2008 - It has begun!
Sunday, February 10th, 2008It has begun!
It has begun!
The January Effect is a well known and fairly consistent trend in stock market swings. In the 4th quarter, each year, large institutional investors dump losing stocks to take losses that will offset their wins over the previous year. This puts a lot of supply of poor stocks on the market and puts a lot of cash into the hands of the investors. The fact that these are stocks that normally are not swept up by others and the holiday spending spree of the consumers, usually absorbs most of this sell-off so we normally do not see a large drop in the market nor a rush to sell off winners. However, after the New Year starts, these same investors, now flush with cash, want to invest and most do so in January.
This is not offset by anything else, happens mostly in January and is in the billions of dollars. The result is prices go up and the general market rises. This has happened all but 4 times in the past 25 years………one of those four is January 2008.
With all this pressure to increase the market, in fact, quite the opposite is happening. It is taking a dive. This means that the market drop is actually much worse than it appears. It is diving despite all this upward pressure - or more precisely, investors have lots of reasons to buy but instead they are selling in large numbers.This is not a new trend. The NASDAQ and Dow hit highs in October and have mostly been going down since. This has a lot to do with the Bush administration’s policies of trade, tax and politics but it also has to do with the normal cycles of regression to the mean of normal and typical stock performance. We have been due for a recession for some time.
What a prudent investor would have noticed is that in January 2007 the price of gold was $610, in July it was $685, in December it was $835 and now, so far in January 2008 it is at $912. This is a clear indicator that people have been bailing out of the market for more than a year. And note that the rate of exit is increasing. In the first six months, it rose $75 but in the last six months it rose $227. That should have been a clear sign to prepare for the worse. It was for me.
Unfortunately, this is just the beginning. Remember that the boomers own more than $6 trillion in stocks in the market plus trillions more in real estate. In fact, while the underlying retail price inflation has only come to 14% over the past 5 years, the value of residential housing has climbed 78%. More than 40% of that total home value is in the hands of boomers that regard it as a pre-retirement investment. As I predicted and justify in The Dismal Science article (written in 2005) on this blog, the boomers will precipitate the largest and longest recession in US history beginning around 2015.
I may have been wrong about that date. It might have already started. This is not that unusual since it is common for investors to buy on rumor and sell on history (news) – making them always over reactive to even the hint of good or bad news. In this case, they are perhaps acting sooner than I had expected or maybe just reacting to a shorter term crisis that will coincidentally run into the large crisis looming just ahead.As one of the more informed generations of investors, they may well be aware of the coming problems created by the boomers and may well be also reacting to that crisis a few years in advance. This can happen if the institutional fund managers are of the mind to be cautious about what they know will happen eventually.
Bottom line is that a major financial downturn has started and will continue for the next two decades or it will take a short spurt upward for a year or two before taking the plunge for two more decades. Either way, prepare now or suffer later.