Will January Predictor Be Wrong?
Those who don't learn from history are condemned to repeat it...
biz.yahoo.com
Sunday February 3, 9:01 am Eastern Time
Will January Predictor Be Wrong?
By Brendan Intindola
NEW YORK (Reuters) - Through Wall Street's long history, January very often has predicted what will happen for the rest the year. But with the books closed on a loser opening month this year, many market pros are defying the past, sticking to their forecasts for a winning 2002.
The prospects of an end to the American recession and a recovery of corporate-profit growth has prognosticators out on a limb as they call for a deviation from one of the Street's most reliable statistical indicators.
Since 1950, the Standard & Poor's 500 (.SPX) has climbed in 38 years and dropped in 14. Of the down years, 11 stumbled out of the blocks in January. When January finished in the black, the winning years followed in all but three.
``I would not change a forecast based on what happens in January,'' said Charles Blood, director of financial markets analysis at Brown Brothers Harriman, New York. ``Our expectation is the market has a good couple of quarters ahead of it. There is extraordinarily easy monetary policy at the moment and an economy that is in the process of recovering.''
On Thursday, the S&P 500 closed out January with a 1.6 decline for the month, It was the worst January since 2000, when the benchmark gauge was ripped for a 5.1 percent loss -- the worst decline in 10 years -- as Internet bubble commenced a painful burst.
True to form, the index finished 2000 with a loss of 10.1 percent, the worst year since 1977.
But last year was no normal. When the ghastly attack on lower Manhattan suddenly shut down the stock market for four days, stocks, it seemed at the time, could not be cheap enough as the risk component to investing soared higher.
At Sept. 10, the Standard & Poor's 500, was down more than 17 percent, then plunged to a three year low later in the month -- down nearly 27 percent on a year-to-date basis. The stock average rallied strongly through the rest of the year but still finished down 13 percent.
A year ago, the S&P 500 jumped 3.5 percent in January, so the January indicator failed for the year.
``Accidents do happen, even in statistics, when there is a high historical correlation,'' said Kevin Caron, market strategist at Gruntal & Co.
But 2002 won't follow January into the red, he said, because the recession is over, so a historical link of another kind presents a more compelling fundamental argument than the January predictor: In the 12 months after the end of 13 recessions logged since 1927, stocks have climbed 11 times -- for an average gain of 17.2 percent.
JANUARY VS. AFC VS. NFC
Charles Reinhard, senior U.S. investment strategist at Lehman Brothers, in New York, said he is sticking by his 2002 forecast of a 20 percent gain in the S&P 500.
``No, we are not going to change out forecast as a result. Last year, the opposite happened. Besides, we won't change our forecast until we see what happens with the Super Bowl'' this Sunday, he joked, referring to another of the Street's non-financial forecasting tools.
``It just so happens that the turn (in the economy) is happening now, and that is a way more important variable'' than using January's stock numbers as a forecasting tool.
As for the annual football mega-event -- investors will be rooting for the St. Louis Rams this weekend in the Super Bowl. That's because the Super Bowl Stock Market Predictor, which is tracked by Prudential's Bob Stovall, says that a victory by a team with roots in the original National Football League points to a rising stock market for the year.
Maybe it is just a coincidence but the predictor has been right 80 percent of the time and Wall Street, battered by two straight down years, needs all the help it can get.
Hank Herrmann, chief investment officer, Waddell & Reed, with $35 billion in assets under management, joked, ``a more reliable indicator is the Super Bowl indicator, so we will know more about the outcome of the year after Sunday.
But he is not heading to the bunker after January's loss.
``It is a coincidence. Periodically, it works. I am not much for the bizarre indicators. Years ago they had the hemline indicator,'' Herrmann said, referring to Wall Street lore that called for rising stock prices as the length on women's skirts decreased.
For the week, the Dow Jones industrial average (.DJI) rose 0.7 percent, the Nasdaq composite (.IXIC) dropped 1.4 percent and the benchmark Standard & Poor's 500 (.SPX) fell 1 percent. |
