Reliance on the January effect – the prevailing wisdom that stock prices rally the first month of the year and particularly the first full trading week of the year – may prove foolhardy this year. So too may be the reliance on Presidential cycle research that points to average gains of 8% in year one of a new President’s term.
Expectations
The first key to survival is to lower expectations. Expecting too much often leads to disappointment. After a decline of more than 30% in the major U.S stock indices, a bounce would be welcomed. But with the economy in crisis and monetary policy all but exhausted, few tools remain for a broad-based rally in U.S. equities. Sideways movement would be an improvement over last year’s roller-coaster ride.
Credit Crunch
Despite the opening of the Federal Reserve’s monetary floodgates, banks aren’t lending. With no provisions in the Troubled Asset Relief Program (TARP) to monitor and enforce lending practices, banks are hoarding money in anticipation of potential buying opportunities and deals that may be presented at home and abroad. This strategy fails to address the root of the credit crisis – home foreclosures. Until trust and confidence is restored, expect credit to remain tight.
Balance Sheets
A company’s balance sheet consists of assets, liabilities and equities. The smaller the debt load, the better the balance sheet. Look for companies with low debt loads. This may not portend a rise in stock price but may insulate investors against the uncertain credit climate.
Dividends
This seems to be the new “new” thing. In an effort to secure income, investors are turning to dividend stocks and away from capital gains. Look at more than just a company’s dividend yield. A high dividend yield may suggest fundamental problems with the company. Instead look for a history of increased dividend payments over several years, including good and bad years.
Large Cap Stocks
The market sell-off of 2008 forced Standard and Poor’s to change the definition of large cap to cover companies with $3 billion in capitalization. Conventional wisdom believes that large cap stocks are safer than those with less cash on their balance sheets. In times of uncertainty, investors look for safety in surviving companies that thrived in times of trouble. Look for concerns with positive outlooks, increased earnings and dominant positions in their industries.
Bond Bubble
Interest paid by the government on treasury securities has fallen to the lowest level since the U.S. government started weekly treasury auctions in 1929. The flight-to-quality sparked by investor panic has pushed prices higher and yields close to zero. With huge stimulus packages set to balloon an already bloated budget deficit and inflationary pressures building as the Federal Reserve pursues an aggressive, easy money policy, Treasury yields will have to rise, forcing prices lower.
While the stock market is oversold by any measure used, it does not follow that a rally will occur. The Dow Jones Industrial Average was essentially flat from 1909-1919. It took 30 years before the Dow made another new high after the 1929 peak. And the Dow was essentially flat for 16 years from 1965-1982. Hope for the best, but expect the worst to avoid disappointment.
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