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 . . .
