want clues as to when interest rates will start to fall, they want data to show inflation continues to decline, and they want central banks to skilfully manage economies toward a so-called soft landing.
As we’ve seen in the past few days, any comment from policymakers or shift in the data that causes expectations to change will be swiftly priced into stock prices. Latest US non-farm payrolls, published Friday 5 January, showing resilient jobs growth and stronger-than-expected average earnings will not help.
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