Starting the Year on the Right Note
1/6/2010
By Charles Payne
"If the past has been an obstacle and a burden, knowledge of the past is the safest and the surest emancipation." -Lord Acton
Well, there is nothing better than coming out of the gate with vigor, even if these are the first steps of an otherwise very long marathon. The fact is that calendars may turn but the action in the stock market is a continuation of trends that can be months, or years, in the making. On that note, yesterday's action was a continuation of the green shoots theory phenomenon where life climbed out of the rubble of an economic nuclear winter. Enthusiasm is a critical part of any recovery, although the flipside is the greater the anticipation the bigger the fall when there is disappointment. History has taught investors this the hard way, unfortunately. By the way, history is mixed with respect to what yesterday's session means for the rest of the year. It is very doubtful that we will escape 2010 without some kind of challenge that scares the daylight out of us. I hope that day comes later rather than sooner.
Action in January and its implication for the entire year have been different since 2000 then it was in periods prior. The Dow Jones Industrial Average has eked out a 0.1% average annual gain even after tough Januarys, but the NASDAQ and S&P 500 both tumbled, 1.2% and 1.1%, respectively. Ironically, the Russell has stumbled out of the gate only to rally an average of 4.7% for the full year.
The "January Effect" Last year's performance looks much like 2003 when the market climbed
off the canvass following a recession and post-technology stock market crash. Of course, January was a disaster last year and very few people were saying that it would be an outlier for the year. At this point I think that the only safe thing to say based on history is the market should be eventful. The bias remained to the upside four more years after the 2003 reversal.
The thing is now where will leadership come from? The Dow Jones
Industrial Average should do well as money managers that totally blew it last year find the gumption to jump in now. Such courage would be facilitated by the fact that their investors have to be more than a little annoyed at lackluster returns. Moreover, blue chip stocks benefit from a strong global economy and weak dollar, which should be the case for the near- term.
The S&P 500, considered the best proxy for the stock market and
economy, should also do well with a strong global economic backdrop but will need domestic growth to outperform. On that note, I just don't see the domestic economy going gangbusters. Sure the bulk of stimulus money will be spent in the first two quarters and there will be another jobs spending plan, but it will be poorly managed and will create a long-term dilemma.
The small-cap names are set to roar this year but the problem is
that the landscape is always laden with landmines among the rows and rows of wondrous flowers. The fate of these names will depend in large part on access to capital. At some point this year banks will be so damn fat with cash they'll wake up in a panic and begin to lend. Of course, that can't happen in earnest until the Fed makes it harder for banks to make money without putting any skin in the game.
One index that really seems poised to take off early in the year is the NASDAQ, led by Apple (AAPL), Google (GOOG), and Amazon (AMZN). I think that
there will be much consolidation in the tech sector, too, and that could be the wildcard. The drag last year was biotechnology stocks, which died on the vine after a wave of takeovers by big drug companies. Biotech will make out in the healthcare bill as it will be exempt from generic drug competition for years.
Charles Payne
Wall Street Strategies
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