The January effect on the Ibex 35 and a bullish candle for 2023 | Opinion of Rubén J. Lapetra

The ‘January effect’ is one of those stock market phenomena that arise from statistics and the behavior of investors. The conclusion is to say that “as January goes, so will the year”, that is, if the first month looks like a profit, so will the whole year. The reality is that it is fulfilled, with nuances, on most occasions according to records both on Wall Street and on the European stock markets.

This monthly barometer is part of a broader and more reliable statistical troika (January Triplet): the ‘Santa Claus rally’ (strictly, the period after Christmas and until the first day of the following year) and the ‘five first days of January. Well, if we stick to what we have experienced this week, there are reasons for optimism for 2023 among both stock and fixed-income investors. The last two sub-indicators have closed positively and all that remains is to see the monthly balance.

The Ibex 35, the Spanish stock market reference, has started the year with a strong rebound of 5.7% that almost completely erases the losses accumulated in 2022 (-5.5%). The rise has been in line with its European peers such as the German Dax, the French Cac or the British Ftse, which accumulate increases of 5 to 6 percent in these five days. It also beats the start of Wall Street with gains of less than 2% for the Dow Jones, the Nasdaq and the S&P.

For lovers of statistics, the ‘Triple Effect of January’ (post-Christmas, five days and monthly balance) seems like a separate talisman in its three parts, but as a whole it is close to an infallible truth with a reasonable margin of error. Is it then the end of the bear market of 2022? Before claiming victory, let’s see what we can leave on paper. Precisely, a scenario like the current change in inflation and interest rate expectations is not the best ground for sowing forecasts.

As both the Federal Reserve (Fed) and the European Central Bank (ECB) have been using during their latest meetings, everything will depend on the incoming data. Despite the aggressive speeches of both central banks, there are winds of change and disinflation is gaining strength. Next Thursday the CPI reading for December in the US will be announced and economists estimate a slowdown of six tenths, to 6.5%, which would complete a cycle of six consecutive months of slowdown. In Europe, last month, it has taken a step back to 9.2%, but it is still too high.

All the ingredients are combining for the gatekeepers of monetary policy to loosen the noose that makes financing more expensive in the near future. Sovereign bond yields reveal a divergence in this regard and anticipate a ceiling in rates of around 5% for the US and 3.5% in the Eurozone. There are even voices who believe that the Fed will have to use its liquidity tools again to maintain stability in bonds if it continues to raise rates in 2023.

If this scenario crystallizes, the thesis of a ‘soft landing’ could be considered valid in the coming months despite the fact that some large economies such as the United Kingdom or the euro area itself are in technical recession. A scenario of stability and inflation under control is once again good news for the stock markets after the severe correction since November 2021 that has hit, above all, technology and growth stocks. For the Ibex 35, 30% nourished by banks, the 180 degree turn after leaving negative rates behind is an additional catalyst. If in 2022 it was one of the least bad rates, this year it can unfold its potential and shine, if the recession gives its permission, as in its best years.

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