Nasdaq Composite notches best start to the year since 2001.
U.S. stock indexes rose Tuesday to finish January with strong monthly gains, a reprieve for investors after a bruising 2022.
Increasing confidence that interest rates are nearing their ultimate level has boosted stocks, particularly growth segments of the market. Speculative, heavily shorted stocks have led this year’s rally.
Investors are eager to parse the Federal Reserve’s statements at Wednesday’s meeting for hints at the future path of policy—the Fed is broadly expected to raise interest rates by a quarter percentage point. Tuesday’s data showing that wage gains are cooling buoyed hopes that waning inflation could prompt officials to pause rate increases in the months ahead.
The Nasdaq Composite jumped 190.74 points, or 1.7%, to 11584.55. The tech-focused index gained 11% in January, its best start to the year since January 2001, when it gained 12%.
The S&P 500 rose 58.83 points, or 1.5%, to 4076.60, while the Dow Jones Industrial Average added 368.95 points, or 1.1%, to 34086.04. The indexes added 6.2% and 2.8%, respectively, this month.
Many investors are hoping the old Wall Street saying that “as goes January, so goes the year,” proves true. History is in their favor: The Nasdaq has averaged a 14% rise through the rest of the year after gaining 10% or more in January, according to Dow Jones Market Data. Of course, the dot-com bubble of 2001 was a different story—the index fell 30% in the following 11 months.
“With unemployment at 3.5% and the economy still adding more than 200,000 jobs per month, it’s way too premature to suggest that the Fed’s work is done,” said Hans Olsen, chief investment officer of Fiduciary Trust Company. “Investors’ expectations are getting a bit ahead of themselves. We’re in the early stages of normalizing inflation—the last 100 yards will be tough.”
Investor optimism is salient in derivatives markets. Wagers show the federal-funds rate reaching 4.9% by June, with two rate cuts expected in the latter half of 2023. Volatility in Eurodollar options—used to bet where central bankers will take interest rates—slipped to its lowest level in roughly a year. That was before the Fed began upping the policy rate.
Meanwhile, central bankers have held the line on maintaining restrictive policy: The latest forecast showed Fed officials expect rates to reach 5.1% and Chairman Jerome Powell has dismissed the possibility of cuts this year.
The market narrative is very much Goldilocks at the moment, according to Mr. Olsen.
In bond markets, Treasurys have soared while yields have dropped to reflect Wall Street’s bets that rates are nearing their peak.
The yield on the benchmark 10-year Treasury note fell to 3.513% from 3.550% Monday, dropping three-tenths of a percentage point this month. The two-year note yield—which is highly sensitive to monetary policy expectations, slipped to 4.211% from 4.259%. Its nearly 0.19 percentage point drop in January is the largest monthly decline since Covid-19 rattled markets in March 2020.
Money managers are tracking corporate earnings for guidance on inflationary pressures facing businesses and their expectations for how the economic backdrop will affect profits. General Motors shares rose $3.03, or 8.4%, to $39.32 after the company reported a rise in quarterly earnings, with vehicle output rebounding from supply-chain troubles and pricing holding strong despite mounting consumer pressures.
Shares of Caterpillar fell $9.21, or 3.5%, to $252.29 after the equipment maker’s profit missed expectations. Shares of Exxon Mobil rose $2.45, or 2.2%, to $116.01 after posting record annual profits.
While McDonald‘s said price increases and promotions boosted sales, warnings that inflation will continue to pressure its business helped drag shares $3.49, or 1.3%, lower to $267.40 per share.
In energy markets, Brent crude slipped 0.5% to $84.49 a barrel. The international benchmark shed 1.7% during January, its sixth month of losses in the last eight.
Overseas stocks closed out a promising start to the year. The pan-continental Stoxx Europe 600 fell 0.3% on Tuesday but rose 6.7% in January, its third month of gains in the past four. Germany’s DAX index rose 8.7% this month, now off just 7% from its record high set more than a year ago.
In Asia, indexes declined but retained strong monthly performances. South Korea’s Kospi Composite and Hong Kong’s Hang Seng each fell 1%. Japan’s Nikkei 225 and China’s Shanghai Composite each declined 0.4%. All four indexes gained more than 4.7% in January, led by the Hang Seng’s 10% rise. Hong Kong stocks’ 49% gain over the past three months is their best since 1993.
