As January goes, so goes the year and other stock market rules.

Chart of the week

The chart shows the return in January, as well as the annual return of the DAX since 2013.

Why this is important
One of the most famous stock market sayings is "As January goes, so goes the year." This is also known as the January Barometer. With data analyzed since 1980, it is one of the most reliable stock market rules. If the return in January is positive, the return for the year is also positive.
However, in the past 10 years, the rule has lost its predictive power. In 5 years it was true and in 5 years it was not.
The rule is part of the widely observed seasonality of returns in the stock market.

The chart shows the average and median return in each month of the year since 1936. December and January are among the strongest stock market months. By contrast, February, August and September are among the worst months of the year. This is also the origin of the stock market rule "Sell in May and go away, but don't forget to come back in October". An investment strategy that is only ever invested from October to May of the following year is historically far superior to a strategy that is always invested.

Inflation on the rise in Germany
Inflation has been falling in the U.S. for months, and the same was expected for Europe.

The chart shows the actual consumer price index (and not the rate of change), with a value of 100 points corresponding to the price level in 2015. Since 2015, prices have increased by over 20%.

The chart shows the annual change in the consumer index, the inflation rate. The increase in consumer prices on an annual basis accelerated again in January. The annual inflation rate rose to 8.7%. In December, the inflation rate had been 8.6%. Most market participants had expected lower inflation in January.

This is a reminder that the high inflation in Europe is not over yet. The European central bank has so far raised interest rates far less than the central bank in the USA. To get inflation under control, it will have to continue to raise interest rates aggressively. However, the European central bank has the problem that if it raises key rates too much, the euro crisis could come back. Portugal and Italy could then head for national bankruptcy.

Interest rate and earnings development in the USA
Last week, Jerome Powell, the head of the U.S. Federal Reserve, made his first public appearance after the disastrous labor market figures the week before. In doing so, he repeated what he had already put forward on the day of the last meeting. He does not expect a first rate cut in 2023 and the rate hike on February 22 should not be the last.

The chart shows how likely market participants in the USA are to expect an interest rate hike at the next meeting of the Federal Reserve on March 22. 90% expect an increase of 25 basis points. However, compared to last week, the number of those expecting an increase of 50 basis points has increased from 0% to 10% (marked in red).  

This development on the interest rate side could slow down the technology rally.

The chart shows the FANG Index, which consists of the stocks Facebook, Amazon, Netflix and Google. After the biggest monthly return since mid-2019, the index now seems to be hitting resistance.

The chart shows the index for meme stocks. This is the name given to shares that are heavily promoted on social networks. Usually, a hype is created that is not justified based on the fundamental figures of a company. One of the best-known examples is when, a year ago, users of the Reddit trading platform banded together to buy the GameStop stock, inflicting a severe blow on hedge funds. The performance of these stocks is seen as emblematic of overly euphoric retail investors. Here, too, the recovery is running into resistance.
The interest rate hikes by the U.S. Federal Reserve make it increasingly attractive to invest in bonds.

Die Grafik zeigt das obere Band der Leitzinsen und den Earnings Yield der Aktien im Russell 1000 Index. Die Rendite, die diese Aktien durch ihre Geschäftstätigkeit erzielen, ist aktuell fast so hoch wie die Obligationenzinsen. Ein Anleger kann sich also die Frage stellen, warum er Firmen als Aktienkapital Geld zur Verfügung stellen soll, wenn er mit tieferem Risiko die gleiche Rendite bei Obligationen bekommt.

Dieser Trend wird sich in den nächsten Monaten wohl noch verstärken.

The chart shows the evolution of analysts' earnings forecasts 39 weeks before each quarter end and companies' actual earnings reports 9 weeks after the quarter end.
39 weeks ago, earnings were expected to increase 10% in Q4 2022 (purple line). This forecast has been consistently lowered. Then at the quarter end on 12/31/2022, a 3.1% decline was expected. The result for all profit reports to date is -2.9%, i.e. slightly better than expected.

However, the chart also shows what profits are expected for the 1st 2nd and 3rd quarters of 2023. We must therefore be prepared for a decline in profits of 5% as of March and June.

The chart shows how many months the economy shrinks in a recession and how many quarters of falling interest rates can be expected. With a three-quarter drop in earnings, we are below all previous recessions here. A 5% drop in profits is also at the lowest end. Based on these new figures, it can be assumed that expectations of only a weak recession do not go far enough. Investors are currently too optimistic.

In connection with the seasonality of monthly returns shown at the beginning, February is indeed likely to be a rather weak stock market month.