What You Need to Know
- DataTrek co-founder Nicholas Colas provides some historical food for thought.
- Much will depend on whether Fed policy pushes the economy into a recession.
- The Fed is expected to raise rates three or four times this year in an effort to reduce inflation.
For the U.S. stock market, January 2022 is turning out to be the second worst-performing January in 42 years.
Whether the weak performance portends a negative full year for the market likely depends on whether the U.S. economy slips into recession, which, in turn, depends on Federal Reserve policy. That’s the belief of Nick Colas, co-founder of DataTrek Research, which publishes a daily guide to markets and data.
“History shows that despite a particularly poor performing January for the S&P, it can bottom early in the year if a) the U.S. does not enter recession amid headwinds or b) the federal government passes meaningful fiscal stimulus. … The latter is unlikely especially with midterm elections later this year, so it’s up to the Fed to not let the U.S. economy tip into recession as they raise rates this year,” Colas writes in a recent report.
While Colas does not fully embrace the idea that the performance of the S&P 500 in January predicts the general direction of the market for the full year, he notes that when the index falls in January, performance for the full year lags compared with the performance in years when January is positive.