Market Commentary: January Gains, Jobs Report Both Bullish for Markets

As Goes January, So Goes the Year

“There is nothing new in the world except the history you do not know.” — Harry S. Truman

• The S&P 500 Index gained 1.7% in January (total return) after a slow start to the year.
• S&P 500 gains in January have historically signaled above-average returns the rest of the year.
• The economy created 353,000 jobs in January, surprising to the upside.
• Job gains continue to support income growth, which in turn supports consumer spending and the overall economy.
• While it has no bearing on the market, for those looking for a rooting interest, we review market performance after the NFC and AFC have won the Super Bowl.
• For a broad view of our expectations for the economy, stocks, and bonds in 2024, download our 2024 Market Outlook.

After huge gains last year and a rocky start to 2024, the S&P 500 rebounded during the second half of January and managed to finish the month higher. The next question is, does a good January mean much for the rest of the year? It might.

The so-called January Barometer is widely known by the saying, “As goes January, so goes the year.” The late Yale Hirsch of Almanac Trader discovered this indicator. Today, the Almanac is carried on by Hirsch’s son Jeff. I’ve known Jeff for years, and I believe the work he and his colleagues at Almanac do is some of the best in the industry on market seasonality, calendar effects, and many other indicators.

Let’s look at the January Barometer. Two years ago, stocks were lower in January, and that down performance was followed by a vicious bear market. Last year, stocks soared more than 6% during the first month of the year and ended up having one of the market’s best years.

Historically speaking, when January is positive for stocks, the rest of the year rises 12% on average and is higher 86.4% of the time. When January is down, the market is up about 2.1% on average and higher only 60% of the time. Compare this with the average year’s final 11 months, which are up 8.0% and higher 75.7% of the time. Clearly, the solid start to 2024 could be a positive for the market.

Here’s another way of showing what tends to happen based on whether January is higher or lower. A good first month tends to see better times, while a weak first month can be trouble.

It’s worth noting that stocks were lower during the historically bullish Santa Claus Rally and the first five days of 2024. We wrote about this in detail in Some Bad News, and Some Good News. But what does it mean when the Santa Rally doesn’t take place and the first five days are down, but the rest of the month is up? Interestingly, this combo has happened only three other times in history, so we are dealing with a very small sample size. The good news is stocks were higher for the full year each time and up nearly 20% on average.

The huge end-of-year rally in 2023 (the S&P 500 was up 14% in November and December) did suggest some weakness in late December and early January would be normal. But the bottom line is the January gains matter more.

We are officially three calendar months off the October 27, 2023, correction lows. Stocks gained 19.6% during those three months, marking one of the best three-month returns ever. We reviewed all the times the index gained at least 17% in three months, and the future returns were quite normal for a bull market: higher six months later 84% of the time, higher a median of 16.2% one year later, and up 80% of the time.

In short, the market’s strength over the last three months is not consistent with the end of a bull market or this period being a “bear market rally” as some analysts believe. In fact, it suggests we are in a strong bull market that is likely to continue.

Ignore the Gloom and Doomers: This Is a Strong Economy!

It’s not like we needed a lot more proof that the economy is strong. If you listen to the doomsayers, it seems the economy is hanging on the edge of a precipice. Never mind the latest GDP report card, which showed the economy grew 3.1% in inflation-adjusted terms in 2023. Of course, it’s one thing to get strong numbers, but it’s even better when the data are strong for the right reasons. In this case, the economy is strong because the labor market is strong. The labor market is generating strong income growth that is powering consumption, and consumption makes up close to 70% of the economy. At the end of the day, that’s what matters. Anything else that is trending higher, be it housing or even manufacturing, is all icing on the cake. Oh, and did I mention that inflation is falling, too? That means inflation-adjusted incomes are growing.

Boom Goes Payrolls

The January payroll report blew past expectations. The economy created a whopping 353,000 jobs in January. Even better, the net job gains in December were revised up from 216,000 to 333,000. So, the economy has averaged 289,000 jobs per month over the last three months. For perspective, the average in 2019 was 163,000. Additionally, job creation in 2023 was better than originally estimated — across the full year, the economy created just more than 3 million net new jobs, versus the prior estimate of 2.7 million.

Here’s icing on the cake if you need it. Cyclical industries also saw a strong employment pickup in January.

• The construction industry created 11,000 jobs in January. Over the last six months, it has created a total of 116,000 jobs.
• The manufacturing sector, which some surveys show is supposedly in a recession, created 23,000 jobs in January. Over the last six months, it has created a total of 40,000. I’m going to go out on a limb and say that manufacturing is not in a recession!
• Leisure and hospitality, one of the most cyclical areas of the economy, created 11,000 jobs in January, taking the six-month total to 195,000. That’s a strong service sector!

There’s more.

The unemployment rate remained unchanged at 3.7%. I’ve noted in previous blogs that the prime-age employment-population ratio is a preferred metric. It measures the number of people aged 25-54 who are employed, as a percent of the total number within this cohort that could potentially be employed. It gets around issues like an aging society and definitions of unemployment, which only counts people who are actively looking for work.

The prime-age employment-population ratio is 80.6%, matching the highest recorded in the last cycle in January 2020, when the economy appeared to be in pretty good shape (pre-COVID). It’s not far below the highest level recorded over the past year when the ratio hit 80.9% in July. It indicates that more people are working and want to work than at any point between 2001 and 2020. In fact, for women, the ratio is at 75%, which is higher than anything recorded in history prior to 2023 (the highest was 75.3% in October 2023).

Income Growth Is Strong, While Inflation is Running Low

What matters for consumption is incomes, and over the last three months, income growth across all workers in the economy has been running at an annual rate of 5.3%. That is above the pre-pandemic pace of 4.8%, which was also strong. Aggregate income growth is the sum of:

• employment growth, which is strong;
• wage growth, which is also strong; and
• hours worked, which has normalized and is running slightly below pre-pandemic levels.

It’s clear why income growth is solid.

Income growth is being boosted by falling inflation, thanks to lower gas prices and other commodity prices. Food prices are also in disinflation, as are several other categories on the services side. Over the last three months, headline inflation, as measured by the Fed’s preferred personal consumption expenditure (PCE) index, is expected to run at close to a 1% annualized rate. (PCE is less prone to being artificially elevated currently due to lagging official rental inflation data.)

This data implies inflation-adjusted aggregate income growth is running at around a whopping 4% annualized pace! In a sense, that’s the potential speed of the economy. Let that sink in.

Up Goes Productivity

The other important data point we received last week was productivity. Quarterly productivity data can be volatile, but over the last three quarters, productivity has grown at an annual rate of 3.9%. That’s well above the 2005-2019 pace of 1.5%, and it is currently higher than what it was in the late 1990s. While the number of hours worked has edged lower recently, output has increased, i.e., we’re producing more by working a tad less. That’s why productivity is up.

As noted in our 2024 Outlook, which you can download here, productivity growth is a potential game changer, if it continues. When productivity growth is strong, workers can see robust wage gains even as inflation remains muted. It allows the Federal Reserve to ease up on interest rates, which can spur business investment and further boost productivity. A key part of this is a strong labor market, as that’s ultimately what forces businesses to invest in productivity-boosting technologies. The Fed obviously plays a key role here, but we believe it will start cutting rates as early as May or June. That’s another tailwind for the economy.

Do Stocks Want the 49ers or Chiefs to Win?

“Baseball is 90% mental, the other half is physical.” — Yogi Berra

First things first, don’t ever invest based on who wins the Super Bowl. Or what color #87 Taylor Swift will wear at the big game, or the coin toss, or how bad the refs will be. With that out of the way, it is Super Bowl season, and that means it is time to talk about the always popular Super Bowl Indicator!

The Super Bowl Indicator suggests stocks rise for the full year when the Super Bowl winner comes from the original National Football League (now the NFC) but fall when an original American Football League (now the AFC) team wins. Of course, this is totally random. But it turns out that reviewing the previous 57 Super Bowls shows that stocks do better when an NFC team wins the big game. But as Yogi Berra playfully noted above, sometimes things don’t always add up, and investing based on this notion won’t either.

This fun indicator was originally discovered in 1978 by Leonard Kopett, a sportswriter for the New York Times. Up until that point, the indicator had never been wrong.

We like to make it a little simpler and break it down by how stocks do when the NFC wins versus the AFC, ignoring the history of the franchises. As our first table shows, the S&P 500 gained 10% on average during the full year when an NFC team won versus 7.5% with an AFC team won.

So, it is clearcut that investors want the 49ers to ground the Chiefs and win, right? Maybe not, as stocks have gained the full year 11 of the past 12 times when a team from the AFC won the championship going back 20 years. In fact, the only time stocks were lower was in 2015, when the full year ended down by 0.7%, so virtually flat.

By my math, there have been 57 Super Bowls and 22 different winners. I broke the data down by franchise and city. For instance, Baltimore has won three championships, with one for the Colts and two for the Ravens. So, I differentiated the two. Then the Colts won one in Indy, so I broke that out as well. Either way, I still don’t see my Bengals on here, but I expect that to change next year after Joe Burrow heals up! Remember, he is the only man who owns Patrick Mahomes and Josh Allen with a 5-1 record against them combined. But I digress.

Getting to the two teams competing this year, the Chiefs have won the Super Bowl three times and stocks gained 13.5%, while the 49ers have won it five times and stocks soared 19.2% on average.

It might not matter which team wins but rather by how much they win. That’s right, the larger the size of the win, the better stocks do. (Let’s have another disclosure that nearly everything I’m saying here isn’t in any way, shape, or form related to what stocks actually do.) When the Super Bowl ends in a single-digit win, the S&P 500 is up less than 6% on average and is higher about 60% of the time. A double-digit win? The data jumps to about 11% and 79%. When the final score is three touchdowns or more, the S&P 500 gained 13.6% on average for the year and is higher about 85% of the time.

Here’s a list of all the big blowouts and what happened to stocks. Not too bad, huh?

Here are 10 other takeaways from the Super Bowl stats:

• The NFC has won 29 Super Bowls and the AFC 28.
• The Steelers and Pats have won the most at six, but the 49ers sit at five and could match them with a win.
• As great as Peyton Manning was, he only won two Super Bowls. His brother also won two. Odds are their kids will win a few more. Omaha, Omaha!
• The Lions, Browns, Jags, and Texans have still never made the Super Bowl.
• The NFC won 13 in a row from 1985 (Bears) until 1997 (Packers).
• The Bills made the Super Bowl four consecutive years, losing each time.
• The highest scoring game was 75 total points in 1995 between the 49ers and Chargers.
• The lowest scoring game was only 16 points in 2019 when the Pats beat the Rams.
• The closest ever was a one-point win for the Giants over the Bills in 1993 (the Scott Norwood game).
• In 1990, the 49ers beat the Broncos by 45 for the largest win ever.

So, there you have it, a complete breakdown for the big game. I’m picking the 49ers, as they have the better offensive and defensive lines. But Mahomes, Swift, Kelce, and the Chiefs are awesome, and it’ll likely be a great game. In the end, I just hope the refs aren’t the story as they have been so many times in big games!

This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

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