Stocks' January drop isn't welcome sign for 2009

[January 31, 2009]  NEW YORK (AP) -- It's been an unusually cold January on Wall Street.

The Standard & Poor's 500 index was down 8.57 percent for the month, its worst January ever and a worrisome sign for investors who see the first month as a trendsetter for the 11 that follow. They're believers in the January Barometer: As January goes, so goes the year.

Since 1950, there have been only five times when January got it wrong in a big way. That gives it an accuracy ratio of 91.4 percent. Throw in the 10 years since then when the market hasn't moved much in a year, and January is still accurate 74.1 percent of the time, according to the "Stock Trader's Almanac," a book that tracks market trends.

But after a horrendous 2008, some Wall Street veterans say 2009 isn't a time for looking at past trends.

"We're in a different world. If the last two years have taught us anything it's to be very skeptical about statistical predictions of markets," said Jerry Webman, chief economist at Oppenheimer Funds Inc. in New York.

Whether the January Barometer holds up this year will depend on the impact of government efforts to help lift the economy. If stimulus plans and capital infusions for banks do revive the economy, the stock market is expected to rally and could end the year with an advance.

"The axioms that always held true are out the window," said Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago. He noted it wasn't too long ago that many investors and consumers alike believed housing prices would always rise.

"This year is so different. You have to go back to the 1930s to find this kind of dislocation," he said. "It's a coin toss."

He's not the only one questioning the January Barometer.

"I don't think any of those things count anymore. This is unprecedented, what we're dealing with here," said Robert B. MacIntosh, chief economist at Eaton Vance Investment Management in Boston.

Still, it's easy to understand why investors would look to anything that could hint where stocks might head. Especially in 2009.

"It's going to be quite a rabbit out of the hat to be positive this year," said Jeffrey Hirsch, editor of the "Stock Trader's Almanac." His father, Yale, developed the January Barometer idea in 1972.

Even a flat year wouldn't seem so bad after the 38.5 percent plunge in the S&P 500 index in 2008. But Hirsch worries about another steep drop in the index, which is a yardstick for the overall stock market.

"Initially, the scary part is that all the down Januarys were followed by a new or continuing bear market, or a flat year," he said. Hirsch noted that only 1956 was an exception; it ended flat after a losing January.

When the January Barometer has been wrong it's often because of major events.

In 2001, the S&P 500 rose 3.5 percent in January. But the index ended the year down 13 percent because of the Sept. 11 terrorist attacks. And in 2003, stocks fell 2.7 percent in January as investors grew nervous ahead of the U.S.-led invasion of Iraq. But investors set aside their jitters and stocks rallied to a huge gain of 26.4 percent for the year.

This year, the concern on the Street is that no one knows how far corporate profits will fall as consumers ratchet back their spending. And banks don't seem anywhere near a resumption of more normal levels of lending, something that could also help stimulate business growth and in turn, stock prices.

Some analysts say history is the only possible guide.

"If you have a bad January, it augurs for a poor rest of the year, said Thomas Nyheim, portfolio manager at Christiana Bank & Trust Co. in Greenville, Del. "It's a pretty good indicator because it's just showing momentum."

Many investors use January to lay out how they will invest for the year. He said they aren't likely to make big changes after that.

"It holds a lot of water, basically because in the beginning of the year they're setting their allocations," Nyheim said.

In January 1960, the S&P slid 7.15 percent for the month. The index, which is the benchmark for many mutual funds, ended that year down 3 percent.

But a market that stumbles in January has found stability by year-end. January 1970 was the worst-ever performance for the S&P. The index tumbled 7.65 percent that month - but ended the year with a gain of 0.1 percent.

[Associated Press; By TIM PARADIS]

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