Stock Market Outlook - Second Half Rally

The January Barometer, a well-known indicator of market performance for the calendar year, suggests that 2008 will be a disappointing year for investors in the U.S. stock market.   Before you sell off all your investments, lets look at why this year may be different. 

Developed by Yale Hirsch of The Stock Market Almanac in 1972, this popular market indicator states that “as the S&P goes in January, so goes the year.”

Simply put, if the S&P 500 finishes January with a positive return, it is highly likely that the index will finish the year with a positive return as well.  Conversely, a negative return in January foreshadows a market decline for the year.

The Almanac further claims this indicator has accurately predicted market performance for the year 91.2% of the time since 1950.  A remarkable track record by any measure.

So what does this mean for investors in 2008?

On the heels of an anemic gain of just 3.5% in 2007, the S&P 500 posted a loss of 1.4% on the first day of trading in 2008.  The index continued its decline largely unimpeded through the end of the month due to a number of reasons which we're all aware of by now.

Although the market recovered from the steep intra-day lows set on January 22nd and 23rd thanks to the Fed’s emergency rate cut, the S&P 500 finished January at 1,378 for a loss of 6.1%.

Now, before you panic and go short, know that there are several interesting factors at play this year that could portend a gain for U.S. stocks in 2008 and prove the Almanac wrong this year.

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