Stocks sizzled in January as rate hike and inflation fears ebbed

(CNN) — New year, new attitude on Wall Street. Stocks are off to a strong start in 2023 following last year’s abysmal showing.

The Dow gained nearly 3% in January. The S&P 500 rose 6% and the tech-heavy Nasdaq Composite soared almost 11%. That’s the Nasdaq’s best month since July.

Stocks moved higher again Tuesday as investors wait for Wednesday’s likely interest rate hike announcement from the Federal Reserve and press conference from Fed Chair Jerome Powell, along with the latest Job Openings and Labor Turnover Survey (JOLTS), which will show whether demand for workers remains high.

The Dow ended the day with a surge of about 370 points, or about 1.1%. The S&P 500 was up 1.5% and the Nasdaq rose 1.7%.

Wall Street is also eagerly awaiting earnings from four key Nasdaq-listed giants later this week: Facebook owner Meta Platforms, Apple, Amazon and Google parent Alphabet. If that wasn’t enough suspense, the jobs report for January comes out Friday morning.

Stocks have rallied this month due to hopes that inflation pressures are starting to abate. That should allow the Fed to issue smaller rate increases — and possibly even pause them later this year. Decent, if not spectacular, earnings from Corporate America also are contributing to the market’s good mood.

Stocks had cooled off a bit in December after big rallies in October and November.

But there is once again a growing sense that the US economy may avoid a recession and instead wind up slowing to a so-called soft landing, a gradual slide in economic conditions that doesn’t lead to a massive spike in the unemployment rate or a major pullback in consumer spending.

Too far too fast?

Still, several economists and investing experts believe a recession is likely to begin at some point later this year or in early 2024. So investors may be overly optimistic. Others argue that the Fed is likely to keep raising rates until it is certain inflation is no longer a problem.

Either way, there are skeptics on Wall Street who doubt that corporate earnings will grow sharply enough this year to justify the January stock rally and keep its momentum going. And the market could be ripe for another fall if earnings, economic data or the Fed disappoint.

The CNN Business Fear & Greed Index, which measures seven indicators of investor sentiment, is now showing signs of Greed and is not far from Extreme Greed territory. That means traders are banking on more good news to sustain this rally.

"The market is partying but many management teams are saying that there are clouds on the horizon," said Austin Graff, chief investment officer with Opal Capital. "The reality is that this is a choppy environment. You have to focus on what’s coming."

With that in mind, Graff said investors should be looking more at high-quality companies that pay dividends and have strong earnings instead of more speculative stocks. Graff owns US Bancorp, Medtronic and Exxon Mobil in the TrueShares Low Volatility Equity Income ETF that he manages.

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