With one day to go in January, our January Barometer (JB) is positive with room to spare. A positive JB builds upon a positive First Five Days (FFD) and lessens the concerns that our Santa Claus Rally (SCR) failed to show. This will be just the fourth time since 1950 that our January Trifecta went down SCR, and up FFD and JB.
Focusing on just the positive JB alone has a solid track record. Up Januarys are followed by up years, 88.9% of the time (40/45 years) with an average S&P 500 gain of 17.0%. 14 of 18 of the last post-election years followed January’s direction. When January is positive in post-election years, 8 of 9 full years were up with an average gain of 17.8%. 2001 was the exception. January was up 3.5%, but full-year was down 13.0%. (See STA 2025 page 18 for more.)
Let’s remember the reason the January Barometer exists is the Twentieth “Lame Duck” Amendment to the Constitution. Passage of the Twentieth Amendment in 1933 created the January Barometer. Since then, it has essentially been “As January goes, so goes the year.” January’s direction has correctly forecasted the major trend for the market in many of the subsequent years.
Prior to 1934, newly elected Senators and Representatives did not take office until December of the following year, 13 months later (except when new Presidents were inaugurated). Defeated Congressmen stayed in Congress for all of the following session. They were known as “lame ducks.” Since 1934, Congress convenes in the first week of January and includes those members newly elected the previous November. Inauguration Day was also moved up from March 4 to January 20.
January’s prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene, Presidents set national goals and priorities, and Wall Street analysts present their forecasts. These events clearly affect our economy and markets and much of the world. Add to that January’s increased cash inflows, portfolio adjustments and market strategizing and it becomes apparent how prophetic January can be. Switch all of these events to any other month and chances are the January Barometer would become a memory.
Presidents used to give their State of the Union message and present an annual budget in January. But over the past six years they have addressed the nation and the world later in February, March or even April. However, President Trumps speech to the World Economic Forum at Davos last week to the titans of business and academia and world leaders felt much like a State of the Union address where he laid out his agenda and policy initiatives quite clearly and succinctly.
We have also had an FOMC meeting this week with a somewhat less dovish tone from the Fed. Several economic readings have also been released. Q4 GDP came in a little lower, but inflation was a bit tamer though we still have the Fed’s preferred inflation metric the PCE deflator out tomorrow. And the labor market remains steady and robust. There was the DeepSeek AI panic this week, but the Dow was up that day and market breath was healthy. So, the market has had a great deal to digest so far this month (and year) and yet S&P 500 is up 3.2% so far this January and our January Barometer will be positive unless the S&P 500 drops 189.55 points tomorrow.
Bullish 2025 Forecast on Track
We remain bullish for full year 2025, but expect more volatility and chop in the near term as Q1 of the post-election tends to be a weak spot in the 4-year cycle as we highlighted in the
January 9, 2025 issue. February has been notoriously weak and even more so in post-election years. In fact,
February is the worst month for S&P 500, NASDAQ and Russell 2000 in post-election years since 1950. With seasonality largely tracking over the past several years and continuing to do so this year we would not be surprised for the market to be down in February with the odds of correction of maybe 5-10% from the highs increasing.
We will be keeping an eye on how 2025 tracks the Post-Election Year Season Pattern Chart above. Currently, we are on the bullish track in line with our base case forecast scenario of 8-12%. But should the market falter and begin to track the red Incumbent Party Losses line, that would be concerning. 2024 was a huge year, and the market has come a long way over the past two years so some profit taking and rotation is not unusual.
We are rather encouraged by the market’s gains so far this January with one day to go despite the DeepSeek deep fake. Gains this year will be tougher to come by and shallower than the past two years. Post-Election years have been much better in recent years but as we have been driving home Q1 is a weak spot. The January Barometer holds the key and it’s quite positive, suggesting that our annual forecast for 8-12% gain with a lot of chop and weakness in Q1 and Q3 is on target.
Do not expect a repeat of 2023/2024 gains. The market does not like quick changes. The new Trump administration is making many of them and making them quickly. We expect this to persist along with other bumps along the way. DeepSeek exposed tech’s potentially stretched valuations. Everyone already knew and was concerned about big tech AI spending. At a minimum DeepSeek was a wake-up call to watch spending and valuations. If DeepSeek proves to be everything it claims, we see this as a positive for the future of AI. Its main appeal is low cost, which could lead to quicker and wider spread AI adoption. Our
Super Boom (2025 STA page 11) forecast rocks on!
Pulse of the Market
For all the apparent gloom and doom circulating around, DJIA has proven itself to be impressively resilient. After declining 6.8% from its early December all-time closing high above 45000 to its first half of January low, DJIA is once again approaching new all-time high territory (1). DJIA’s recent bullish momentum is confirmed by both faster and slower moving MACD indicators turning positive in mid-January (2). Should DJIA break out to new all-time closing highs, it could confirm the bull market lives.
DJIA closed out 2024 by logging its third Down Friday/Down Monday (DF/DM) of December (3) and its ninth of 2024. That final DF/DM of 2024 did kick off two straight weeks of declines by DJIA, S&P 500, and NASDAQ but the declines abruptly ended. DJIA, S&P 500 (4), and NASDAQ (5) were up for two weeks in a row. S&P 500 did close at a new all-time high last week. DJIA is currently on track to record a third week of gains, but S&P 500 and NASDAQ are not.
Throughout the majority of December into the first two weeks of January, Weekly market breadth data was mixed or weak. When the market turned mid-January and began rallying Weekly market breadth data improved (6) for two weeks and was consistent with broad market strength. During the week ending January 3, 2025, when all three indexes declined modestly, Weekly Advancers outnumbered Weekly Decliners suggesting some sector rotation and new positioning could have taken place as the New Year kicked off. With DJIA outperforming S&P 500 and NASDAQ this week, it would not be surprising to see similar readings for this week.
Somewhat consistent with the theme of rotation and adjusting portfolio positions for a new year, along with S&P 500 closing at a new all-time high, New 52-week Highs have been slowly, steadily increasing this year (7). New 52-week Lows remained elevated until last week when they abruptly declined. Overall, Weekly breadth and New Highs/New Lows data has been choppy since early December. This matches our expectations of higher volatility as the market labors to find a clear direction.
Reasonably strong economic data combined with stubborn inflation has pushed the 30-year Treasury bond yield (8) back towards 5% and it has caused the Fed to hit pause on rate cuts. The last time the 30-year Treasury bond yield exceeded 5% on a weekly basis was in October of 2023. When the yield began retreating in early November 2023, DJIA, S&P 500 and NASDAQ went on to enjoy nine straight weeks of gains. If tomorrow’s Personal Consumption Expenditures (PCE) report comes in better than anticipated, it could be a catalyst to reverse the trend in the 30-year Treasury bond yield.