The stock market's sudden downward pattern does not bode well for the rest of 2010, according an analysis of market history.
Fueled by compensation bonuses and contributions to retirement plans, January is typically a strong month for stocks, but it also stands out as a barometer for the next 11 months.
“Every down January since 1950 was followed by a new or continuing bear market, a 10% correction or a flat year,” according to Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac 2010.
As of the Jan. 21 close, the S&P 500 was still slightly positive for the year, but both the Dow Jones Industrial Average and the Nasdaq Composite Index had moved into negative territory.
Both the Dow and the Nasdaq had also fallen below their 50-day moving averages.
Even though January began by carrying momentum from last year's historic rally, Mr. Hirsch said, the stock market's strength over the final six trading days of the month could be in serious jeopardy.
“The market was spooked [Thursday] by Obama's financial-reform agenda and perhaps much of his policy priorities,” Mr. Hirsch said. “The country in general seems frustrated with the lack of progress in Washington. Change has been elusive, and the economy is still struggling.”
In addition to the unfolding turmoil in Washington, Mr. Hirsch said, the stock market's strength will be tested next week by such significant events as a Federal Reserve meeting on interest rates and President Barack Obama's State of the Union address.
Of the 23 down Januarys since 1950, the 8.6% S&P decline in 2009 was the worst on record.
Despite the S&P 500's 26% gain for all of 2009, it was still calculated as a continuation of a bear market.
The second-worst January on record was 2008, when the S&P 500 fell by 6.1%. It finished the year down 38.5%.
In late-afternoon trading on Friday, the Dow was down another 170 points or so. Buckle up.
Jeff Benjamin is senior editor at InvestmentNews, a sister publication of Pensions & Investments