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January Effect: Bet on US Economy All Year Long

By    |   Monday, 09 January 2012 01:54 PM

The market has a short-term view of things. to say the least.

In the 1980s, it was famously said that the United States only looks to the next quarter while the Japanese look at the next 20 years.

This was a reasonable assessment of attitudes in the United States. However, all that looking ahead to the next 20 years didn't seem to do the Japanese any good. But, that's beside the point.

This short-term outlook is pervasive in the market as well as society at large.

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Ours is a culture that craves instant gratification. Traders need to stay ahead of the competition and the financial press needs to write stories every single day. The result is an overemphasis on the latest market swings as indicative of the current state of the world.

For example, the financial press is riddled with stories about how January sets the tone for the market for the year.

The theory goes like this. A higher stock market in January portends a good market for the calendar year. And, the market is up so far in January – so things look good.

But, assuming January turns out to be an up month in the market (never mind the fact it's only Jan. 9 and there is a whole lot more January left to go), how indicative is a higher January to stock market performance for the year?

According to S&P, there is some validity to this theory. Since 1929, a higher market in January has culminated in a higher market for the calendar year 60 of those 83 years. That means that January has been a reliable forecaster more than 72 percent of the time. On the surface, that's a pretty good indicator.

However, it's also true that since 1950 the market has finished higher in three out of every four years. That means that just predicting an up market in any given year no matter what the circumstances, a person would have been correct 75 percent of the time.

Just being a perpetual bull like a broken clock would have bested the forecasting powers of this January malarkey.

There is a much more meaningful truth buried beneath this short term hooey in the financial press – the market is usually up in any given year because the resilient U.S. economy almost always finds a way to grow.

The real historical lesson is that it is a mistake to ever underestimate the American economy.

No matter what gets thrown at it, the American economy has always persevered. To illustrate, remember back to 1979. At that time Newsweek magazine published an article (well in line with the popular view) called "The Death of Equities."

The theory was that the stock market had not been good for about 15 years and the declining American economy over that period foretold a continuing "malaise" in the stock market. By the way, many of the smartest talking heads on TV also felt that the smart money was on the Soviet Union to win the Cold War.

But, look what happened. The following two decades enjoyed the greatest prolonged bull market in U.S. history. And, the United States won the Cold War.

Sure, there are serious problems now. Out of control deficits and debt threaten to bankrupt us. The housing market is still in bad shape. Europe is a ticking tomb bomb that could potentially explode and plunge the American economy into recession. Washington seems utterly incapable of dealing with any of these problems. But, I believe the economy will find a way.

If policies from Washington continue to be lacking, the economy will adjust and grow at the high end of the slow growth predictions. If Washington actually gets a handle on policy and pursues a pro growth agenda and reduces spending, the US economy will absolutely boom in a relatively short period of time.

Capitalism is our game and we play it better than anyone else. Forget this January nonsense.

If you need a rule of thumb with which to invest, bet on the U.S. economy.

You'll never get better odds than that.

About the Author: Tom Hutchinson

Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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Monday, 09 January 2012 01:54 PM
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