Will January’s stock market rally spill into February?

UK shares have had their best start to a year for a decade, but there’s lots going on and talk of a recession refuses to go away. We turn to history for clues as to what might happen in the month ahead.

After topping the performance table for developed markets in 2022, the UK stock market ended January in the bottom half, despite having the best start to a year for a decade and doing far better than expected.

The FTSE All-Share index rose 4.4%, making it just the third time it’s risen during January in the past 10 years. It also beat the previous best of 4.1% in 2019. You have to go back to 2013 for a better January when the index rose 6.3%.

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A month ago, I’d cautioned that January had lost its reputation as a hot month. Since 2000, the average return for the month is negative and the FTSE All-Share had fallen in 16 of the past 23 January’s. It had made a loss in seven of the past nine years and posted declines in each of the past three.

But this year has been very different. The All-Share index recently hit its highest levels since May 2018 and the blue-chip FTSE 100 index breached 7,800 for the first time in almost five years.

Behind the gains is growing optimism that the promised recession won’t be as bad as feared, and that inflation can be brought under control with less aggressive interest rate increases. Meanwhile, US quarterly earnings season has been mixed, but perhaps not as bad as many had feared. 

However, investors will react quickly to any negativity on Wall Street. We saw that in London during the morning session of the final trading day of January. It’s a big week for data and decision making by central bankers, which investors fear could derail the recovery if news doesn’t justify recent optimism.

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Should you fear February?

There’s often an air of optimism in February, certainly if we look at stock market performance in years gone by. In the past 32 years since 1991, the FTSE 100 has fallen in February just nine times.

Last February was one of those nine declines, but the blue-chip index fell just a fraction of one percentage point, while the FTSE All-Share index eased just 0.8%. However, that was a magnificent performance given the context of plunging stock markets elsewhere.

Rising interest rates are bad news for growth stocks who clearly benefit when rates are low and money can be borrowed cheaply. Share prices last year reflected the trend toward higher rates, with the Nasdaq Composite tech index down 3.4%, the FTSE AIM All-Share down 5% and the German Dax down 6.5%.

The FTSE 100’s resilience is put down to the significant influence of oil majors Shell (LSE:SHEL) and BP (LSE:BP.), which have been helped by high oil prices. The UK index is full of banks too, which typically do better when interest rates rise. BAE Systems (LSE:BA.) has benefited from the war in Ukraine, while other older, well-established businesses are defensive in nature. There are no large and vulnerable tech stocks in the FTSE 100 either.

But be careful; when the Footsie does fall in February, it can do so in a big way as we saw in 2001, 2009, 2018 and the near-10% slump in February 2020.