By William Patalon III
Money Morning/The Money Map Report
The relationship is precisely the same when it comes to January and U.S. stock prices. It's called the "January Effect," and it does like this: As stock prices go in the first five trading days of January, so go stock prices for the entire year – most of the time, anyway.
Indeed, according to the January Effect theory, since 1970, in 31 out of 37 years (84%), the Standard & Poor's 500 Index has enjoyed positive annual returns when the index increased during those five early trading daysy days. On that note, the pressure is now on for investors to make up some serious ground today (Monday) and tomorrow (Tuesday), since those first three trading days already resulted in some dismal results.
The blue-chip Dow Jones Industrial Average Index closed the week at 12,800.18, a drop of 3.50%, marking its worst start since 1904. The tech-laden Nasdaq Composite Index lost 5.57% to close at 2,504.65, the worst start since the index's inception in 1971. And the broader Standard & Poor's 500 Index lost 3.86% to end the week at 1,411.63, the index's lowest level in the past five months.
Maybe, like DiMaggio, stocks will generate positive returns for 56 straight days.
10 yr Treasury (Yield)
There were no shortage of reasons why the markets reacted so negatively last week. Perhaps Wall Street is growing more fearful of that populist message uttered throughout the campaign trail in Iowa and moving to New Hampshire. Relative no-name Republican candidate, Mike Huckabee, shocked the nation with a decisive victory in the Iowa caucus after "preaching" what many perceive to be an anti-business, anti-investment rhetoric. [If not for that "R-word" in front of his name, Huckabee might have been mistaken for Democratic candiate John Edwards – well, at least from an economic/fiscal perspective].
His early win in Iowa set the rumor mill in motion, as billionaire New York Mayor Michael Bloomberg may once again be "entertaining" a run as an independent, a move that would, most likely, be cheered by the investment community as an attractive alternative to Huckabee, or to any other any traditional "tax-and-spend" Democrat.
[Editor's Note: Money Morning investment guru Martin Hutchinson has studied the campaign platforms for all the key Democratic and Republican candidates and has written two research reports detailing ways to profit no matter who ultimately wins the White House. To read the report on the Republican candidates, please click here. To read the report on the Democrats, please click here. Each report is free of charge].
Or perhaps news from the corporate boardroom frightened investors this week as PHH Corp. (PHH) announced that its $1.7 billion deal with The Blackstone Group LP (BX) fell through because of the lack of needed funding. The ongoing credit crisis could very well put a damper on major private equity transactions for a while. Despite a positive showing from the tech sector late last year, Intel Corp. (INTC) . State Street Corp. (STT) and (RFC) emerged the latest subprime victims as both institutions took steps to shore up bad debt positions [It looks like the main story of 2007 just won't go away].
Or maybe Wall Street finally took notice of skyrocketing oil prices and the possibility that inflation is lurking in the [not-so-distant] horizon. Late last week, crude oil briefly eclipsed the psychologically significant $100 a barrel level for the first time as geopolitical turmoil, supply concerns, and a weak dollar contributed to the seemingly never-ending climb. Additionally, the economic news of the week sounded some serious alarms among traders and investors, as manufacturing appears to be contracting for the first time in a long time, and the once steadfast labor market may not be as strong as most economists believed. Just what will this mean for the already nervous consumer?
While major indexes [sans small-cap] finished 2007 with modest gains, investors rang in the New Year by sending the Dow to its worst first-day percentage decline in 25 years. The weaker-than-expected data added fuel to the bearish fire, and fixed income benefited from the ensuing flight-to-quality as investors rushed into U.S. Treasuries. So what about the next two days? Perhaps investors remain on vacation and will find some nice bargains upon their return? Or perhaps the January Effect "myth" is simply filler for bloggers and self-proclaimed pundits.
Weekly Economic Calendar
Existing Home Sales (11/07)
1st increase in 9 months
January 1, 2008
New Years Day
Fireworks, Parades, Football, and Black-eyed Peas
Construction Spending (11/07)
21st straight month of declining residential construction
ISM Manu Index (12/07)
Worst showing since April 2003
Fed Policy Meeting Minutes
Weak housing left door open for more cuts
Initial Jobless Claims (12/29/07)
Sharp decline in most recent week
Factory Orders (11/07)
Increase due to rising energy prices
Unemployment Rate (12/07)
Highest jobless level since November 2005
Nonfarm Payroll Additions (12/07)
Lowest number of job additions since August 2003
ISM Services Index (12/07)
Sector expanding, but at a slower pace
The Week Ahead
Consumer Credit (11/07)
Initial Jobless Claims (01/05/07)
Balance of Trade (11/08)
So much for easing into the New Year with economists taking a few days off to nurse those holiday hangovers. The economic-report calendar was "hot and heavy" and the results were worse than many expected. The "inflation vs. recession" battle rages on as investors weighed the implications of $100 a barrel oil, a contracting manufacturing sector, continued sluggish housing, and a weaker jobs market. The December ISM manufacturing index was reported as 47.7, its first reading under 50 in 11 months, and a sign that the sector is now contracting.
Though construction spending (0.1%) and existing home sales (0.4%) increased in November, a look inside the data revealed that housing conditions are not improving. Residential construction fell by 2.5%, its 21st straight monthly decline. Further, the current level of existing home sales now stands 20% below that of last year.
The unemployment data represented the biggest surprise as the jobless rate rose to 5% (from 4.7%) in December and only 18,000 new jobs were added to the economy. Interestingly, just days before, payroll giant Automatic Data Processing (ADP) reported stronger-than-expected jobs growth, and the latest jobless claims release fell significantly last week.
So what gives? Clearly, subprime woes are starting to impact labor as financial-services firms announce more layoffs with each passing day. However, the magnitude of the jump in the unemployment rate seemed dramatic, so expect some revisions in next month's report.
For now, the U.S. Federal Reserve has its work cut out. The minutes of the last policy meeting revealed that more rate cuts could be in the works. After this week…can anyone say 50 basis points? The policymaking Federal Open Market Committee (FOMC) has a two-day meeting scheduled for Jan. 29-30. Any interest-rate announcements will be made in the mid-afternoon of the second day.
News and Related Story Links:
- Money Morning Special Investment Research Report:
Election 2008: Which Republican Candidates Will Be Best For Investor Profits.
- Money Morning Special Investment Research Report:
Election 2008: Which Democratic Candidates Will Be Best For Investor Profits.
- The Seattle Post-Intelligencer: .
- Money Morning Special Investment Report:
Outlook 2008: The January Effect, the Presidential Election and Other Indicators Bode Well for U.S. Stock Prices.
- Baseball Reference.com:
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.