Stock Market Outlook – Second Half Rally
The January Barometer, a well-known indicator of market performance for the calendar year, suggests that 2008 will be a disappointing year for investors in the U.S. stock market. Before you sell off all your investments, lets look at why this year may be different.
Developed by Yale Hirsch of The Stock Market Almanac in 1972, this popular market indicator states that “as the S&P goes in January, so goes the year.”
Simply put, if the S&P 500 finishes January with a positive return, it is highly likely that the index will finish the year with a positive return as well. Conversely, a negative return in January foreshadows a market decline for the year.
The Almanac further claims this indicator has accurately predicted market performance for the year 91.2% of the time since 1950. A remarkable track record by any measure.
So what does this mean for investors in 2008?
On the heels of an anemic gain of just 3.5% in 2007, the S&P 500 posted a loss of 1.4% on the first day of trading in 2008. The index continued its decline largely unimpeded through the end of the month due to a number of reasons which we’re all aware of by now.
Although the market recovered from the steep intra-day lows set on January 22nd and 23rd thanks to the Fed’s emergency rate cut, the S&P 500 finished January at 1,378 for a loss of 6.1%.
Now, before you panic and go short, know that there are several interesting factors at play this year that could portend a gain for U.S. stocks in 2008 and prove the Almanac wrong this year.
There is a strong likelihood that the Fed rate cuts will have a significant positive influence on the market this year. The Fed has cut rates five times, from 5.25% to 3.00%, since September 2007. In addition, the Fed Funds futures are predicting the Fed will announce another cut of 0.25% at the March meeting.
As you all know, Fed cuts today usually equate to market rallies in the future.
Another potentially positive influence on the market is the upcoming presidential election. According to The Almanac, the S&P 500 has posted gains in the last seven months in 13 of the last 14 presidential election years since 1950. That seems to suggest that if we can make it through the next several months, things may look good going into the second half of the year.
Lastly, and this is generally ignored by many investors, earnings comparisons should get easier and easier throughout the year. Towards the end of 2007, earnings estimates were being revised downward quite considerably. That could set the stage for some nice upside surprises later in the year.
So, although many are predicting gloom and doom for the markets in 2008, I think there are some important developments that may prove them wrong (especially in the second half of the year). Also keep in mind that when everyone is expecting a market decline, the opposite usually happens!
Category: Stocks
