The Troubling Stock Market

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.

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