Putting Money Into the Market, the Fed and the January Barometer

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“Is now a good time to invest?”

This question, or some version of it, is the most recurring question that those of us who work in finance get. A related question we often get is “I have X amount in cash, should I put it in the market now or wait?” We can also reverse the question to be “Should I take a withdrawal, such as a required minimum distribution (RMD), now or wait?”

If you are looking at a time horizon of approximately 10 years or longer, then going with a very large allocation to stocks makes sense based on how the stock market has historically performed. A shorter time frame of at least five years works if you can handle shorter-term volatility and a higher potential for some loss of capital. Shorter periods are not suggested because there may not be enough time to recover from an ill-timed bear market.

But what about being tactical or otherwise focusing on what is happening right now? Nobody has a working crystal ball. However, the Federal Reserve and the January effect both provided optimism for how stocks could perform over the remainder of this fiscal year.

Yesterday, the Federal Open Market Committee (FOMC) dropped the “any additional policy firming that may be appropriate” language from its meeting statement. This is a step toward interest rate cuts. It is still uncertain when the first interest rate cut will occur or how many will occur this year, but—barring any surprises—they are coming.

Notably, federal funds futures traders have not changed their expectations for where interest rates will be in December. This morning, CME FedWatch tool implied a 43.7% chance of an interest rate target between 3.75% and 4.00% following 2024’s last FOMC meeting. Three weeks ago, traders were pricing in a 40.4% chance of the target being at this level. The current target is still 5.25% to 5.50%.

Interest rate cuts by the Fed should, in turn, lower the interest rates paid by money market funds, certificates of deposit (CDs) and other cash equivalents. Plus, there is no capital appreciation and the interest paid by them is subject to ordinary tax rates. So, investment dollars sitting in these accounts come with both an opportunity risk and the risk of losing future purchasing power. (Purchasing power is the ability to buy goods and services with the dollars you have.)

The January Barometer was also triggered yesterday. This barometer holds that as goes January, so goes the rest of the year—particularly when it comes to gains. Since 1938, The S&P 500 index has realized additional gains over the 11 months of February through December 67.4% of the time following a positive start, notes Jeffrey Hirsch of the Stock Trader’s Almanac. The record is even better when it’s an election year. During “the nine election years with positive January returns [since 1945], the S&P 500 gained an average 15.6% and rose in price 100% of the time,” observed Sam Stovall of CFRA Research in a note published earlier this week.

The sample size for election years is small and historical odds are never guaranteed to continue. Still, the stock market tends to rise more often than not. It just tends to do much better when the S&P 500 starts a year by posting a positive return in January.

Even if you put little credit in the January Barometer, it’s still helpful to realize that stocks have historically risen more than they’ve fallen. The S&P 500 has risen during nearly three-quarters of all six-month periods since we started the AAII Sentiment Survey in June 1987.

Combined, these data points argue for making a lump-sum investment with dollars slated for longer-term investing when you are able to, including through individual retirement account (IRA) contributions. Likewise, delaying RMDs to the end of a calendar year leaves more in your account to grow. Both require the ability to financially and psychologically tolerate shorter-term drops in the stock market.

It is reasonable to use a dollar-cost averaging approach instead if you are concerned about the timing of putting a large amount of money to work at once. It lessens timing risk and can be psychologically easier to follow for many people.