I hate to be the one to say we need to prepare for an unprecedented fourth straight down year in the major U.S. markets since 1926, but the charts are persuasive.
I see the need for a close above DOW 8,375 by the end of the first week in February, to confirm even a modest positive finish to 2003.
At this writing the unworthy, but widely-followed index has criss-crossed 8,000 several times intraday. The only good news is that if we finish January equity settlements (thus, the "wiggle room" of one additional week) near the 7,900-8,100 level, we could end the year flat or down 1-5 per cent.
Strategies in this regard present some tough choices.
Many of us are already overweighted in quality government, corporate, and muni bonds, and principal values should hold nicely through summer, even with a war in Iraq.
The problem is that even one or two slight increases in rates by the Fed could cause a modest 1 per cent rise in 15 and/or 30-year conventional fixed mortgage rates. This erodes medium to long-term bond portfolios and bond mutual funds by as much as 12 per cent in value. Those of us who are hedged, and hedged within hedges as to instruments inversely related to a rising rate scenario will fare quite well. The typical small investor, or lazy stock broker might not.
In the equity sector we will continue to favor the eight remaining investment-grade blue chips as reported by S&P, plus some selected buying and covered call-writing on what I call "businessman's risk" or "blue chip surrogates" such as DELL or Mellon Financial (MEL).
With a rising Euro, which I predict will have it's run and then settle back to a respectable $1.05-1.07 range, we could have one of those years in which Zurich, Paris, Frankfurt, and London significantly outperform U.S. exchanges.
In my variable annuity sub-accounts, we hope to take profits in natural resources portfolios in Q1 or QII after some windfall oil profits (again, with or without a war), and back off of growth and mid-cap portfolios.
In the pure equity sector we will over-weigh those blue chip overseas/international equity funds which are very light on the Pacific Rim and emerging markets, and very heavily top-loaded with their 10 major holdings in the U.K. and Euro-based equities.
This is not an attempt for a home run in another lousy year, but an attempt to combine every possible diversification we know into a true total return of +4 to 9 per cent this year.
Certainly, international events and a surge of institutional equity buying by a handful of major institutions in early February could make the picture much rosier. Yet, the very, very high correlation (I've seen different analysts call the accuracy as 17 of 19 years fitting certain criteria; 40 out of 42 years, etc.) of a January Dow Jones Industrial, S&P 100, and S&P 500 close in January which is lower than at the start of the year, makes me NOT want to be the contrarian this time out.
Even in the year of the 1987 "crash" adherence to the January Effect meant that those who did not panic after August highs were erased by October devastation, saw all indices end December with a tiny gain.
It's a dangerous time to buck the technical indicators.
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Mark Scheinbaum, chief investment strategist, Kaplan & Co. Securities, member Boston Stock Exchange, NASD, SIPC www.kaplansecurities.com
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