Shall we think about the “January Effect” on Wall Street, which says the stock market, for the full year, will mimic the stock market during the month of January. I hope not!
Or, shall we think about the historical performance of the stock market during years of a presidential election, which average a gain of 11%. While I would prefer to think about that, this presidential election cycle has been so bizarre, I cannot imagine history means as much this year.
What we know is this – the month started down so rapidly that historical records were shattered almost daily, before it turned back up the last week or so. What does it mean?
The number that best explains it is .97 – that was the correlation between the stock market and oil prices for January. In other words, they moved together 97% of the time, which is a record high. The stock market reflected oil prices and little else. (Importantly, that problem is not fixed.) Last week’s rally is explained primarily by the calls for an emergency OPEC meeting to control the over-supplied oil market. OPEC is the only institution as dysfunctional and useless as Congress. They could meet every day of the week and produce no agreement that was enforceable. Their best days are behind them, just like Congress.
Economists are fond of saying “the cure for low prices is low prices.” With the price of oil so low, the number of rigs actually drilling is dropping rapidly — one estimate is that 50% of all rigs are now idle. Capital expenditures by the integrated oil companies are now based on closing-in facilities, not expanding them. While the cure for low prices is indeed low prices, that cure is painful and prolonged. I don’t see it in the near future. My hope is that OPEC will make some grandiose statement that will allow the market to look elsewhere, if only for a brief while.
Friday’s massive bull run down Wall Street was also due to the Bank of Japan announcing negative interest rates – you know, I’ll pay you to borrow my money. As nonsensical as this is, it should help propel the world’s third largest economy, which is still vibrant but nonetheless staring into the ugly face of deflation. In other words, it should improve global demand.
Buried beneath the bulls, I did notice that the initial reading of our GDP growth was an unexpectedly low 0.7% during the last quarter. The second reading is next month, and I’m hoping for a significant upward revision. That requires watching, as it is the first strong sign of recession in the short-term. (Remember: don’t fear recessions – they come and go – but always be afraid of another financial crisis.)
Stay tuned . . .