Pessimism May Be New Year's Only Economic Hope

Article excerpt

The stock market stumbled to a close for 2007 when the Dow Jones Industrial Average nearly wiped out the entire pre-Christmas rally by falling about 287 points in the year's final three trading sessions.

Nonetheless, the final tally for the year was positive with the Dow, S&P 500 index and the Nasdaq Composite index posting gains of 6.43, 3.53 and 9.81 percent respectively. Eight of the 10 S&P 500 sectors posted gains. Five sectors were up by a double-digit percentage led by energy up 32.38 percent. The eight winning sectors averaged a 14.87 percent advance. Only the financial and consumer discretionary sectors ended 2007 lower.

It probably is a gross understatement to say that the stock market started off 2008 with a dull thud. The Dow continued its late- 2007 weakness by posting its largest loss ever for the first trading day of a new year and the worst percentage first-day loss since 1983. Friday's weak report on payrolls capped off a week focused on negatives.

The record-breaking first-day loss quickly brought to mind the January barometer theory.

A long-standing premise suggests that the market's direction in January foretells its direction for the entire year. The premise also says that whatever the market does during the first five trading sessions in January predicts the direction for the month and therefore the year.

It is no accident that the January barometer gets attention. It has a nearly 80 percent accuracy rate. The fact that the market dug itself a deep hole the first day this year made some people edgy.

The January barometer worked last year. The S&P 500 ended January 2007 a 1.41 percent gain. The barometer accurately foretold a profitable 2006, but it did not work in 2005. The S&P 500 posted a gain in the first five days of January 2005, but it had a loss for the entire month. The S&P 500 ended the year with a 3 percent gain.

The roots of the January barometer partly are politically based. The State of the Union message offered near the end of January sets several agendas for the White House, not the least of which is economic policy. Whether January pushes the market to plus or minus side for the month often relates to how the market perceives economic policy initiatives that will carry through for the full year. …