Financial Market Review

Stocks Have Worst January Drop in History

By Lou Scatigna

Stocks posted the worst performance ever for a January. Many investors looked to the new year with hope that with 2008's horrible year in the history books, 2009 would offer better times. There is an old adage on Wall Street: "As goes January so goes the year". If that is the case do not expect 2009 to be much different than 2008.

The SP500 index declined 8.6% in January, the worst performance ever recorded for a January. The Dow Jones Industrials drop even more, declining 8.8% also the worst performance for any January.

According to the Stock Traders Almanac's January Barometer, the month of January tends to predict the direction of the market with a 91.4% accuracy ratio, with only five major errors recorded since 1950. That means that the odds are 91.4% that the market will end down for the year, not very optimistic.

Continued problems in the financial sector was the main culprit in January's historically bad performance. Banks across the globe reported multi-billion dollar losses. Defacto nationalization also took it's toll on share prices as shareholders braced for massive dilution as governments took equity positions in the worlds biggest banks.

Corporate earnings reports for the 4th quarter 2008 were largely worse than expected. Many companies downgraded forward looking projections indicating that the economy is still contracting at an accelarating rate.

January retail sales as well as the all important payroll report should indicate that the worst is yet to come for the economy. The payroll report comes out next Friday and will be a main driver of the market. Some economists predict job losses of between 700,000 and 1 million.

The one bright spot in financial markets was the precious metals sector. Gold was up nicely in January closing at a six month high around $925/oz. Gold mining stocks performed relatively well in January. Concerns about the expansion of the money supply worldwide have driven investors to gold and silver as a hedge against currency debasement and future inflation.

Energy prices showed continued weakness with Crude Oil down 10% for the month. Gasoline on the other hand has risen smartly at the pump, rising from a low of about 1.35/gallon to 1.70.