Wall Street rode out 2003 on a wave of optimism this past week as upbeat investors bet that the economic rebound will accelerate. But analysts say the next few trading days may be more telling since early January gains historically bode well for the rest of the year.
The main gauges notched their first winning year since 1999 Wednesday after investors shook off mad cow fears and kept their faith in a strong recovery. But the celebration appeared to cool Friday, the first trading day of the year, after stocks lost momentum and closed mostly lower.
However, analysts noted that volume was very light during the holiday week, accentuating price swings. As a result, the more critical test will be in the coming week when investors return from the holidays and digest scheduled reports on construction spending and factory orders.
"We don't think too much" of the past week's trading, but more on "when we get back from the holiday on Monday or Tuesday," said John Caldwell, chief equity strategist for McDonald Financial Group. "Folks are looking for signs of economic health."
"Durable goods orders from the last month weren't all that great, and people are still looking for the jobs recovery. That will be more important for the market," he said.
There are historical reasons for keying in on the coming week's trading. The January barometer, as it's known, dictates that if the first five days on average finish higher, then investors can expect gains for the month and entire year.
Early January gains led to yearly advances each year since 1950, with the exception of five times, according to the Stock Trader's Almanac.
In the next few days, "investors will be discounting for the entire year. Everyone is sitting down and making their forecasts for 2004," said Robert Streed, portfolio manager of Northern Trust Select Equity Fund.
"And for the most part, investors tend to be right and their bets early in the year will probably carry through," Streed said.
If some analyst forecasts are right, January may post more modest gains than average.
January typically is the second strongest month of the year, ranking just behind December as investors put year-end bonuses and dividends to work. Since 1939, the Standard & Poor's 500 index has posted a median return of 1.5 percent in January.
But Russ Koesterich, US equity strategist at State Street Corp in Boston, said January gains tend to be more modest following a strong yearly market performance such as last year, when the S&P 500 gained more than 25 percent.
In those cases, the S&P only rose an average of 0.38 percent in January, he said.
One reason might be that during strong market years, investors often wait until January to sell stocks so they can defer tax payments until the following year.
"Historically, a big gain in the prior year appears to steal some of January's traditional strength," Koesterich said.
There are other risks that could derail a market rally even if the new few trading days are strong. Investors have been bracing for the Federal Reserve to raise short-term interest rates as early as this year now that the economic recovery appears to be back on track.
Terrorism fears continue to pressure the market -- and may have contributed to Friday's declines after a half-dozen flights were canceled or delayed by US authorities who cited safety concerns.
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