Positive starts to the year historically bode well. Looking at the S&P500, since World War II, a positive January has seen strength through the remainder of the year over 85 per cent of the time.
Gains have been more pronounced after a big sell-off. Of the five instances in which the S&P500 gained more than 5 per cent in January after a negative year, the benchmark index rose 30 per cent on average. The broad US index typically carries a strong degree of influence on how other markets perform.
Will history repeat?
The central banks hold many cards, with recent meetings in focus for pointers as to when interest rates will peak.
The US Federal Reserve has lifted interest rates to their highest since October 2007. The recent 25 basis point increase was however a step-down from the rapid pace of increases last year. Markets rallied as Fed Chair Jerome Powell acknowledged that “disinflationary processes” were under way, and that officials were now looking at the “extent” of future rate increases.
Significantly, the Fed Chair also sees a ‘soft’ economic landing. Despite all the headlines about companies (particularly in the technology sector) making job cuts, the world’s largest economy is still creating jobs (517,000 in January) at a robust rate.
Central bank officials elsewhere have indicated that inflation is easing, and interest rates are peaking. The Bank of England recently raised rates by 50 basis points but indicated that the tightening cycle was nearing an end, and that any recession would be “short and sharp” (as opposed to a previous view that it would be the longest on record). The ECB also raised by 50 basis points but recognised that inflationary pressures were easing.
Globally, officials appear to be saying that while the war against inflation has not been won yet, the finish line is in sight, and economies have come through rate tightening programmes better than expected.
Reaching the mountain top? – official interest rates in the US, UK and Europe
Inflation may also have peaked in Australia. The RBA last week put through a ninth consecutive rate rise, taking the cash rate 25 basis points higher to 3.35 per cent.
Governor Philip Lowe suggested that rates were likely to rise another couple of times yet, but inflation is expected to fall to 4.75 per cent by the end of the year.
It will be interesting to see what the RBNZ does at the next meeting on February 22. Central banks do not operate in silos, and typically a degree of implicit co-ordination exists.
External/offshore inflationary drivers are unquestionably moderating. In NZ, domestic inflation has remained sticky (the floods and minimum wage increase probably won’t help). The recent CPI release showed that inflation held at 7.2 per cent in the December quarter (food inflation was a big driver), although was lower than the 7.5 per cent forecast by the RBNZ for the period.
The jobless rate has however ticked up, which may signal that labour market tightness is easing. Many kiwi consumers with mortgages will also be faced with further pressures as they roll off ultra-low fixed borrowing rates. Will the RBNZ see the bigger picture and side with a 50 basis point increase as opposed to a 75 basis point lift? Time will soon tell.
The upcoming NZ earnings season will also be looked at for signs of better-than-feared outcomes. This has largely been the case in the US, and so far in Australia. Added to the improving global picture, and particularly relevant to New Zealand, is that China is reopening.
So, can the strong start made by markets continue? There is some evidence to suggest it can over the course of the year, although it pays to remember that markets by their nature are never linear.
- Greg Smith is head of retail at Devon Funds
