You learn a new thing everyday--Saturday January 30 3:14 AM ET
January: A Road Map To The Stock Market's Year
By Pierre Belec
NEW YORK (Reuters) - The January Barometer may be the closest thing to a ''Sure Thing'' on Wall Street.
The stock market theory says that ''as January goes, so goes the year.'' If it holds water, the market could be in for another up
year.
''The incredible January Barometer has had only three errors in 48 years,'' said Hugh Johnson, chief investment officer at First
Albany Corp. in Albany, N.Y.
He said the market is almost ''guaranteed'' to finish the year with another gain after posting double digit advances in the last four
years.
Dating to 1950, the stock market has reflected the direction of the Standard & Poor's composite index's rise or fall in January,
Friday, the last trading day in January, the S&P closed at 1,279.64 after finishing 1998 at 1,229.29, meaning the market should
go higher this year.
The barometer has an impressive batting average of having been right 94 percent of the time over the past 48 years.
Why does it work?
It's all linked to the changing of the guard in Washington, said Yale Hirsch, the stock market historian who developed the
theory.
''When the new Congress comes into session at the beginning of the year, Wall Street is affected by what it does,'' he said.
''And, in a year of national elections, the goal is usually to get the economy moving again, and the message goes out in January.''
The nation's priorities are also set in January when the president delivers the State of the Union address and presents the annual
budget.
''Switch these events to any other month and chances are the January Barometer would become a memory,'' he said.
Hirsch said the market has another good thing in its favor this year and he calls it: The Presidential Cycle.
''Usually, whoever is in the White House will get the bad or unpopular issues out of the way early in their term and during the
last two years, they push the more popular things to score points, which tends to boost the stock market,'' he said.
Johnson said the January Barometer may be pointing to higher stock prices this year but, there are many things that can spoil
this market.
Johnson offered a short list of potential problems, although he admitted, ''It's probably a much longer list, but I don't know
what's on it.''
The global financial crisis, Johnson said, is still a scary problem that could shoot down the earnings of U.S. multinational
companies.
The market is now struggling with Brazil's currency-spurred recession, which could quickly spread to the rest of Latin America,
a big trade partner with the United States.
The concern is that the aftershocks that are rocking Brazil, the world's eighth-largest economy, could jolt the earnings of
American companies, possibly as early as the first quarter of this year.
There are other potential roadblocks on Wall Street.
''By mid-year, investors will focus on the Year 2000 computer problem and they'll ask the question: Will Y2K mean the U.S.
economy will slide into recession?'' Johnson said. ''And, if the answer is 'yes,' the market could begin to discount the bad times
by the end of the third quarter.''
Some experts believe the Y2K problem, or Millennium bug -- a potentially serious flaw in many existing computers whose
outdated software prevents them from distinguishing between the years 2000 and 1900 -- could cause tremendous disruption to
the economy.
Ed Yardeni, chief economist for Deutche Bank Research, said Y2K will be far more serious than a natural disaster, such as the
1996 snowstorm that paralyzed much of the country. The reason is because natural disasters tend to be localized.
''Y2K is potentially a series of disasters and multiple failures that will occur all around the world at more or less the same time,''
he said.
''Disaster areas usually recover quickly because outside help from numerous unaffected communities is immediately available,''
Yardeni said. ''In 2000, there could be many more communities that need help than can provide it.''
Meanwhile, inflation may be nearly dead, but it could still rear its ugly head and come back to bite the stock market this year.
''If the price of oil and other commodities start to rise, the Federal Reserve could respond to inflation by raising short-term
interest rates,'' Johnson said. ''This would kill off the liquidity that has driven this stock market higher.''
But investors are still partying, with the major stock indexes standing at or near their record highs.
Wall Street has a very different view of the world. Investors doubt that Brazil's economic turmoil is the start of something big
and could drag down Latin America.
There is a consensus that the 18-month-old Asia crisis is over and the region's economies will soon start to climb off the mat.
Also, the U.S. market has been able to rationalize the fear that China could ignite the next devastating chain of currency
devaluations in the Pacific Rim.
''There seems to be a disconnect between the stock market and the real world,'' Johnson said. ''The reason is that the flood of
money into the 401K retirement plans has created a liquidity-driven market that often over-values stocks out of proportion to
economic growth and corporate earnings.''
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