What does a dismal January mean for 2008?
But the 6.12 percent plunge by the Standard & Poor's 500-stock index - despite a 1.7 percent rally Thursday - was its worst January decline since 1990 and the sixth-worst ever.
And it could be a harbinger of tougher times ahead.
The Stock Trader's Almanac coined a saying in 1972: "As the S&P goes in January, so goes the year." The newsletter says the indicator has had only five major errors since 1950, making it 91.4 percent accurate.
There are other troubling seasonal trends. Almanac editor Jeffrey Hirsch points out that the so-called Santa Claus Rally never materialized in December and that the "First Five Days" of the year indicator this year also was negative. "2008 is setting up to be one of the worst election years in history," Hirsch wrote in a research note after Thursday's close. Typically, the fourth year of the presidential cycle has been a bullish period for stocks.
Even though January is a month investors would like to forget, plenty of Wall Street pundits say it is way too early to rule out a rebound that could salvage 2008 for investors. "I'd be careful in concluding that we should write off the year," says Jeremy Siegel, a finance professor at the Wharton School of Business.
Some undercurrents do offer reason for hope. For instance, financial-services companies, which have suffered the biggest losses due to the mortgage crisis, were the S&P 500's best-performing sector in January. But, even as the best sector, it was down less than 1 percent. Optimists would say that's a sign these stocks are at or close to a bottom.
Other potential market drivers:
- Lower interest rates. The Federal Reserve has been slashing short-term rates, including cuts totaling 1.25 percentage points since Jan. 22. "If these cuts forestall a recession, it would definitely lead to a positive year for the market," Siegel says.
- Government stimulus. It's an election year, and the government and presidential candidates will push for policies to boost the economy, says Frank Holmes, CEO of U.S. Global Investors. "There's an urgency to keep the economy going."
- Easier profit comparisons. S&P 500 profit growth, thanks to weakness from financial companies, is estimated to have fallen 21 percent in the fourth quarter. That will make it easier for companies to top year-over-year estimates later in '08, says Nick Raich, research director at National City Private Client Group.
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