Pennsylvania Investment Observer

Let's Start the New Year Right!

by Judy Loy

2004 was a year of surprises. The market has always had a sense of humor and often what you assume will happen, doesn't. 2004 exemplified that idea. That's why it's always important to pay attention when investing your money.

Bonds and small caps were supposedly on their way out in 2004. The yield on the 10-year Treasury Note was supposed to rise in 2004 in response to higher fed rates, and in turn bond prices would fall. Surprise, surprise, the 10-year Treasury's yield ended the year at 4.22%, a slight decrease from where it began. Yet the Fed increased short-term rates five times in 2004 to 2.25%. (However, the Fed rate is a long way from neutral, which is considered 4 %.) At the end of 2003, small cap stocks, usually defined as those companies with less than $500 million in market capitalization (number of shares outstanding multiplied by the stock price) were reported to be over priced. Yet small caps, as illustrated by the Russell 2000 small cap index were up a whopping 17.0% in 2004, thus beating most other major indexes. They're singing the same tune in 2005 for bonds and small caps. We'll see if they are right this year. (Heck, the gurus have to be right sometime!)

The U.S. stock markets ended the year in positive territory. The returns on the major indexes for 2004 were as follows:

Being invested in U.S. stocks in 2004 was very rewarding, but that's the past. If you have ever read a stock report or a prospectus, you know the disclaimer that past results don't guarantee future returns. So you have to ask: where are we going from here? To look forward to 2005, let's look at two indicators for January that project annual results.

One indicator that analysts look at is the First Five Days of January "Early Warning" System. Since 1950, of the 34 First Five Days that were up (as indicated by the S & P 500 stock index), 29 were followed by full-year gains. This indicator has a 85.3% accuracy ratio. The average gain in those 34 years was 13.8%.1

An even better indicator is the January barometer. Its accuracy is 90.7%, which are only five major errors since 1950. The January barometer states that as the S & P goes in January, the year follows.

Let's face it, if you believe in the indicators above there is a lot riding on how January goes. We didn't start the first day with a bang. The Dow ended down 53.58 points, the Nasdaq Composite was down 23.29, and the S & P 500 Index ended the session down 9.84 points. The second trading day doesn't seem to be turning out any better. Not a stellar beginning to the year.

Will gold, oil, and commodities continue their bullish behavior? In the end, only time will tell what performs well in 2005. The best thing you can do is look over your assets and investments and start the New Year making sure that you aren't just invested for 2005, but for your long-term future. Cheers and all the best in 2005!

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