Well known to many investors, “the January effect” has become known as the seasonal strength in the markets everybody loved to bank on. However, it has completely faded over the past 25 years. On average, the S&P 500 has declined by 0.26% in January, which is in stark contrast to the previous 50 years, where January showed a solid return on average of 1.6%.
Investors have a habit of forming expectations based on an indefinite past, the January effect being an example, that often hides the fact that historical patterns – seasonal in this case – are constantly changing. Another such example of beating previously held expectations is the strength of the Swiss franc.
Best performing currency of 2023: Swiss franc
The Swiss franc was exceptionally strong over the holidays, rising to a new record high vs the euro and a multi-year high vs the US dollar. In doing so, it has surprised, as it largely ignored its persisting rate disadvantage against both the US dollar and the euro.
The Swiss franc’s strength is nothing new – it outperformed its peers throughout last year and became the best-performing G10 currency of 2023. A contributing factor to its overall strength was the Swiss National Bank’s (SNB) sales of foreign assets purchased during the intervention period following 2015. The slowdown of growth dynamics in the eurozone and later also geopolitical risks due to the resurgence of the Middle East conflict, also benefited the safe-haven currency. In December, the expectations of earlier policy interest rate cuts by the large central banks, the ECB and the US Fed, contributed to this strength. Finally, thin trading over the holidays may have enabled more leeway for appreciation, with short covering possibly contributing to the strength.
Will this strength last?
We are skeptical as to whether the franc’s strength will persist much longer.
First, the SNB has stated that it has sufficiently reduced its foreign exchange assets, removing this tailwind going forward. Although the Swiss franc looks increasingly overvalued again, we doubt that the SNB will return to foreign asset purchases, but rather remain restrictive with asset sales. Second, the eurozone has shown some green shoots with rises in credit growth. It is thus likely that the eurozone will stave off a recession and bottom-out during the course of 2024. Third, the repricing of money market expectations for rate cuts seems complete. And finally, trading volumes will pick up after the holidays.
Earnings season preview: Major downward revisions
In the US, the Q4 2023 earnings season is just beginning, with several large US banks reporting results later this week. The earnings season will likely turn out to be a decisive factor for short-term equity market direction. Current consensus estimates indicate an increase of 1.3% in earnings compared to the same quarter in the previous year.
The figure has been revised down from 8.1% three months ago, which represents a sharp decline in the months leading up to the reporting season (-6.8% vs a 10-year average of 3.5%). In terms of sectors, communications and utilities are expected to post the highest earnings growth, followed by consumer cyclicals and information technology (IT). On the other side of the spectrum, oil & gas and materials are expected to post an earnings contraction.
What does this mean for investors?
Looking at the January effect, maybe it is time for investors to shrug off such rituals as simply stock market folklore. At the same time, we note that stock market sentiment is signaling overconfidence and we may be entering ‘overshooting’ territory if prices rise further.
We have also adjusted our 3-month forecast from EUR/CHF 0.97 to EUR/CHF 0.95, in order to smoothen the Swiss franc’s path, but remain convinced that it will be unable to resist its rate disadvantage forever.
