‘January effect’ propels
market to strong start

The rally's staying power, though, will
depend on the strength of earnings
and economic data

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By Lisa Singhania
Associated Press

NEW YORK >> The stock market's surge during the first trading sessions of 2002 was welcomed by investors looking forward to a better year. The advance certainly was evidence that Wall Street is growing more optimistic about the outlook for the economy and stock prices.

But analysts note that the market's own mechanics were also likely at play -- stocks frequently rise in January as investors stop selling stocks for tax purposes and start investing year-end bonuses.

"You have money coming into the market," said Jeff Hirsch, publisher and president of the Stock Trader's Almanac. "Once the new year starts, tax selling pressure lifts and stocks rise. You also have people feeling better about the change of the year."

The phenomenon, which is heartening as Wall Street continues its recovery from its post-Sept. 11 lows, coincides with what historically has been a strong time of the year for stocks. The market rises or falls based upon what it believes will happen in the future, usually about six months out. As a result, stocks typically rise in November, December and January on hopes for the new year and then settle or fall back during the spring as corporate earnings and economic news come in. Investors also collect profits and otherwise adjust their portfolios.

That's what happened in 2000 and 2001, and it's possible that will happen this year. The market's current gains reflect the economic recovery Wall Street expects to see this summer. If earnings or economic news fail to bear out that forecast -- or the numbers just meet rather than exceed expectations -- investors might decide to sell and consolidate their gains rather than stay exposed.

Weak results, including earnings due out this month, might also give investors little incentive to keep buying and slow the momentum of any future rally.

Although economic reports and earnings predictions appear to be stabilizing, analysts say the market must be careful not to go too high or to overestimate the extent of a turnaround.

"I would say that a recovery in the economy by the end of the first half of 2002 is basically close to 100 percent, excluding something coming out of left field like a terrorist attack. This is a classic recovery we're seeing," said Charles Pradilla, chief investment strategist at SG Cowen.

"That said, it doesn't mean the rally is going to last forever. It could run out of steam by the end of the first quarter. We'll have to see," he said.

But many analysts do expect Wall Street to have a strong January.

The gains stand to be especially striking for lower priced small-cap stocks, which often do well the first month of the year, said Hirsch, of the Stock Trader's Almanac. "It's easier for a dollar stock to double than a $10 stock," Hirsch said.

Pradilla, the SG Cowen analyst, noted that many big-cap stocks have also run up considerably in the last three months. Some of the most significant gains have been in the technology sector -- which helped lead the market higher this past week.

Advanced Micro Devices, for example, is up nearly 160 percent from its post-Sept. 11 low. Intel has gained nearly 90 percent during the same period.

It was a good week for the markets despite a report yesterday that showed unemployment in December climbed to a 6-year high of 5.8 percent.

The tech-focused Nasdaq advanced 72.12, or 3.6 percent, to 2,059.38, after a 15.11-point gain yesterday. The Dow rose 122.75, or 1.2 percent, to 10,259.74 for the week, helped by an 87.60 advance yesterday.

The Standard & Poor's 500 index climbed 7.24 yesterday to 1,172.51, notching a weekly gain of 11.49, or nearly 1.0 percent.

For the week, the Russell 2000 index rose 5.68, or almost 1.2 percent, to 499.30, after rising 3.79 yesterday.

The Wilshire Associates Equity Index, which represents the combined market value of all NYSE, American and Nasdaq issues, ended the week at $10,932 trillion, up $113.750 billion from the previous week. A year ago the index was $11.872 trillion.