The Troubling Stock Market

Posted by: Ben Steverman on January 21, 2009

The performance of the stock market so far in January has been disturbing. The S&P 500 is down about 9% so far this year.

In 2008, the S&P 500 tumbled 38%. A rally in December trimmed some of 2008’s losses, but many assumed the market was already priced for a very tough economic environment in 2009.

Bruce Bittles, chief investment strategist at R.W. Baird & Co., says that, given last year’s losses and “the huge sums” of cash already sitting in money market funds, “the persistent selling is surprising.”

“This forces the question whether October and November represented a selling climax and the lows for the cycle?” he asks.

Bittles says there’s historical evidence that stocks correct just before a new president takes office and rally within a week or two after inauguration day. We’ll see whether a post-Obama rally materializes.

The stock market’s performance in the next few weeks could be crucial.
For one thing, there is the “January Barometer,” identified by the Stock Trader’s Almanac. The idea is that as January goes, so goes the year. It’s been accurate 91% of the years since 1950, and it was certainly correct last year. The first month of the year can give investors important clues to the financial, political and business climate of the coming year.

For another thing, a strong, or at least stabilizing, stock market could help prop up a weak economy. Bittles notes:

The stock market is critical to the economy for many reasons not the least of which is the confidence factor. Almost without exception, financial crises that tend to overstay their welcome do so because of the loss of confidence. If the economy is to bottom in the first quarter as expected and stabilize by mid-year, a new low in the popular averages would place that in jeopardy.

Another collapse in the stock market would be bad news not just for investors but for everyone else too.

Reader Comments

Karen

January 21, 2009 12:24 PM

"Another collapse in the stock market would be bad news not just for investors but for everyone else too." Not really, you are overreacting. For the conservative prescient saver who saw these asset bubbles forming and decided to stay out, this recession is not a bad thing. She can now buy stocks 50% cheaper, a house 30% cheaper, pay lower rent, and buy more goods with her salary. The price for all this? A so far 2% increase in unemployment. I can deal with that.

Peter

January 21, 2009 2:30 PM

My gut tells me that the market will need to drop below 6,000 before it will start to go up. This will occur in late 2011 or mid 2012.

Andy

January 21, 2009 7:57 PM

Even the "prescient saver" who can now see opportunity would be wise to continue this saving program... When government solutions are to free credit to enable the taxpayer to fall further into debt in an uncertain economy in some last gasp effort to fund its obligations, one should assume that we are far from a bottom. There is not one pundit, bailed-out broker, or blind optimist that can convince me to support a fundamentally flawed system. We should not be "speculating" in times like this... We need to "purge", protect wealth, and wait for unimpaired opportunity. Because "It's the system, stupid." Inflation is coming... Look busy.

Andy

January 21, 2009 8:02 PM

Even the "prescient saver" who can now see opportunity would be wise to continue this saving program... When government solutions are to free credit to enable the taxpayer to fall further into debt in an uncertain economy in some last gasp effort to fund its obligations, one should assume that we are far from a bottom. There is not one pundit, bailed-out broker, or blind optimist that can convince me to support a fundamentally flawed system. We should not be "speculating" in times like this... We need to "purge", protect wealth, and wait for unimpaired opportunity. Because "It's the system, stupid." Inflation is coming... Look busy.

Kobe

January 21, 2009 11:08 PM

Karen's naive and selfish "I can deal with that" shows little understanding of the markets , (financial and real estate), and she will learn as this year unfolds, the folly of her remarks. But that is how one learns. Talk is cheap. Be very careful when making decisions, because much is going to become cheaper still. Therein lies the problem, and if long enough, even Karen will feel the pain.

Holly Garfield

January 22, 2009 10:18 AM

The market in December reacted positively to individual company news but did not react negatively to persistent negative general economic news. That only works for a short time. We are now in a downturn that is the result of a widespread financial system failure. The subprime problem was a symptom, not the whole problem. It was only the first of multiple problems to show up. This is unlike the past dips after the Great Depression. The entire economy is based on a sound financial system, and now that system is very damaged in every aspect. The S&L failure was contained to that sector, the dotcom burst was centered on tech stocks, this is an economy-wide failure. I doubt that the economy will start recovery until debt writeoffs get to the point where the remaining debt can be paid by the generated income at the time. We don't need to create more debt, a la Hank Paulson; we need to pay down debt before a restart. How can banks make more loans until they have enough creditworthy customers looking for loans? 'Too big to fail' may turn into 'too big to survive' the shrinking lending market. We are putting too much hope into President Obama. The damage is still coming. Any bailout will at best slow, but not stop, the fall. Or it might saddle us with so much debt that recovery will be extended.

Jimmy Turano

January 23, 2009 1:13 PM

Jan,23rd.-I strongly believe we must test the lows of last November before moving forward. I would even wait until the first quarter is over and then re-evaluate the
Dow as a Bull or still a Bear.

jimmy Turano

January 23, 2009 1:17 PM

Re:Biotech stock MDRNA INC(MRNA) $.28
THE CLOCK IS TICKING ON THIS STOCK.
BURN RATE EATING UP CASH ON HAND QUICKLY. IT IS EITHER PARTNER UP, SELL LICENSING, OR HAVE A FIRE SALE OF SORTS AND HAVE SOMEONE BUY OUT THE COMPANY TO CONTINUE TO EXIST ANY FURTHER. IMAGINE, FROM $20 DOLLARS TO NOW $.28 CENTS.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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