A rare stock market indicator has led to gains in the S&P 500 100% of the time, with an average return of 15.6% for the year.
REUTERS/Lucas Jackson
The stock market is flashing an ultra-rare bullish signal with a 100% success rate, according to CFRA Research.
The investment research firm pointed to the positive January for stocks, with the S&P 500 gaining 3.2% since the start of the year.
In an election year, that's actually a very rare, very bullish signal for stocks, CFRA chief investment strategist Sam Stovall said. Election years have only started with a gain in the first month 11% of the time. And once the S&P 500 have crossed that threshold, stocks ended up gaining an average 15.6% for the year, with gains posted 100% of the time, Stovall said.
A 15% gain would take the S&P 500 to around 5,629. That exceeds what most Wall Street strategists are expecting for the year, with Goldman Sachs, Bank of America, Deutsche Bank, and BMO seeing a 10% or smaller gain for stocks in 2024.
Some of the market's hottest sectors could see even bigger returns, according to the positive January indicator. Since 1990, a positive January for stocks has led to the top three sectors in the S&P 500 to return an average 21% for the year, outperforming the overall market 84% of the time, Stovall added.
That implies a more than 20% return for communication services, information technology, and financial stocks, which currently make up the three strongest sectors of the market, according to a CFRA analysis of Dow Jones data.
Those indicators aren't "gospel," Stovall warned. Still, the firm saw a positive year coming for stocks, pointing to strong economic and investing conditions. Those include expectations of a soft-landing, strong corporate earnings, and the Fed easing interest rates, which will loosen financial conditions and give asset prices a boost.
"For 2024, our positive investment thesis is based upon the avoidance of recession, falling inflation, three Fed-triggered rate cuts starting in Q2, 2024, and double-digit, full-year EPS increases. Leadership by growth sectors over defensive groups also offers confirmation that the market will likely maintain its upward trajectory for the coming year," Stovall said.
Stovall warned though that the S&P 500 is still at risk of a correction of as much as 20% given the recent strong recovery in stocks. The benchmark index officially recouped all its losses from the 2022 bear market last week, notching a string of all-time highs this month, and market experts have grown concerned that much of the full-year 2024 gain has been "pulled forward" and the rest of the year could suffer as a result.
"The S&P 500 typically gained an additional 5% over the subsequent two months after recovering all that it lost in the prior bear market before slipping into a decline from 5% to 15%, and averaging around 8%. Never did the fully recovered bull market slip immediately into a new bear market."
Wall Street has been growing increasingly optimistic on stocks as traders ambitiously price in Fed rate cuts, cooling inflation, and a soft-landing for the US economy. Investors have penciled in six rate cuts this year, according to the CME FedWatch tool, about double what central bankers have officially forecasted for 2024.
Meanwhile, the expected inflation rate over the next 10 years fell to 2.2% in January, around the Fed's long-run target, according to Cleveland Fed economists.
