The Year Doesn't Look Lost Just Yet

Now that January is behind us, people are talking about what its performance portends for the rest of the year.

The Stock Trader's Almanac, which I've lambasted before for its focus on patterns that are too big-picture oriented to help people with practical timing decisions, claims that "as the S&P goes in January, so goes the year." The Almanac states, "The indicator has registered only five major errors since 1950 for a 91.1% accuracy ratio."

This January was the sixth worst on record, with the S&P 500 dropping 6% on the heaviest volume in a decade. While it's too early to say whether this will be another successful January barometer call for the year, some analysts are warning that we're in for a doozy. I don't pay much attention to such signals.

First of all, even if we are in for a bad year, it doesn't mean a whole lot to longer-term goals. Bargains bought are bargains bought, period. Is a year too long to wait for something to start appreciating? Not if it eventually grows your money to meet your goal.

Warren Buffett has spoken on this subject. He's pointed out the obvious that for net buyers -- which almost everybody is until they reach retirement age -- low prices that stay low for long periods of time and then appreciate suddenly near the end of the time frame are ideal. They allow the gradual investor to put more money to work over the long time period when prices remain down.

If, for instance, the S&P Midcap 400 stays in its recent 760 to 820 trading range for the rest of the year, it will finish the year at -4.4% at the top of the range or -11.4% at the bottom of the range.

Those are both negative, and the January barometer adherents would claim a victory to have told you to get out way back at the beginning of the year. You would have "avoided the pain of 2008," they'd say.

Well, what's painful about buying as much as possible when prices are cheap? Unless you need to sell your portfolio this December to buy a lifetime supply of freeze-dried rations, you don't care all that much about the value of your shares come Christmas.

That's the first point to keep in mind.

Second, the January barometer may have a strong track record, but two big exceptions happened recently.

In 2001, the S&P 500 gained 3.5% in January but lost 13% for the year. In 2003, the S&P 500 lost 2.7% in January but gained 26% for the year.

What will 2008 bring? As I mentioned in the first Kelly Letter note of the year, a recession starting now would probably end sometime in summer. The stock market has its own track record of turning up before the economy. The market leads the economy, not the other way around.

Too, the Federal Reserve has been cutting rates aggressively and probably isn't done yet. That has always turned the market around in the past after a lag time. That lag time coincides well with the end of the recession, if we're in one.

Those two factors together, combined with the seasonally strong autumn time period, could well make the end of the year rewarding for those who put money to work in the weak months earlier on the calendar.

All told, I'd say the year doesn't look lost yet. More importantly, even if it is, it's just the go-ahead for plenty of buying in the next eleven months for the recovery to come, regardless of the dates it chooses.

Comments

[Chuck]

Doesn't look lost just yet... but will look lost later ?

[User 150661]

The one scenario you don't discuss is buying now and the market declining more, a lot more from here, perhaps for years. I am not saying this is going to happen, but what if this bear lasts more than one year and declines a lot more? Perhaps this is still fine for long-term investors, but it does seem to make sense that if we are in a protracted bear market to stay in cash or other asset classes (have you seen gold?) until it is over and then buy near the low.

Assets can go up AND down. People said real estate always goes up right before the housing bubble burst. How long will the housing bear last? Some people said to start buying again six months ago, yet if you had chances are you could now be upside down on your loan. Sure long term stocks will most likely be up, but how long term are you talking and how much loss will you have to endure in this asset class before you see a gain. A 50% loss in stocks means you will need a 100% gain just to get back to BREAK EVEN.

Meanwhile there will most certainly be asset classes that are appreciating. Just because an asset class is cheaper than it has been in a while, does not automatically make it a bargain and anyone who has studied economics understands opportunity cost. While you are standing around waiting for stocks to rebound there are other asset classes that could have made you lots of money.

[westwest888]

You're an idiot. Can you make your next post about astrology? What does Zeus think the S&P500 will do?