Stock Markets Register Worst January Performance in History

By: Paul_J_Nolte

We've seen this movie before and unfortunately it doesn't end well. With the decline of over 8% for the month of January, the SP500 has cemented the worst January in the history of the index. Nothing like piling on! Economically speaking, the markets took their cue from the very poor reports. Although the GDP figure was better than expected, once the details were pulled apart, there really was nothing to get excited about going into the first quarter. Housing figures also indicated that there is no improvement in housing.

With three more banks going bust Friday afternoon, it is little wonder that investors are dreading the upcoming week, as it will have consumption, manufacturing and oh by the way – employment. Expectations for employment are for payroll losses of around 500,000 and an increase to 7.5%. Estimates are for the unemployment rate to rise to well over 9% before this sorry episode is finished (likely in '10). While employment is a lagging indicator, there are plenty of signs from corporate layoff announcements to keep many investors on the sidelines into the spring.

After a nice one-week rise to just under 900 on the SP500, another retest of the 800 level looks to be in sight this week. While we have been encouraged by the volume figures and modest improvement in the number of advancing to declining stocks, we have yet to eclipse any recent highs in these figures – effectively reversing the one step forward two steps back characteristics of the market. We are seeing investor confidence erode pretty quickly with the most recent decline, effectively erasing the near giddiness of mid-January.

The long-term weekly data remains depressed, seemingly waiting for something good to happen so that the numbers can improve from their oversold levels. Here too, however, are patterns of lower highs and lower lows – a stair step lower pattern. Surprisingly, over the past few years, January has been rather weak with strength showing back up into May before rolling over again. So, if past is indeed precedent, we should see a much better couple of months ahead. Again, we will be concerned about a break of 800 on the SP500 and a rise above 950 should give us a better feeling about the bottom having been “in” during the November swoon.

The bond model swung back to positive as the utility average rose. However, commodity prices are beginning to show some strength having jumped over 10% since early December. A 3% increase in prices could keep the model in negative territory for a while. Already we are seeing an increase in treasury rates, with the 30-year bond increasing by nearly a full percentage point over the past six weeks.

Short-term rates have inched up from nothing to merely next-to-nothing. The spread between short and long-term rates has hovered around 3% for the past year, but history shows that condition has persisted for at least 3 years during the last two economic cycles.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2009 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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