Attack the Week (ATW)
January 2, 2024
Welcome to the other side. I hope you thoroughly enjoyed your well-deserved holiday break. Markets are back open, and many PnL statements start again with a boring zero. Many of us eagerly await January, hoping to start the calendar year's performance clock positively. That’s natural behaviour. The “January effect”, as I am sure you have read, would stipulate that an above-average return is usually obtainable as we start the year. However, recent studies show that such an effect has nearly disappeared in the US stock market. The skew in higher January readings is mostly related to the extremely great start in the years ‘75, ‘76 and ‘87.
According to the study, the January effect is weaker during periods of higher real GDP growth and stronger during periods of lower real GDP growth. The anomaly is less apparent for years with higher inflation and more apparent for years with lower inflation. The research also shows that the contribution of the January return to the calendar year return is relatively insignificant when there is a good performance year but relatively significant for poor market years.
As for me, I usually stay away in the first few days of the year and observe market action. This helps me unanchor from whatever beliefs and narratives I tried to run across from the now crystallised 2023. Every year will unfold its own playbook and narratives, as we are just observing the market’s storytelling. Jawad Mian, who I highly recommend to follow, puts it more eloquently:
“It’s not our job to predict the future but to see the present clearly.”
With that in mind, let’s briefly look at what the first week of the year has in store for us. Last week’s Friday Charts unveiled a few interesting developments, especially in bonds.
It’s a relatively data-heavy start to the new year. Payrolls will be the largest event risk for the week, although JOLTS openings and jobless claims will again be scanned for any significant signs of labour weakness. Meanwhile, ISM surveys should show familiar trends. FOMC minutes on Wednesday will be interesting to analyse for any pushback on current market rate cut pricing. European inflation, meanwhile, might see an uptick due to energy-related base effects.
Let’s dig deeper.