Since 1927, whenever the first five days were down for the market, it closed the year at a loss 52% of the time. But, that may not be what the market should be worried about.
Happy new year? Not quite for stocks.
Since the start of 2014, the benchmark S&P 500 index lost 0.55%. Some are seeing this as a reason to worry about the rest of the year. Why? Because since 1927, whenever the first five days were down for the market, it closed the year at a loss 52% of the time. That's according to research by Oppenheimer & Co.
CNBC contributor Gina Sanchez, founder of Chantico Global, thinks the fact that the market dropped in the first week of trading means little compared to other factors that may threaten the market. Hanging over the market is the Federal Reserve Bank's tapering of its monetary stimulus program ("quantitative easing") which had helped to keep interest rates down.
"The unknowns in the market right now are really now boiled down to the pace of the taper," says Sanchez. "Everybody's trying to figure out how quickly the taper will happen and whether or not that will make a difference to yields overall and to interest expense, which is has been the last buoy of EPS (earnings per share)."
The S&P 500's growth was pushed by earnings growth which, in turn was fueled by cost-cutting and lower interest costs as a result of quantitative easing, says Sanchez. She believes with that companies have cut to the bone and rates are headed up, leaving it up to revenue growth to increase the bottom line. However, Sanchez says there are three challenges to revenue growth in 2014:
1. Personal income. Sanchez says: "That has been slowing dramatically since 2010 and we're still on a downward trajectory."
2. Duration of unemployment. Sanchez says: "Yes, it peaked out at 40 weeks but we're still at 37 weeks on average of people unemployed between jobs. That is an incredibly high number. If you go all the way back to the 1950s, that number doesn't get above 30."
3. Labor participation rate. Sanchez says: "That continues to go down."
Indeed, labor force participation rate – the percentage of the population above the age of 16 that is currently working in some capacity – is now 62.8%, the lowest it's been since the 1970s.
"I don’t necessarily think things are bad," says Sanchez. "I think that we're still going to continue to see improvement in the economy, more jobs added, etc. But, if you look at the household ability to spend an extra dollar, I don't see it."
CNBC contributor Andrew Busch, editor and publisher of The Busch Update, also doesn't believe the first week of trading matters for what stocks do for the rest of the year.
"There's very little correlation between what happened in the first weeks and what happened for the rest of the year," says Busch. "As a matter of fact, with the analysis that's done of the first five weeks or the January Effect, there's very little statistical basis for making a decision on this. You just don't have enough events. If you go back to 1950, you only have 23 events where the stocks were down for five days in a row at the beginning of the year. It's basically nonsense. I just can't see any value to that."
Busch agrees with Sanchez that Fed action means more to the markets than, say, the first five days being down.
"What is the central bank doing? That matters so much more than whatever else you think is going on," says Busch.
To see the rest of Sanchez's analysis and for Busch's chart of the S&P 500, watch the video above.
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