Insights & Advice

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“Where January Goes So Goes the Market”

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 sign that the prospects for 2009 are less then encouraging.

Yet, the president’s stimulus package is right around the corner and with luck will pass by President’s Day (see my column “One for the Little Guy”). 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 disturbing 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 everything from refrigerators to automobiles while you and I are on a spending strike. It doesn’t take a fortune teller to figure out what happens next. Companies will ratchet down the rate of production of additional goods. That will mean less sales, profits, and, yes, additional lay-offs so expect an equally poor showing in this first quarter of 2009 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 the bigger firms have 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 forecasts.

I wrote last week that volatility has returned to global markets with daily moves of 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 a sign 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, red midway through the day and end back on the black at the close.
The S&P 500 has had the worst January in its history. When all is said and done, the S&P 500 is almost exactly where it was in the beginning of December. In markets like this, the only avenue in my opinion 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 is another market indicator and it is coming up on Sunday (see last year’s column “Myths of the Market” for more indicators). 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, both teams competing this year qualify for the old NFL so whoever wins the markets could move higher if this indicator works. So enjoy the game and hope
for the best.

Posted in A Few Dollars More, At the Market