Stocks Higher on Renewed Confidence
Stocks rallied for a second day Thursday on optimism about the economy, but it wasn’t enough to lift key indexes into positive territory for January--which could be a bad sign for the year.
The Standard & Poor’s 500 gained 1.5% on the day but finished the month down 1.6%, while the Nasdaq composite rose 1.1% but lost 0.8% for the month.
The Dow industrials rose 157.14 points, or 1.6%, to 9,920. With Wednesday’s gain of 144 points, the Dow has recouped all of Tuesday’s plunge, when stocks sank on fears of more accounting-related scandals. But the Dow too lost ground in January, off 1%.
According to the “January barometer,” the direction of major indexes in the first month usually foretells the rest of the year.
Meanwhile, small and mid-sized stocks fared better than blue chips last month, continuing a 2-year-old trend. The S&P; small-cap index rose 0.8% in January while the S&P; mid-cap index eased 0.6%.
A more tongue-in-cheek market barometer will send its signal this weekend: the Super Bowl indicator, which for much of the last 35 years accurately “predicted” an up year for stocks when a team from the original NFL won and a down year when an old AFL team won. Market bulls may hope the favored St. Louis Rams prove the oddsmakers right, but bears note that the indicator has fumbled for four straight years.
However, the January barometer generally has worked well since 1950, according to Ned Davis Research of Venice, Fla. When the S&P; 500 has sagged in January, the index has slid an average of 1.8% in the rest of the year; when the index has risen in January, it has gained an average of 12.8% in the next 11 months.
But the barometer failed in 2001, as a January rally last year gave way to a dismal year.
Thursday’s rally, amid heavy trading, was fueled by renewed hopes for an economic pickup, analysts said. Personal income rose in December, new data showed, lending credence to the Federal Reserve’s upbeat outlook Wednesday. Winners topped losers by 2 to 1 on the New York Stock Exchange on Thursday and by 3 to 2 on Nasdaq.
Gainers included consumer names such as Procter & Gamble, which rose $3.39 to $81.68 after reporting brisk quarterly sales, and Kraft Foods, up $1.56 to $37.06 a day after raising profit projections.
Chip bellwether Intel gained $1.18 to $35.04 on an upgrade by Merrill Lynch. Elsewhere in tech, IBM climbed $2.34 at $107.89.
Defense contractors rose in anticipation of higher military spending. Lockheed Martin gained $2.51 to $52.97, and Raytheon climbed $1.11 to $38.27.
In other trading, Treasury yields continued to edge higher in anticipation of a stronger economy. In currency trading the Japanese yen fell to a fresh three-year low against the dollar.
Though blue-chip stocks carried the day Thursday, the so-called January effect apparently bolstered smaller stocks last month.
The January effect has historically referred to smaller stocks’ tendency to beat bigger stocks in the first month of the year, in part because smaller names may suffer more from tax-related selling at year’s end, and thus are primed for a bounce.
Satya Pradhuman, director of small-cap research at Merrill Lynch, notes that smaller “value” stocks did especially well last month, continuing their strong performance of 2001. “Investors are more valuation-sensitive these days, more judicious,” he said. “That may accidentally lead them to lower-cap names.”
As for the Super Bowl indicator, it has been accurate in 28 of 35 years--but wrong since 1998.
Historically, it has helped the indicator that the majority of football teams are from the old NFL, and that the stock market rises more years than it falls.
Academics rail against the indicator as sheer coincidence. Still, said Prudential Financial market strategist Robert Stovall, “it outperforms any gaggle of gurus or econometric model I’ve ever heard of.”
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Market Roundup: C5-C6.
