February Outlook: 2024 Bullish But Expect Feb & Q1 Weakness
By: Jeffrey A. Hirsch & Christopher Mistal
January 25, 2024
2023 was a textbook seasonality and cycle year with the market delivering above average gains and closing at the annual highs right on cue at yearend. We expect this bull market to continue and our 2024 Forecast remains on track for our base case scenario of annual gains in the 8-15% range with perhaps more for S&P and NASDAQ. Following last year’s and the fourth quarter’s momentous rally, the market succumbed to early January profit taking and portfolio adjusting. 
January selling has become a regular occurrence in the last 20-25 years and is also typical of election year Januarys. It makes sense if you think about it. Fourth quarters are notoriously strong (see STA 2024 page 82) as are pre-election years, so it would not be a stretch to expect some profit taking in January in general and election year January specifically – at least early in the month.
This caused the Santa Claus Rally and the First Five Days to fail. But stocks have bounced back into positive territory for the most part, pushing DJIA, S&P 500 and NASDAQ 100 to new all-time highs. NASDAQ Composite and Russell 2000 have not hit new ATHs. NASDAQ Composite is only 3.5% away, but R2K is still 23.6% below its November 2021 ATH.
The Russell 2000 small cap benchmark also rallied off its mid-January low but is still under water in 2024. After the big 26% runup from late October to yearend R2K is struggling in the New Year, likely weighed down by higher interest rates and tepid economic growth (GDP) expectations. This is not to say that small cap season is over, but we have our eye on them and if they breakdown further we may issue a sell or put in a stop on the iShares Russell 2000 (IWM) position in the Tactical Seasonal Switching ETF Portfolio.
At this juncture, with the Santa Claus Rally (SCR) and the First Five Days (FFD registering losses this year, our flagship January Indicator Trifecta component, the January Barometer (JB) holds the key. Two weeks ago we detailed how years with down SCRs and FFDs did quite well when the full month JB was green and why the January Barometer works and is so important. We have also been clear on how impactful the 4-year cycle can be, especially when it continues to track the historical pattern as closely as it has been for the past three years. 
Digging deeper into the 4-year cycle we find that when the midterm year was down as it was in 2022, the following pre-election years are up huge just like 2023 – and this is also bullish for the election year. The numbers in the following tables of the S&P 500, NASDAQ and DJIA support our bullish forecast and outlook for 2024. Note some of the down January Barometers in the table as well as softness in Q1. Q1 weakness and election year March lows are also visible in the charts on page 34 in the 2024 Stock Trader’s Almanac. “Incumbent Party Wins & Losses” as well as our Election Year Seasonal Pattern Chart below.
[3 CHARTS: Election Years Are Bullish After Down Midterm Year & Big Pre-Election Year Gains]
[3 CHARTS: Election Years Are Bullish After Down Midterm Year & Big Pre-Election Year Gains]
[3 CHARTS: Election Years Are Bullish After Down Midterm Year & Big Pre-Election Year Gains]
As noted in the “Pulse of the Market” below market internals leave a little something to be desired, which may be indicative of the potential for a continuation of Q1 election year weakness after this late January rebound runs its course. Other than tech, especially mega-cap, and financials some technical consolidation and distribution is afoot. Macroeconomic readings remain supportive with the latest GDP growth numbers out today better than expected and resilient. Inflation continues to mitigate, and the job market is solid. The economy will likely decelerate this year, but the soft-landing scenario is still firmly in play.
Finally, our Election Year Seasonal Pattern Chart highlights the continuation of the 4-year cycle tracking the historical pattern. After dipping into negative territory at the outset of the year S&P 500 has moved back to the Sitting President line in the chart. As we detail on STA 2024 page 26 and related pages, the First Five Months are better when the incumbent wins. As the election appears to be heading toward a rematch of 2020 we can look to the market for clues as to how the election may play out and reverse handicap that to how the market is likely to perform for the rest of the year. As the campaign trail rhetoric heats up follow the market for guidance. Whoever gets elected, one pattern is clear and that is that there have only been Two Losses in the Last Seven Months of Election Years since 1950: 2000 (Tech bust, undecided election) and 2008 (GFC). We remain bullish on 2024.
[Election Year Seasonal Pattern Chart]
Pulse of the Market
Earlier this week DJIA closed above 38,000 for the first time ever (1). DJIA, S&P 500 and NASDAQ 100 have also closed at new all-time highs in 2024, which is encouraging and positive. But the NASDAQ Comp and Russell 2000 continue to lag and have not broken out yet. We suspect the NASDAQ Comp and Russell 2000 lagging performance will continue until interest rates make a move lower. Interest rates could move lower in anticipation of Fed rate cuts, but it may require actual cuts for Russell 2000 to close its sizable underperformance gap.
DJIA’s strong surge off its late-October low was accompanied by a similar move in the faster and slower MACD indicators. When DJIA’s pace of gains began to slow in December, both MACD indicators rolled over and turned negative. Recent DJIA gains have nearly reversed the negative MACD indicators (2). Although we do not use these signals during the “Best Months,” a positive MACD crossover would be a welcome sign that the rally could continue.
[Dow Jones Industrials & MACD Chart]
DJIA (3), S&P 500 (4), and NASDAQ (5) did extend their respective weekly winning streaks to nine in a row. The same New Year profit taking pullback that ended the weekly winning streak also contributed to a negative Santa Claus Rally and First Five Days. Since that down week ending January 5, DJIA, S&P 500 and NASDAQ have resumed their weekly winning ways, and our January Barometer is currently on track to be positive.
Market breadth over the past two weeks has been tepid when compared to the magnitude of the weekly gains. Last week (ending January 19), NYSE Weekly Decliners outnumbered NYSE Weekly Advancers (6) by over 1.6 to 1 while S&P 500 gained 1.2%. NASDAQ Weekly Decliners outnumbered NASDAQ Weekly Advancers by a little over 1.5 to 1 (not shown in table) as NASDAQ advanced 2.3%. These numbers are somewhat of a concern as it suggests participation in the rally is fading and it could soon stall again. Any improvement in the Weekly Advance/Decline metrics would be very much welcome.
The trend of Weekly New Highs and New Lows (7) paints a similar picture as Weekly Advance/Decline numbers. New Weekly Highs have fallen while New Weekly Lows have ballooned from just 16 during the last week of 2023 to 125 last week. We would like to see the number of New Weekly Highs expanding and New Weekly Lows shrinking.
Longer-dated Treasury bond yields have been trending higher in 2024. After falling to 4.00% during the last week of 2023, the 30-year Treasury bond yield (8) has rebounded back to 4.34% last week. So far, most of the collateral damage from this increase in rates has been inflicted upon the Russell 2000, small-cap index. If rates continue to rise, they could become an issue to the remainder of the market.
[Pulse of the Market Table]