February Outlook: January Barometer Positive Bull Intact But Weakness & Chop Ahead
Seasonal: Neutral. February is the weak link of the “Best Months.” Although up more often than down. In the post-presidential-election years, February has been weaker than average. The market has tended to rally in the first half of the month, but gains tend to fade after mid-month, and even sooner in post-election years.
Fundamental: Fair. Q4 GDP came in at 2.3% and full-year GDP for 2024 was 2.8%. Consumer spending remained firm in Q4 at 4.2%. Unemployment data continues to be respectable with the unemployment rate at 4.1%. Inflation, however, remains stubbornly above 2%. Corporate earnings are also largely holding up despite a stronger dollar and lingering tariff concerns.
Technical: Diverging. The S&P 500 closed at a new all-time high last week. The DOW has not but is trending in that direction while the NASDAQ has not done so since December 16. DeepSeek’s AI model hit technology shares and concerns linger. Bullishly, all three indexes are currently above their respective 50-day moving averages and technical indicators are improving yet stretched. Across the board, new all-time highs would be bullish.
Monetary: 4.25 – 4.50%. At the conclusion of the Fed’s latest meeting on January 29, it again acknowledged inflation is still elevated while economic activity and the labor market has remained firm. The Fed reiterated it remains data dependent regarding any future monetary policy actions. Based upon GDP data and recent inflation metrics, the Fed’s target interest rate is likely neutral. It is unlikely they will raise or lower their benchmark interest rate without a corresponding established trend in inflation data.
Sentiment: Retreated. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 47.5%. Correction advisors are at 23.0% and Bearish advisors number 29.5% as of their January 29 release. After peaking at 62.9% in early December, Bullish advisors retreated all the way down to 42.4% by mid-January. Over the same period, Bearish advisors surged from 16.1% to 32.2%. Excessively bullish sentiment has abated, leaving room for any positive market momentum to build.
The Stock Traders Almanac January Barometer (JB) finished in positive territory with room to spare. A positive JB builds upon a positive First Five Days (FFD) and lessens the concerns that the Santa Claus Rally (SCR) failed to show. Focusing on just the positive JB alone has a solid track record. Up Januarys are followed by up years, 88.9% of the time (40/45 years) with an average S&P 500 gain of 17.0%. 14 of 18 of the last post-election years followed January’s direction. When January is positive in post-election years, 8 of 9 full years were up with an average gain of 17.8%.
January’s prognostic power is attributed to the host of important events transpiring during the month: new Congresses convene, Presidents set national goals and priorities, and Wall Street analysts present their forecasts. These events clearly affect our economy and markets and much of the world. Add to that January’s increased cash inflows, portfolio adjustments and market strategizing and it becomes apparent how prophetic January can be. Switch all these events to any other month and chances are the January Barometer would become a memory.
I remain bullish for the full year 2025, but expect more volatility and chop in the near term as Q1 of the post-election tends to be a weak spot in the 4-year cycle. February has been notoriously weak and even more so in post-election years. In fact, February is the worst month for the S&P 500, NASDAQ and Russell 2000 in post-election years since 1950. With seasonality largely tracking over the past several years and continuing to do so this year I would not be surprised for the market to be down in February with the odds of correction of maybe 5-10% from the highs increasing.
Currently, I am sticking with my base case forecast scenario of 8-12%. 2023 and 2024 were big years so some profit taking and rotation would not be unusual, especially in Q1 and Q3.
*Source: The Stock Trader’s Almanac