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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.
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.
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