The stock market is showing even stronger bullish signals compared to last year, thanks to surging consumer sentiment in January. A study published in the International Review of Financial Analysis reveals that when investors alter the equity allocations of their monthly 401(k) contributions, it has a significant impact on the stock market. While investors can make changes to their equity allocation at any time, most tend to do so in January.
According to the researchers behind the study, an increase in consumer sentiment in January leads to higher inflows of cash into the stock market for the remaining months of the year. This correlation was not found for any other month besides January. The study, titled “The January sentiment effect in the U.S. Stock Market,” was conducted by Zhongdong Chen of the University of Northern Iowa and Phillip Daves of the University of Tennessee, Knoxville. They analyzed monthly changes in the University of Michigan’s Index of Consumer Sentiment and discovered the January sentiment effect.
Since 1978, when the index began to be updated monthly, a significant jump in the index from December to January has been correlated with above-average returns from February through December. Last year, this sentiment effect held true. The January 2023 Index of Consumer Sentiment reading was 5.2 percentage points higher than in December 2022, resulting in a total return of 18.8% for the S&P 500 from February through December 2023.
Looking ahead to 2024, the January sentiment effect is expected to be even more bullish. The January 2024 Index of Consumer Sentiment reading was 9.3 percentage points higher than the December reading, placing it in the 99th percentile of all readings since 1978. It’s important to note that the January sentiment effect should not be confused with the discredited January indicator, which suggests that the stock market’s direction in January predicts its direction for the next 11 months. The January indicator has no statistical significance.
While no indicator is foolproof, it is reassuring to come across a little-known indicator with a strong track record like the January sentiment effect. This indicator provides a positive outlook for the stock market and offers hope for investors in 2024. It’s always wise to exercise caution and consider various factors when making investment decisions, but the current indicators are certainly encouraging.
In conclusion, the stock market is showing even stronger bullish signals this year compared to last year. The correlation between surging consumer sentiment in January and increased inflows of cash into the stock market for the remaining months of the year has been established through extensive research. The January sentiment effect has proven to hold true in previous years and is expected to be even more bullish in 2024. While no indicator is infallible, this little-known indicator provides a positive outlook for the stock market and offers hope for investors in the coming months.
