By Joseph Lisanti In 2003, the Standard & Poor's 500 index posted its first gain since 1999 and its best full year since 1998's 26.7% advance. The index began 2004 with a fairly strong tail wind, and the solid 5.1% upward move last month suggests that January may also end in positive territory, though probably much less so.
Since 1928, December has been outstanding for the stock market as the "Santa Claus" rally boosted the S&P 500 an average of 1.4% for the final month of the year. Before last month, the "500" had gained 5% or more in 11 other Decembers. The subsequent January saw further gains in eight of those 11 periods, or almost 73% of the time.
But not once did such a January gain exceed 5%. The best result of the 11 under consideration was a 4.1% advance in January 1971; the worst showings were declines of 5.1% in January 1977 and again in January 2000. On average, the gain in a January following a 5%-or-better advance in December was only 0.6%. That's well below the historical 1.5% average gain for the S&P 500 in the first month of the year.
Whatever happens to the index in January, we think the full year will be up, but not as much as in 2003. This year, the economy should continue to grow, but less vigorously than in recent quarters. Last year's tax cut should still be felt as investors in dividend-paying stocks pay less in taxes than they did in 2003. But overall, the tax cut is not likely to have as large a stimulative effect on the economy this year.
In short, the market outlook remains positive, but investors should not expect a rerun of 2003. We think the S&P 500 index will end the year at 1190.
Given what we view as currently unattractive alternatives in bonds and cash, we continue to recommend keeping 65% of investment assets in stocks. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook