Judging Stocks by January: Barometer Sees a Tough 2003
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
The January barometer says it will be stormy on Wall Street this year.
As Wall Street folklore goes, the so-called January barometer -- which predicts the market's yearlong results according to the first month's performance -- has both vocal supporters and critics among market watchers. Either way, its accuracy rate is tough to ignore. If it's right again this year, it would be the market's first four-year down stretch since the Great Depression.
The January barometer theorizes that the S&P 500-stock index will move in the same direction for the entire year as it does in the first month. According to the Stock Trader's Almanac, the assumption sports a 92% accuracy ratio since 1950. Years when the month or year ended flat are excluded.) This January, the S&P 500 index ended down 2.7%.
Year January % Change Year % Change
1990 -6.9 -6.6
1991 4.2 26.3
1992 -2.0 4.5
1993 0.7 7.1
1994 3.3 -1.5
1995 2.4 34.1
1996 3.3 20.3
1997 6.1 31.0
1998 1.0 26.7
1999 4.1 19.5
2000 -5.1 -10.1
2001 3.5 -13
2002 -1.6 -23
-- Source: Stock Trader's Almanac 2003
The almanac says exogenous events were responsible for the aberrations: The Vietnam War threw a wrench in results in 1966 and 1968. In 1966, for instance, the S&P had a mildly better January but posted a big 13% drop for the year.
In 1982, the start of a bull market late in the year turned things around. And in 2001, two interest-rate cuts by the Federal Reserve in January mucked things up, giving the market oomph in January even though it would end down for the year.
Critics argue that the indicator is inherently flawed because it includes January's results in the full-year performance. For example, if the market shoots up in the first month of the year by 10% but slips a bit for the rest of the year, the S&P 500 still could end higher even though performance in the final 11 months was weak. Someone who bought stocks on Feb. 1 because of January's performance would surely be disappointed.
"I'm not going to disagree with its historical track record, but there's enough question in the January barometer concerning its interpretation that I don't put it at the top of my list of indicators," says Art Huprich, technical analyst at Raymond James.
In addition, the January barometer this year conflicts with another oft-cited Stock Trader's Almanac indicator -- that market action during the first five trading days of the year can be an "early warning" system for the whole year. Since 1950, gains in the first trading week of the year have resulted in full-year gains 92% of the time; the result for bad starts is less telling -- only half resulted in down years.
In the first five trading days of 2003, the S&P 500 index gained 3.4%.
See a calendar of the coming week's earnings reports.
See a calendar of the coming week's economic reports.
Mr. Huprich sees the market remaining in the red in coming weeks, and won't project out as far as a year; however, he says he believes the market hit its lows last October and won't retrench that far again.
Others say the indicator is a good guide in spite of its flaws.
"The January barometer is one piece of Wall Street folklore that has some real foundation," says Gail Dudack, chief investment strategist at SunGard Institutional Brokerage in New York. "January tends to provide the market with the best liquidity you're going to see."
That the market couldn't pull off a gain this month doesn't bode well for the rest of the year, Ms. Dudack says. She points out that companies tend to fund their pensions in January -- and this year she expects that cash infusion to be even bigger than usual.
That's because in 2002, total institutional pension-fund assets plunged by about $1.4 trillion, or 12%, according to benefits consulting firm Watson Wyatt Worldwide. That means funds have about $10.7 trillion in assets -- the same level as five years ago.
Once pension funds fall to a certain level, companies are required to put new cash in (instead of depending on investment gains) to make up for shortfalls.
Only about 15% of employers made pension-plan contributions in 2000, and about 25% did in 2001, according to Watson Wyatt. About 30% contributed last year, and the company estimates that that rate could more than double this year "if current market conditions persist."
January is normally the month that investors put Christmas bonuses to work in the market (though that's a smaller-than-usual pool of money this year, analysts say), and corporate payouts to employees' 401(k) plans also happen in January.
Meanwhile, individual contribution limits for 401(k) programs rose last month in the next step of a seven-year program to increase limits. In 2003, anyone under age 50 can now contribute $12,000 to an employer-sponsored plan, up from $11,000 last year. Older investors can contribute even more.
Finally, Ms. Dudack says, professional money managers tend to shape their investment strategies late in the year and implement them in January, which can bring fresh cash to the table.
"You have a lot of different pieces that tend to work in a positive way for the market. If you can't get a good January, then you've got to question what's wrong," says Ms. Dudack. "I think there's lots of things, but mainly, we have investors questioning why they should own more equities, and why should they if the earnings outlooks are dim?"
Indeed, the overall tone of corporate outlooks last week made many a heart -- not to mention stock -- sink. Chip-equipment giant Applied Materials said Friday it expects orders for its just-ended first quarter to be well below previous targets because of deferred capital expenditures by customers amid "ongoing economic weakness and geopolitical uncertainties." That's bad news for the overall tech sector, since semiconductors often lead the broader technology world.
Another example: Finland's Nokia warned last week of continued weakness in demand for wireless-network equipment and sluggishness in the mobile-phone market in the current quarter.
Not only the wheezing tech sector was pointing to bad times ahead. Food giant Kraft warned last week that troubled economies in Latin America, competition from private-label brands and higher benefit costs would weigh on 2003 earnings, prompting a number of analyst downgrades.
Perhaps those corporate outlooks, more than any market-timing theory, will best determine what happens in the rest of 2003.
Write to Erin Schulte at erin.schulte@wsj.com |
