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Investors to Consider U.S. Economic Stimulus Package, Company Reports, January Barometer in the Week Ahead

26 January 2009 - Markets - Editor

With President Obama’s grim summing up of the nation’s economic situation on Saturday, and facing a barrage of company reports in the coming weeks, stock market players are hopeful that the fact that the Dow gained ground after wavering below the 8,000 point level for four days in a row, could very well indicate a bottoming out of the market. While some may see this as clutching at straws, others feel that the Obama administration’s proposed economic stimulus package may turn this hope into a reality.

Stating that his administration, and the year, have both started off in the midst of an “unprecedented crisis that calls for unprecedented action”, President Obama is urging congressional members to pass an $825 billion package to stimulate the economy and hopefully create up to four million jobs over the next two years. These are jobs that are desperately needed in light of the fact that the unemployment rate is heading for double digits, with people filing for unemployment at a rate that has not been seen in more than twenty-six years. While the proposed stimulus package has both supporters and critics, it is clear to all that swift and decisive action by the U.S. government is required to prevent a bad situation becoming even worse.

The week ahead will bring reports from more than 130 S& P 500 companies, as well as 12 Dow components, some of the most noteworthy of these being Caterpillar, McDonalds, American Express, Wells Fargo and Yahoo. Of the 85 S&P 500 companies that have already reported, only 10 percent have topped forecasts, with 60 percent meeting estimates and 30 percent missing the mark. While investors and analysts have no doubt that fourth quarter results will be bad, the coming week will reveal just how bad the situation is.

For proponents of the “January Barometer” theory, the way this week ends will be a deciding factor for their 2009 investment strategy. The January Barometer theory proposes that movement in the market during the month of January sets the direction of the stock market for the remaining eleven months of the year as measured by the S&P 500. Should the S&P 500 be at a higher level at the end of January compared to the beginning of the month, the stock market will be expected to rise during the rest of the year. During the 59 years between 1950 and 2008 the January Barometer has been correct in 44 of the cases as measured over the remaining eleven months of the year. However, when January was a down month, the barometer was accurate in only half of the cases, with the other half posting gains despite January’s negative performance. So, if January 2009 turns out to be a down month, statistically investors stand a 50/50 chance of the market gaining during the balance of 2009. Of course, this means that they stand a 50/50 chance of the market declining, which critics of the accuracy of the January Barometer are quick to point out.

Whatever investment tools U.S. stock market players choose to assist them in their investment decisions, there is little doubt that the coming months will prove challenging as the Obama administration focuses its attention on rescue efforts for an economy in deep trouble.

 


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