Back-to-back January declines in stocks are ominous
City Index January 21, 2015 12:05 AM
<p>Ten days remaining into January and stocks are already down 3% as measured by the S&P500. While many are familiar with the old adage “As […]</p>
Ten days remaining into January and stocks are already down 3% as measured by the S&P500. While many are familiar with the old adage “As January goes, so goes the rest of the year”, we pointed to the fact that negative January performances in the S&P500 have almost always led to high profile volatility and/or double digit declines in a single month that year. This was illustrated here and here
What about back-to-back January declines?
Since declines in January have had major implications, back-to-back- declines in January have not only been less frequent, but have had more ominous implications for the general market.
There was no great suspense about what would happen next when stocks fell in January 2008 as the world economy was already in recession and US indices had lost more than 7%. What ensued was the biggest market crash in over 70 years.
January 2002 -2003
The bust of the technology bubble was kicked off by a 7% in January 2000, triggering a 50% drop in the S&P500 and a 79% plunge in the Nasdaq composite index. Although stocks bottomed in October 2002, they fell by as much as 14% from January to March 2003.
Although there was no contraction in US economic output in the early 1980s, GDP growth almost came to a standstill going from as high as 12% in Q1 1981 to 3.2% in Q4 1982. S&P500 fell 27% from November 1980 to August 1982. 1981 saw a 10% decline in stocks, followed by a 16% drop in the first seven months of 1982.
There was no recession in 1977-1978, but the Fed’s anti-inflation war sent interest rates soaring to as much as 20% as the central bank targeted money supply, leaving rates as the reactionary element. The 4% decline of January 1977 headed off a 14% sell-off for the rest of the year, while a positive 1978 was not without its share of geopolitical shudders such as the outbreak of the Iran Revolution and the Soviet-Afghan war.
The early 1970s should merit no introduction – The quadrupling of oil prices, the inflationary spillover from the Vietnam War and soaring interest rates to 13% was started by the infamous January 1973, which started as a new all-time high in stocks, only to turn into a declining month as part of a 18% fall for the whole year. January 1974 showed a modest 2% retreat before giving way to the 29% collapse for the rest of the year.
January 2014- 2015 ?
In order for the S&P50 0 avoid the second consecutive January decline, it would have to close the month at or above 2059, or a 2.2% increase from current levels. This would be highly plausible. But considering the index has not had three consecutive rallying sessions since late December and intraday swings of 2-3% are growing increasingly frequent, confidence is being lost by traders and investors.
We have already warned about the repercussions of emerging deflation from China and Europe as well as lingering expectations by most private economists that the Fed will raise interest rates. As long as such fantasy remains a possibility, the nightmare from Wall Street would not too far behind.
Once again, we warned you.
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