U.S. stocks have a bullish start to the new year, will the January effect be fulfilled again?

　　There is an old saying on Wall Street: A rise in January means a rise in the whole year. Historical statistics show that the market performance in January can often predict the direction of the whole year.

　　U.S. stocks ended the first month of the new year on a strong note despite the possibility that the economy may be on the brink of recession.

Among the three major stock indexes, the Nasdaq refreshed its best January performance since 2001 with an increase of nearly 11%, while the S&P 500 index recorded the largest increase in the same period in nearly four years.

　　However, considering the end of the Fed's interest rate hike cycle and the risk of economic recession, the situation this year may be slightly complicated, and there are many uncertainties in the outlook for the stock market.

The Fed's stance is key

　　Boosted by factors such as signs of slowing inflation and the cooling expectations of the Federal Reserve’s interest rate hike, U.S. stocks swept away last year’s sluggish trend, and the three major stock indexes all regained their 200-day moving averages, which measure the strength of the medium-term.

　　The growth sector has once again become the focus of the market this year.

Including consumer discretionary stocks, communication services, technology and other sectors that suffered sharp sell-offs last year led the S&P 500 Index. Star stocks such as Tesla, Amazon, Meta Platforms, and Nvidia have all risen by more than 20% in the past month.

　　The good start performance also makes the outside world have expectations for the prospects of the whole year.

According to the Stock Trader's Almanac

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　　Boris Schlossberg, macro strategist at BK Asset Management, an asset management agency, said in an interview with China Business News that the January effect is a seasonal feature of U.S. stocks, and is generally related to investors’ tax arrangements at the end of the year, holidays and other factors.

In his view, the recent rebound in U.S. stocks is largely related to the market's adjustment to the outlook for interest rates.

Considering that the Federal Reserve is still on the most aggressive rate hike cycle in nearly 40 years, he believes that the direction of policy tightening after the end will be the key driver of the stock market this year.

　　The Federal Reserve's interest rate meeting was held on Wednesday, and the Federal Open Market Committee FOMC decided to raise interest rates by 25 basis points.

Since the start of the rate hike cycle in March last year, the federal funds rate has been raised by 450 basis points.

　　Schlossberg told reporters that 25 basis points was the start of a regular pattern of rate hikes, and policymakers' views on the rest of the year loomed large in comparison.

Today's market reaction suggests that while the Fed remains hawkish, investors believe that the rate hike cycle may be approaching its end and that terminal rates won't be as high as officials forecast.

Soft landing doubtful market space or limited

　　Many institutions believe that if inflation continues to decelerate, the Federal Reserve does not need to raise interest rates to a higher level, nor does it need to maintain a tight state for a long time, so that the US economy may avoid recession.

Powell also raised the prospect of a soft landing during today's briefing.

　　However, the risk of recession still cannot be ignored.

Weakness in consumer demand was further revealed in retail sales data after housing and manufacturing took a hit.

Concerns about economic risks caused by excessive policy efforts have intensified.

The inversion of the 2/10-year U.S. Treasury yield curve, which has been used as an indicator of recession on Wall Street, has remained at record highs this year.

Interest rate futures are pricing in the Fed cutting rates as early as September.

　　The latest U.S. non-farm payrolls report will be released on Friday, with the unemployment rate falling to 3.5 percent in December, underscoring the difficulty for potential employers finding labor.

But recent layoffs are spreading outward from tech giants, with January data expected to show a cooling in the labor market.

The PMI survey of purchasing managers showed that the economic slowdown is affecting demand for goods and services, negatively affecting employment.

The Fed wants to see the number of job vacancies fall while avoiding a sharp rise in the unemployment rate, which it forecast at the end of the year at 4.6%.

　　Schlossberg analyzed to reporters that part of the external concerns stemmed from the bad memories of the early 1980s. Considering the complexity of inflation stickiness, the Fed's determination to stick to the end may mean that recession is inevitable.

Typically, a weakening economy and rising unemployment have a more pronounced dampening effect on inflation, with the Fed projecting a year-end unemployment rate of 4.6 percent, which has historically been the standard for recessions.

　　U.S. Treasury Secretary Janet Yellen said last week that she was encouraged by recent U.S. inflation and employment data, but at the same time she acknowledged that the U.S. economy does risk a recession in the current high interest rate environment.

"I'm pretty happy with the data I'm seeing so far, but given that the Fed is 'slowing the economy,' I can't guarantee that recession risks are minimized."

　　Morgan Stanley's chief equity strategist, Michael Wilson, said the surprisingly good start for U.S. stocks could come to an end soon.

"Recent price action reflects more of a seasonal January effect and short-covering. The truth is that earnings are even worse than feared, especially when it comes to corporate margins," he said in a statement. The report released this week continued to warn that U.S. stocks will usher in the worst earnings recession since 2008.

　　According to data from Citigroup, the current overall valuation of the S&P 500 Index has reached 18.5 times, close to the upper limit of the fair value range of 19 times.

Under the current macroeconomic environment, it is difficult for the index to have room for a substantial rise.

Barring a major change in the macro backdrop, current valuation dips are unsustainable.

The bank expects the low point of the S&P 500 index in the first half of the year to appear around 3,700 points, and is expected to rebound to 4,000 points by the end of the year.