Blog : The Market So Far; A New Spirit of Sacrifice

by Ed Zwirn on January 16th, 2014

What we can say so far about the tone of the market this year;

Plus, a new spirit of shared sacrifice, 

Many market followers are fond of taking the performance at the start of any given year and making educated guesses as to what--if anything--that portends for the remainder of the calendar.

Looking at things this way, the stock market so far this year has presented a mixed bag. Companies at the very top of the food chain have so far languished, with the 30 blue-chip Dow Jones Industrial Average off 1% year-to-date as of Thursday's close. The broader market, on the other hand, has handily outperformed the Dow so far this year, with the NASDAQ Composite up 1% and the Russell 2000, which consists of penny stocks and other small-cap investment opportunities, ahead by 0.8%.

There are two basic things that can be said about the stock market of 2014 at this point.

First of all, the common wisdom would have it that the tremendous gains seen in 2013 will spill over into 2014, albeit at the slowing rate that comes with an aging bull market. As early as it is in the calendar at this point, the relatively solid performance (so far) of the broader market would seem to bear this out.

Then there are those of us who love charts. Of the various "calendar effects" (also including the Halloween effect) that have gained popularity over the years, the so-called January effect may have the largest following. Actually, there are two January effects: One, which is basically useless, purports to show that gains in the first week of trading are predictive of bull years 52% of the time.

The other, which I outlined in a November investment blog, shows that for smaller stocks, the month of January can be accurately predictive of annual performance. Using statistical analysis researchers have found out that penny stocks and other small-cap shares (but not blue chips) tend to outperform in January. This is holding true as we start the year.

In addition, the solid performance of scrappier, more entrepreneurial companies can serve as a bullish indicator. With smaller companies so far outperforming larger ones, it is evident that the hunger for yield driving investors into more speculative plays is continuing, providing grounds for belief that penny stock investors will continue to function in a liquid environment.

Another cause for optimism is the apparent break we are witnessing in the politically induced cycle of budget and debt "crises" seen over the past couple of years. By the time they leave town Friday, senators are expected to pass a $1.1 trillion spending bill that will avert the threat of a government shutdown for the next several months. The House passed the bill Wednesday afternoon by a vote of 357 to 64. Passing the bill would be the last step in averting another government shutdown after funding ran out today. In order to allow themselves time to debate and vote on the appropriations measures, both the House and Senate passed short, three-day bills to buy a few extra days. They have until Saturday night to finish off the larger bill.

This bill, which follows the resolution which ended the October government shutdown and debt standoff, arouses bad feelings on both sides of the political fence, as would be expected of any compromise.

Conservatives, for one, are correct when they complain that the measure does little to curb what they see as runaway government spending, trimming the deficit by only $23 billion over the next two years.

Democrats, for their part, managed to defeat a Republican provision that would have prevented the Environmental Protection Agency from regulating greenhouse gas emissions, but--in a striking victory for those championing obsolete technology--regulations were dropped that would have phased out incandescent light bulbs for more energy-efficient ones. Also, all funding has been cut for President Obama's high-speed rail program, and the U.S. won't be able to make its full payments to the International Monetary Fund.

To be fair, the top echelons of government power are sharing in the sacrifice. Going forward, no more money can be spent on official portraits of Cabinet secretaries or members of Congress.

Easy as it may be to dismiss this austerity move, it should impress the 99 percent and help restore confidence in our governing class. The Bill Clinton/Monica Lewinsky scandal did much to remove an incentive to claw one's way to the top of the political pecking order. Now, with the absence of official portraits, we can rest assured that our leaders have no more privilege than we do and will have to rely on selfies like the rest of us.

Without getting too misty-eyed over this new spirit of shared sacrifice, we may actually be in store for a break in the political stalemate cycle which has heretofore plagued the markets, if only because midterm elections are coming up. Traders may very well lose the opportunity to profit off of political brinksmanship, but we all must be prepared to give up perqs in these tough times.