BACK • 
"Don't Fight the Feds"
"Don't fight the Fed," is one of Wall Street's oldest sayings. Unfortunately, in retrospect, many of us chose to ignore that good advice last year, thinking the New Economy and high-tech were bulletproof from the nation's central bank. As we have come to find out, however, Wall Street's old adages do mean something, and the pressure of six rate increases took their toll on 2000. These figures make 2000 the first clear-cut loser since 1990. Over the last 11 years, the markets have recorded 8 wins, 2 losses, in 1990 and 2000, and one draw in 1994.
The six-year average from 1995 through 2000 shows annual rates of return of 19.53% for the Dow, 20.25% for the S&P 500, 28.36% for the NASDAQ Composite, and 12.25% for the Russell 2000.
The point? While last year was admittedly very rough, over the last 3, 5, 10 or even 20 years, most investors have had the opportunity to do very well in the market (20-year rate of return for the S&P 500 is +15.7%). While any year or period of time can prove disappointing, we still feel that statistics tend to support our long-term investment philosophies.
If last year was a rough year, what are the statistics that follow a bad year on Wall Street? Since 1945, the average rate of return for the S&P 500 in the year following a down year, has been 16.7%, for the NASDAQ, the average gain following a down year has been 22.4%. The figures are even more impressive if the down year is followed by a year in which the Fed is cutting interest rates. Then, the S&P 500 has averaged 24.4%, and the NASDAQ, 35.3%. That is the point: "Don't fight the Fed," thus applies to all the pessimists who are sure the world is about to come to an end, just as the Fed begins to cut rates. As usual, we believe the gloom-and-doomers will be wrong AGAIN.
Admittedly, last year was not the Fed's best year. But, this year we think Alan Greenspan will try to make amends, not intending to have his brilliant 13-year record tarnished so late in his career. He does not want to be left with the legacy of the man who killed the goose who was laying the golden eggs by keeping interest rates too high too long. The Fed has already started cutting rates, and by the end of January, we think they may cut as much as three-quarters of a point. For the entire year, we think the total cuts could range from as little as a point, to as much as a point and three-quarters. Those moves by the Fed should act as a good stimulus to our slowing economy, just as their raising rates last year acted to slow the economy.
Just as the market was priced for perfection last year, and failed to meet that perfection, drastically lowered expectations may actually work in the market's favor this year. Last June, earnings tracker IBES had Wall Street projecting corporate earnings up 16% in the coming 12 months. Those expectations have now been reduced to a gain of just 4.5%. Last June, the Market was still priced for perfection, and now, it most certainly is not. So, what we are left with is a battle of lower earnings projections vs. a friendly Fed. We'll say it one more time- "Don't fight the Fed." Once the Fed has started to cut, on average, the S&P 500 has shown an increase of 10.4% after 3 months, 19.1% after 6 months, and 23.5% after 12 months.
January would not be complete without a reminder of the so-called January factor. You remember- "As January goes, so goes the year." Another one of those Wall Street sayings, and by the way, last year, January was lower. Since 1950, the "January barometer" has been correct in predicting the entire year about 90% of the time. It is very simple; if the S&P 500 is higher for the month of January, that bodes well for the entire year, and if it is lower it does not. The early warning system on the "January Effect" involves the first five trading days. If those first five trading days of January are higher, about 90% of the time the month of January is also higher, and if they are lower, again, it does not bode well for the month.
Just a word about the word "recession." People have now begun to indiscriminately throw that word around, but the real definition is, "two consecutive quarters of negative Gross Domestic Product." That's it. That's a recession. Please remember, a slowing and slower economy is not a recession.
The bottom line, don't believe the gloom-and-doomers; a slowdown is not a recession, Greenspan does not want his legacy tarnished, and the market will probably do better than most people expect.
(Tom Butenhoff is a First Vice President with J. E. Liss and Company, Inc.
in Milwaukee. The views are his, and not necessarily those of Liss
Financial Services or the Job Connection/Hiring
Network.)