Making Money Alert
If There's Buying, it Must be January
01/18/2012
Stocks are off to a solid start in 2012. So far this year, the S&P 500 Index is up about 2%. Of course, a move higher in stocks at the beginning of the year is a common phenomenon. In fact, there’s even a name for it -- it’s called “the January effect.”
The January effect rally is usually attributed to the increased buying of stocks following end-of-year tax loss selling in December. This year, however, we’re seeing a lot of money come out of cash and bonds and back into the market from mutual funds, pension funds and increased 401(k)-type plan contributions. The move into stocks so far this year has pushed the S&P 500 Index back above the technically significant 200-day moving average and, as of this writing, back above the 1,300 mark.
I must say that I think stocks have been remarkably resilient this year, despite some rather downbeat news. But I suspect that the January effect is largely responsible for much of the gains. In terms of negative news, we’ve seen earnings from big financials come in tepid at best, and the news out of Europe isn’t getting any better. In fact, last week we saw ratings agency Standard & Poor’s downgrade the credit rating of nine European countries.
S&P lowered its long-term credit rating on Cyprus , Italy , Portugal and Spain by two notches, and cut its rating on Austria , France , Malta , Slovakia and Slovenia France plays a key role in the European Union and is second only to Germany Germany
On the economic front, we had some slightly better-than-expected GDP growth figures from China China China ’s slowing, along with the imminent slowdown in Europe , is going to put a lot of pressure on the global economy.
In fact, we received word today that the World Bank warned developing countries to prepare for the “real” risk that an escalation in the euro area debt crisis could tip the world into a slump on a par with the global downturn in 2008/09.
The World Bank concluded that Europe was probably already in recession and, if the euro area debt crisis deepened, global economic forecasts would be significantly lower. Already, the World Bank is predicting global economic growth of just 2.5% in 2012 and 3.1% in 2013. That’s well below the 3.6% growth for each year projected in June.
The bottom line here is that there are a lot of potentially disastrous events on the horizon that could really do some damage to the equity markets. The kind of damage we’re talking about is no match for a modest January effect.
I am currently advising readers of my Successful Investing advisory service to remain cautious with respect to their allocations to this dangerous market. I think there is just too much potential peril here for investors, and that means cash could be your best friend in the months to come.