US Stock Market: Bad Year In 2008 Equals Promising 2009?

A steady and slow move higher throughout the session ended with solid gains for all the major indices. The Dow (^DJI) gained 190 points or 2.2% and is once again sitting at the 50-day moving average. The S&P 500 (^GSPC), also sitting at the 50-day, gained 21 points or 2.5%. The NASDAQ (^IXIC) is closing in on its moving average and was able to put together a solid rally of 39 points or 2.6%.

Gold closed the day little changed, falling $2.70 to $872.80. Oil lost 75 cents to close back below the $40/barrel level. The one glimmer of hope for oil is that the black gold has consolidated the last few days, though that could be the result of light trading volume.

Many investors were asking Santa Claus for a year-end rally in stocks and historically they get their wish. So far the market has done next to nothing the last week as big money sits on the sidelines and waits for 2009 - which will hopefully be a better year. The failure of the indices to break above the 50-day moving average earlier this month has been an issue for PFG and a big reason we have not moved out of our intermediate-term neutral bias. If the moving average is taken out and the indices can continue through the December highs it will force us to move to a bullish short-term and intermediate-term view.

READY TO PUT 2008 IN THE BOOKS

It appears as if 2008 will be the worst year for stocks in over 50 years as the major indices are on pace for losses of about 40%. Should the poor performance in 2008 keep investors from reentering the stock market in 2009? No.

Looking back to 1975, the S&P 500 has suffered 7 down years and the only consecutive losers were from 2000 to 2002. The odds of 2009 turning into another down year is not good, but earlier this decade there is evidence it can happen. However looking back at the down years versus some of the best years since 1975, it is clear that buying after big years is not the best strategy. A 26% gain in 1980 was followed by a 10% loss; the best year in the 1980’s was a 27% gain in 1989 that was followed by a loss of 7%. In the late 1990’s there was a string of solid years that we now call the Tech Bubble. The big years in the 2000’s have both been followed by single-digit returns in the index. As far as performance after down years since 1975, besides the 2001 and 2002 years of the bubble, historically after a down year on Wall Street the market tends to rally.

I would not make a bet on 2009 being an up year simply based on the historical numbers, however they do add substance to my thought process that 2009 will be good to those investors in stocks. Low valuations, a technical bottom that formed in November, and very high levels of cash in money markets and fixed income are more reasons I feel stocks could outperform once again in 2009. We have been working overtime looking for new stock ideas to take advantage of what could be the Year of Opportunity in 2009.

Posted in Categories: Contributor, External Research, Stocks, USA.

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Comment by gustongroves

2009-01-03 05:42:53

2008 would remains in the history of stock market; it is such a worse year to experience to investors. Expect 2009 would help in transition to bullish market.

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