AND THE BEAT GOES ON
We are now in our 107th month of our current economic expansion; it is unprecedented, and it has nothing to do with the current occupant of the White House, except, to his possible credit, that he left the economy to Mr. Greenspan and Mr. Ruben, and now to Mr. Summers.
For months, if not years, the so-called experts have tried to talk this economy down, tried to predict the moment when it would roll over and die. It continues to confuse and confound them, for reasons (technology and productivity) that we have long documented in this space. It is good to remember that economies do not go into recession because they get "tired." Recessions occur because of poor economic policies. Hopefully, Mr. Greenspan and the Fed will not lose their touch as we continue to maneuver through these uncharted waters.
Recently, the Fed raised interest rates by a quarter of a point, and they may well rise by another quarter of a point on the 21st of March, when the Federal Open Market Committee meets again. Beyond that, I would not rule out an additional increase or two thereafter, although I am rapidly becoming convinced that the interest rate "bears," i.e., those that think that there are many more increases in our future, are going to be wrong.
It must be remembered that the reason for these increases is not because inflation is running away. We are getting these increases in response to the constant fear of eventual inflation creeping into the economy that has been so strong for so long. There is a big difference.
It must be remembered that while the economic numbers this year may not good match last year's performance, that is principally because 1999 turned in a so-called "career year" statistically. Still, things are pretty darn good, and likely to stay that way this year.
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I have received several inquiries this year concerning the "January Effect," and the poor performance that January turned in. Though we've written about this before, a quick review may be in order: January has historically been an important month for the year; in fact, somewhere between 85 and 90% of the time, January statistically dictates the eventual outcome of the entire year. In other words, if January is up, since about 1950, about 85 or 90% of the time, the year is going to be up--and of course, the reverse is true. Now people are worried because this was a lower January, and the worse January performance since 1990. What are we to make of it?
Well, like the old Sinatra song, January turned out to be "Just one of those things," and to paraphrase a small part of that song, "Perhaps we should have been aware that the December love affair with stocks was too hot not to cool down." So, with the all-important month of January to the downside, does this end the game and doom the remainder of the year? OF COURSE NOT.
For those of you looking for a statistical "hand-hold;" as we all know, the final quarter of last year was sizzling. The S&P 500, for example, gained 14.5%. While some might think the hot fourth quarter might require a first-quarter slow-down, a study published by The Outlook, an S&P newsletter, found otherwise.
The study focused on fourth-quarter returns from 1935 through 1998. It noted that the S&P 500 had gained 10% or more only eight times over that 53-year period. Of these eight instances, the average first-quarter gain for the following year was 8%- which is four times the average first-quarter gain for the entire period, which is just 2%.
Additionally, the following year's outperformance continued into the second quarter. The study shows that in the years following the big fourth-quarter returns, second-quarter S&P 500 returns averaged 6.2%, compared with an overall 2.4% gain in the second quarter for the entire period measured.
Finally, given the overperformance in the first two quarters following the double-digit fourth-quarter gain, it is not surprising that the full-year returns were also well above the average of the following year. On average, the S&P 500 gained 19.1% in those eight years, compared with 9.5% over the entire period from 1935 to 1998.
Remember, it's all about earnings, inflation, and controlled economic growth. As long as we keep the current package together, we'll be in some form of "good."
(Tom Butenhoff is a First Vice President with J. E. Liss & Company in Milwaukee. The views are his and not necessarily those of Liss Financial Services or the Job Connection/Hiring Network.)