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The January Effect and 2010 Market Outlook

In the annals of Wall Street lore, many professional investors believe that the ‘January effect” has a positive impact on stocks during the initial weeks of a new year. The belief holds that investors who sold stock at the end of the previous year for tax reasons look to buy back stocks at the beginning of the new tax year, thus driving stock prices higher. In addition to tax-related trading, we believe that the January effect may be more pronounced this year than in previous years given the amount of money still sitting on the sidelines and in bond funds.

Further to this end, according to the Stock Trader’s Almanac, the last 36 times the first five trading days of a new year were positive, the stock market ended the year positive in 31 of these 36 years. This equates to an 86.1% accuracy ratio.

As a result, many investors are focusing on these first few trading days of January for potential 2010 stock market outlook indications. While this kind of analysis may be interesting, we, at Hennion & Walsh, tend to be skeptical of relying solely on these kinds of statistics. One would only have to look back to last year to find a violation of these widely accepted beliefs. As you will recall, January 2009 was a very difficult month for stocks but then the stock market improved considerably, notably after the bottom of this particular bear market was reached on March 9, 2009.

We believe that economic growth will likely be muted in the U.S. in 2010 and that a significant dent into the existing high level of unemployment will not be accomplished. As a result, the Federal Reserve will find it challenging to raise interest rates although inflationary concerns may present cause for them to do so. Low interest rates will continue to serve as an anchor to the U.S. Dollar and create opportunities overseas – particularly in certain emerging markets.

Following this line of reasoning, having a portfolio that consists primarily of U.S. large cap stocks, as many investors tend to, may present unnecessary risk to the growth portion of an investment portfolio following a decade where, according to MarketWatch, the U.S. large cap dominated Dow Jones Industrial Average (“DJIA”) lost 9.3% – the second worst decade performance in history. In our opinion, investors should sit with their financial advisors and consider a wide range of asset classes and investment strategies when conducting their annual portfolio reviews and re-balancings given the uncertainty and expected volatility in the markets in the months and quarters ahead.

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