Markets in a Nutshell
February 1, 2010 Issue
The stock market continued its correction last week. The Dow fell 1.1%, the S&P 500 1.6% and the Nasdaq 2.6%. For the first month of the new year stocks showed losses with the Dow down 3.5%, the S&P 500 3.7% and the Nasdaq 5.4%.
A down January has often led to a subpar annual performance for stocks (called the "January Effect" which conversely has also meant an up January has led to above average annual performance). According to Ned Davis Research (from the 1/29/10 Wall Street Journal), since 1900, years which experienced an positive performing January added average gains of 10.4% for the remainder of the year. When January has been a down month, the average gains shrank to 0.28% for the ensuing 11 months. And of course this trend is not always correct. We don't have to look back too far to see deviations from the January effect. Say, 2009 for instance when the Dow dropped 9% in January yet finished 2009 up 18%.
Investment advisor Steve Leuthold, chairman of the Leuthold Group which manages $4.5 billion, believes stocks will continue their rally this year. In an article from Advisors Perspectives, Leuthold says he sees 16-20% gains in the first six months of 2010. The drivers of the rally (as has been over the past year) will be institutions (ie pension funds, hedge funds, insurance companies) rebuilding stock allocations they dumped during the market crash of fall 2008-spring 2009.
As was mentioned above it is the institutions that are the big net buyers of stocks. The retail or "mom" and "pop" buyers are scarce as the final 2009 mutual fund flow (purchases and sales) numbers show. According the Investment Company Institute (reported in the 1/29 Investors Business Daily), $8.8 billion was withdrawn from stock mutual funds in 2009 (although much less than 2008's $233 billion which was a record amount of withdrawals) which means the average investor is still timid about buying. The trend in 2009 was to sell mutual funds that invest in big company U.S. stocks and buy foreign stock funds (which may very well mean it is a better time to buy big company U.S. stocks and lighten up on foreign stocks!).
Another stock market "bull" gave his prediction on the future. Long time successful stock fund manager Bill Miller (Legg Mason funds) believes that 2010 economic growth will come in higher than expectations as will corporate profit growth. He is predicting a strong up year for stocks but a "challenging" one for bonds as interest rates potentially move up (which would hurt bond prices. Interest rates up, bond prices down and vice versa). Miller has some head winds in his favor as 4th quarter 2009 GDP data came in at 5.7%, the fastest growth rate for the U.S. economy in 6 years (although 3.4% of that growth was from "inventory restocking" which means overall growth is still muddling along).
In an Advisor Perspectives interview (1/19/10), John Cochrane, Finance Professor at the Booth School at the University of Chicago, made some statements that echoes our sentiments on what we interpret as too much federal government intervention into the economy. When asked about advice he would give the political leaders in Washington, Cochrane answered, "Stop trying to fix everything in such a panic. Sometimes the patient just needs time to heal." We agree. If you break your ankle, it going to take some time to heal. You can take pain-killers and all kinds of drugs to help get you back on your feet (in economic terms the "drugs" to the economy are in the form of money as the government has shoveled in about $6 trillion into the economy the past couple years) but you are still going to have to let the ankle heal over time. And if you try too quickly to "get back to normal" and use your ankle, sometimes it makes it worse and the recovery time longer. Federal government: please take note!