The Market's January Effect May Be Snowed Out This Year [WSJ]
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December 26, 2001
Heard on the Street
By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
Will the stock market's January Effect be snowed out this year?
A chilly combination of layoffs, reduced retirement benefits, and slashed bonuses could make early 2002 a slim time for money flowing into stocks and other financial products. A bulk of that money traditionally comes in January, after year-end bonuses are paid.
But this time around, financial-services firms are bracing for the worst, "a sequential ladder of pain," says Peter Starr, a managing director at Cerulli Associates, a Boston consulting firm. "Bonuses are off 50% on Wall Street, and a lot of that money was flowing to the stock market."
Indeed, slimmer investor wallets at the end of the year could lead to bad news for Wall Street and the market in general, in contrast to years past. This past January, for example, $25 billion in net new assets flowed into stock mutual funds, exceeding fund-sales figures for any other month this year by more than $5 billion. The previous two Januarys were also strong, with investors putting a net $17 billion into stock funds in 1999 and $41 billion in 2000.
Most analysts are skeptical that 2002 will be an encore performance. For one thing, investors have tended to flee anything that has experienced back-to-back years of negative returns, as the average mutual fund has. In addition, many 401(k) participants already feel they have enough in stocks, putting more than 80% of their retirement-plan assets there last year, according to a report by Steve Galbraith, chief investment officer at Morgan Stanley.
Then there is the more fundamental problem: Many people will have less money to invest in the first place. Large, blue-chip companies, including auto makers Ford Motor, General Motors and Daimler Chrysler; Bethlehem Steel; auto-parts supplier Visteon and hotel chain Wyndham International have either cut or scaled back the amounts they match when their U.S. employees' contribute to 401(k) retirement plans. More than 100,000 employees will be affected at the auto companies alone.
Many other large companies are inquiring about ways they could change their 401(k) plans so their contributions to employee accounts would vary with the success of the company, says Lori Shapiro, a principal with benefits consulting firm William M. Mercer, New York. About 50% of companies already tie at least some of their 401(k) matching contributions to annual profits, adds David Wray, president of the Profit Sharing/401(k) Council in Chicago.
Looking for alternatives to layoffs, companies already were starting to squeeze the amount of money going to employees in the form of matching contributions. According to data collected by the Profit Sharing/401(k) Council, companies contributed 2.5% of eligible employees' salaries to 401(k) plans in 2000, down from 3.3% in 1999. The 2000 figure is a 10-year low.
Then there's the bonus problem. Top executives at companies including Hewlett-Packard, Cisco Systems, Tribune Co., Delta Air Lines and Bear Stearns are forgoing all or parts of their bonuses, a trend likely to hurt sales of financial-products as well as luxury goods.
"It's clearly going to have a negative impact" on the flow of money into stocks and bonds, says Edgar Larsen, chief equity officer at AIM Management, a Houston money-management firm. "I have less money than a year ago to invest in the market, and that's true of many."
January traditionally has been a good month for the stock market, although not quite as strong as December, when investors in many years past have piled assets into the market anticipating January's stampede of new money. Since 1900, the Dow Jones Industrial Average has risen during January 64% of the time; only December sports a better consistency record, with the Dow industrials rising in that month 73% of the time, according to Ned Davis Research. The blue-chip stock index has risen an average of 1.1% in January, behind July's 1.4% gain and December's 1.5%.
Some other drivers of the January effect may not be present this year either. In past years, stocks that had fallen the most during the previous year often led the pack in January, a trend especially evident among small-capitalization stocks. But during the past few months, many of this year's worst-performing small stocks staged a comeback, says Paul Lieberman, a vice president of quantitative research at Lehman Brothers.
Nevertheless, there are some reasons to believe this January could live up to past years. For one thing, tax rules go into effect in 2002 that allow more tax-favored investments in 401(k) and education-savings plans. As AIM's Mr. Larsen points out, an estimated $6 trillion is sitting in cash or money-market funds. "That money is earning next to nothing" and may move back into stocks, especially if the Federal Reserve cuts interest rates further, he says.
Any declines in contributions to 401(k) programs also might be balanced out by companies adding money to corporate pension funds that have decreased in value because of the stock market's steep declines. Mutual-fund companies and other asset managers are also hoping to receive some interest from employees diversifying their 401(k) assets out of their own company's stock. According to a 2000 study by Frank Russell Co., employees invested 22% of their 401(k) balances in company stock, and 67% of companies made matching 401(k) contributions at least partially in company stock. Both practices have come under scrutiny recently because of losses in the 401(k) accounts of Enron Corp. employees, many of whom made heavy investments in the company that is under bankruptcy-court protection.
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com |
