Will it be feast or famine for investors in February 2024?

A month ago, I said it would require a Herculean effort to turn around significant early losses in January, a month notorious as the worst of all months for shares this century. Well, the market delivered that effort almost everywhere, except the UK and China.

That initial January slump was perhaps not surprising given a two-month rally put the S&P 500 near a record high, and the Nasdaq tech index close to a two-year best. While the FTSE 100 was still some way short of record territory, it had risen about 6% from the autumn low to the start of January.

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But while buyers took just a week to return in the US, we didn’t experience a similar uptick in the UK until the FTSE 100 reached a seven-week low 10 days later. Even then, the domestic index failed to close a trading session above where it had ended 2023. Another great advert for portfolio diversification.

At month-end, Japan’s Nikkei topped the performance table, up 8.4% in January. Trailing far behind was the Nasdaq 100 with a 1.8% gain, Switzerland up a fraction less, the S&P 500 up 1.6% and French Cac 40 up 1.5%. Tech stocks dominated on Wall Street, as earnings season mostly justified higher valuations for big players such as NVIDIA Corp (NASDAQ:NVDA), up 24%, Netflix Inc (NASDAQ:NFLX) (16%), Advanced Micro Devices Inc (NASDAQ:AMD) (14%), International Business Machines Corp (NYSE:IBM) (12%) and Meta Platforms Inc Class A (NASDAQ:META) (10%)

While the UK fared better than China’s 6.3% loss and a 9.2% slump in Hong Kong, that is little consolation for investors here. The FTSE 100 fell 1.3% last month and the FTSE 250 1.7%, both beaten by the AIM All-Share which dropped a fractionally more modest 1.2%.

Wall Street’s gains would have been much larger had it not been for a significant sell-off – the S&P fell 1.6% and Nasdaq 2.2% - following the Federal Reserve’s interest rate decision Wednesday.

After announcing that the federal funds rate would stay at 5.25-5.5%, Fed chair Jerome Powell said:“In considering any adjustments to the target range for the federal funds rate, the [Federal Open Market Committee] will carefully assess incoming data, the evolving outlook, and the balance of risks. The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”.

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Now, the debate about whether a first cut comes on 20 March or 1 May continues. Whitney Watson at Goldman Sachs Asset Management believes a 50% probability of a rate cut by March, currently being priced in by markets, “seems reasonable, given the recent positive signals from the Fed's preferred measures of inflation and wage growth”.

“With steady economic growth, it is expected that policymakers will wait for more evidence of a sustained downtrend in inflation before making any changes.”

Much like in 2023, inflation and rate expectations will continue to drive stock prices in 2024.

A 72% success rate in February

An unbroken eight-year run of positive returns in February came to an end in 2018 when the FTSE All-Share index fell 3.69%, amid fears that a rise in inflation would trigger higher interest rates. 

Since then, the index has risen in 2019 (1.65%), 2021 (1.66%) and 2023 (1.15%), and fallen in 2020 (9.46%) and 2022 (0.81%).

Last year, the FTSE All-Share and FTSE 100 were among the best-performing major stock markets, registering their best February return in four years. Only the French Cac 40, up 2.6%, and German Dax, up 1.6%, did better.

UK stocks were buoyed by receding fears of a global recession and better inflation data. That was enough to push the FTSE 100 index above 8,000 for the first time. Big performances from Rolls-Royce Holdings (LSE:RR.), up 37%, and from oil majors Shell (LSE:SHEL) and BP (LSE:BP.), and Asia-focused banks Standard Chartered (LSE:STAN) and HSBC Holdings (LSE:HSBA), easily offset losses among miners where weaker demand from China-hit profits.

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Nasdaq declined more than 1% and the broader S&P 500 lost 2.6%. Some of that was profit taking following a cracking start to 2023, but stronger economic data also heightened fears about inflation and higher-for-longer interest rates. That was bad news for US growth stocks.

So, despite the recent unpredictability of February for investors, the All-Share index has still fallen just nine times in the month in the 33 years since 1991 – a success rate of 72%.

According to the UK Stock Market Almanac, there is no logical explanation, only perhaps that because January has been the worst of all months for shares since 2000, investors are able to pick up cheap stocks the following month.