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January marked the nineteenth time in 50 years that the markets have delivered negative returns during the first month of the year. Looking back, during 11 of those years the market ended the year on a negative note, declining an average of 13.11%. Adjusting for inflation adds four more years to the tally. The frequency of the joint negative returns suggests that there is more than a coincidence here. Taken at face value the historical data suggests that there is an 83% chance of a down year this year. If the bears have their way, it would be the first time since 1939-41 that the market has declined three consecutive years. Yet, before conceding the year to the bears, maybe we should take a closer look at the data. The up years under consideration are 1956, 1968, 1970, 1978, 1982, 1984, and 1992. The down years are 1953, 1957, 1960, 1962, 1969, 1973, 1974, 1977, 1981, 1990, and 2000. The down years include the announcement of the Kennedy personal income-tax-rate cuts implemented during 1963 and 1964 and the first year of the implementation of the Reagan tax-rate cuts. Also included in the sample of down years is 1990 (the year of Bush 41's tax-rate increase), 1974 (oil embargo year), and 1973 (the first time U.S. inflation approached a double-digit rate during the post-war years). The up years include 1970, 1978, 1982, and 1984, during which tax rates were reduced. The list also includes 1968, the year prior to a tax-rate increase. Taken together all of these results suggest that the market does not like pre-announcements of phased-in tax-rate cuts, high inflation, tax increases, or oil embargoes. In contrast, the market seems to prefer tax-rate cuts. The data also suggests that pre-announcements of tax increases cause a false prosperity. The differences in the economic environment during the up and down years should be used to argue against the bear market hypothesis. The current economic environment is not consistent with the environment that prevailed during the down years. Although it's often pretty easy to be critical of Alan Greenspan, the sound outlook for inflation is that it will remain in the 2% to 3% range. President Bush has called for accelerating and making the tax-rate cuts permanent. While some democrats led by Ted Kennedy have called for the repeal of the Bush 43 tax-rate cuts, the odds do not seem to favor Teddy. Meanwhile, the Russians have clearly signaled that they will not let the price of oil get out of hand. Hence, looking back, the historical conditions that have produced down years do not seem present. If the up years are the relevant sample, it is comforting to know that returns during those years averaged 4.37% (as opposed to the -13.11% return produced in the down years). This forecast is not a complete certainty. The market declined when there was the unexpected disruption in the oil markets in 1974 and the unanticipated surge in the inflation rate. The market is quite vulnerable to a negative surprises. A big question today is whether the Enron affair and its impact on the accounting and financial disclosure standards will produce a large and negative shock to the system. The quest for transparency may lead some companies to restate their earnings or the liabilities of their defined benefit plans. The contagion of the accounting woes could very well bring down the market. Oh yeah, the AFC. Comparing the down years mentioned above with the Super Bowl victors — 1969 (Jets, AFC), 1973 (Miami, AFC), 1974 (Miami, AFC), 1977 (Oakland, AFC), 1981 (Oakland, AFC), 1990 (San Fran, NFC), and 2000 (St. Louis, NFC), the AFCs have it. But this year (Patriots, AFC), let's look a little harder at the historical data and bet on a market victory.
— Victor
A. Canto and Peter Mork of La Jolla Economics |
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S&P 500 was down for the month of January and the AFC won the Super Bowl.
Is there a correlation here? Let's find out. 
