As January Goes, So Goes the Market
By Bill Schmick, Portfolio Strategist, Dion Money Management
The above saying is one of the many myths of the markets. It’s called the “January Effect.” Given this month closed with hefty losses, it is just one more discouraging sign that the prospects for 2009 are less than encouraging.
Yet, the president’s stimulus package is right around the corner, and with luck it will pass by President’s Day. That should give the economy a boost although don’t look for anything immediately. It will take time for all that new spending to show up in the economic numbers.
In the meantime be prepared for even worse numbers in the months ahead. The preliminary estimate for fourth quarter GDP (Gross Domestic Product) was announced today—down 3.8%—the largest drop since 1982. The markets were actually relieved it wasn’t worse. Consensus forecasts from the majority of economists polled indicated as much as a 5.5% decline.
Unfortunately, the difference was in the build-up of unsold goods called inventory gains. Companies are now sitting on a huge stockpile of goods on the shelves, while you and I are on a spending strike. It doesn’t take a fortune teller to figure out what happens next. Companies will slow down the rate of production of additional goods. That will mean less sales, profits, and additional lay-offs in this quarter. So expect an equally poor showing this quarter and most likely for the one after that.
It is hard to believe that on the unemployment front things could get worse but so far this month over 233,000 jobs were cut and those are the ones that have been announced. How many more jobs have been lost among smaller companies is anyone’s guess, but I am prepared for at least 10%, if not higher, unemployment by June. However, unemployment and GDP are what we call lagging economic indicators (signs of what has already happened). The future, although murky at best, may see some first glimmer of a pick-up by the second half of the year. At least that is what the Federal Reserve is hoping for, although they did say there were many risks to that forecast.
As for the markets, I wrote last week that volatility has returned to global markets with daily moves up and down by 2-3%. That is not a healthy sign and certainly does not indicate that we have reached a bottom. Trading volume also remains fairly weak, which is an indication that many investors are sitting on the sidelines. I can’t blame them. The stock markets have become a daily casino where day traders bet on the black in the morning and red midway through the day and end back on the black at the close. When all is said and done, the S&P 500 is almost exactly where it was eight days ago. In markets like this, the only avenue is income and interest bearing investments. My advice is stick to that plan and keep cash on the sidelines until this market finally bottoms. We are now in our 14th month of declines. Hopefully at some point soon the bears will simply run out of ammunition and the markets will flatten out in exhaustion.
As for the January Effect, it is not the only indicator. The Super Bowl results are another market indicator. If the winner of the Super Bowl, so the legend goes, can trace its origins back to the old NFL, it would mean a positive year for the markets. So take heart, dear reader, the Pittsburgh Steelers qualify for the old NFL.
Bill Schmick is a Vice President and Portfolio Strategist for Dion Money Management, which offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. He can be reached at 800-432-7447, ext. 146 to learn about the benefits of our managed account programs.
