If one is to believe Wall Street lore, the first five trading days of a new year can predict the course of trading for the entire year. But while stocks had an outstanding showing last week, it's still far too early to start counting your returns.
According to the Stock Trader's Almanac, the so-called "January Effect" is startlingly accurate. The last 35 times that the first five days of trading resulted in a net gain for stocks, stocks posted full-year gains in 30 of those years — 85.7 percent of the time.
Certainly, Wall Street enjoyed its most bullish week since the November rally. In the minutes from the Federal Reserve's Dec. 13 meeting, investors saw that the Fed was likely to end its string of interest rate hikes sooner rather than later. Some even speculate that the Jan. 31 meeting could bring the last rate hike for a while.
In the face of a slowing economy, that's great news for Wall Street, which was afraid that if the Fed continued raising rates, making borrowing costs more expensive, economic growth could grind to a halt. That concern had overshadowed investors' bullishness for nearly all of 2005.
But once unfettered from such worries, investors responded overwhelmingly, sending the Standard & Poor's 500 index and Nasdaq composite index to highs not seen since mid-2001 and pushing the Dow once again toward the psychologically important 11,000 mark. For the week, the Dow rose 2.26 percent, the S&P climbed 2.98 percent and the Nasdaq surged 4.55 percent.
Yet 2006 will remain a challenging year: Oil prices are around $64 per barrel right now, which augurs poorly for both heating costs as well as gasoline prices heading into the summer. Job growth is sluggish, and with interest rates still rising, credit cards and mortgages will become more expensive for consumers.
If the consumer spends less, the economy slows. And if they spend a lot less, the stock market could have a difficult year, no matter what the first five days look like.
There is little economic data likely to affect trading early in the week, but two key reports due Friday have a better chance of spurring activity.
An important gauge of inflation, the Producer Price Index, will be released by the Labor Department. The index, which measures inflation at the wholesale level, is expected to rise 0.4 percent in December, compared to an 0.7 percent drop the previous month. So-called "core" PPI, with energy and food prices removed, is expected to climb just 0.2 percent, up from a 0.1 percent increase in November.
The Commerce Department will round up the nation's retail sales as well. Total retail sales are expected to have risen 0.8 percent in December, better than November's 0.3 percent rise. With auto sales removed, retail sales are expected to climb 0.4 percent for December, countering the 0.3 percent drop seen the previous month.
The fourth-quarter earnings season officially begins Monday, though there are few notable companies reporting until the following week.
Earnings season traditionally kicks off with the first Dow component to report, Alcoa Inc., which will issue its results after Monday's session. The aluminum producer is expected to earn 38 cents per share for the quarter, down slightly from 39 cents per share in the fourth quarter of 2004. Alcoa's stock rallied sharply in the fourth quarter, up 35.6 percent from a 52-week low of $22.28 on Oct. 14 to close Friday at $30.21.
Shares of drug maker Genentech Inc. had an even more impressive 2004, more than doubling from a 52-week low of $43.90 on March 14 to finish Friday at $91.30. The company is expected post earnings of 34 cents per share, up from 21 cents per share a year ago, when it reports after Tuesday's session. Strong results could reflect well on the rest of the pharmaceutical sector.
The stock and bond markets will be closed Monday, Jan. 16, to observe Martin Luther King Jr. Day.