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‘January effect’ hinges on job creation data

Holiday sales data and a jobs report this week will provide the first glimpse of the economy's health going into 2005, and could give another boost to the end-of-year stock rally, analysts said.
/ Source: The Associated Press

With a choppy but ultimately solid 2004 behind it, Wall Street is looking ahead to the so-called January effect, when new money enters the market and drives stock prices higher. But with questions remaining about the strength of the labor market, Friday’s job creation report from the Labor Department could determine the fate of the New Year’s buying spree.

The January effect describes the market’s positive bias coming into a new year. Starting in late December, investors reshuffle portfolios to either buy up stronger stocks or to lessen their tax impact. By January, the mood shifts as investors, freed from short-term tax considerations, spread out their investments into whatever stocks they feel will do well.

There’s also an influx of cash from yearend bonuses.

With an economy that appears to be growing steadily, a positive January effect seems like a lock again this year. But the Labor Department’s jobs report is one of Wall Street’s most important barometers of economic growth, and is closely watched by investors.

Analysts expect the economy to have created 175,000 jobs in December. However, they expected 200,000 jobs in November and only got 112,000.

With post-election exuberance and the yearend rally wearing thin, will the markets be able to absorb another negative surprise when the report is issued Friday? A better-than-expected jobs report would make that question moot, and many investors grateful.

Last week, Wall Street closed out 2004 with light, uneven trading, as most investors sat out for the holidays and the few that remained shuffled portfolios and investments before the year’s end. For the week, the Dow fell 0.41 percent, while the S&P rose 0.15 percent and the Nasdaq climbed 0.69 percent.

For the year, the Dow gained 3.15 percent, the S&P rose 8.99 percent and the Nadsaq was up 8.59 percent.

ISM Index figures due out
In addition to Friday’s jobs report, Wall Street will look closely at the latest readings on economic activity in manufacturing and the service sector.

On Monday, the Institute for Supply Management will release its manufacturing activity index for December. Economists are expecting a reading of 58.5, up from 57.8 in November. And on Tuesday, the Commerce Department reports on November factory orders, which are expected to rise 0.8 percent, compared with a 0.5 percent rise in October.

And on Wednesday, the ISM issues its services index reading for December. The index of non-manufacturing activity is expected to come in at 61, slightly lower than November’s 61.3 reading.

On Thursday, the nation’s big retailers issue their sales reports for December, including their final assessment of the holiday shopping season.

Earnings this week
Only a handful of companies are expected to post earnings in the week ahead, especially with the first-quarter earnings season getting under way next Monday.

Among the notable companies reporting earnings this week:

  • Drug store chain Walgreen Co. is expected to earn 29 cents per share when it reports Monday morning, up from 25 cents per share from a year ago.
  • Monsanto Co., the agricultural products company, reports on Wednesday and is expected to earn 9 cents per share, compared to 4 cents per share a year ago. The company’s stock climbed 93.4 percent in 2004.
  • Accenture Ltd. is expected to earn 31 cents per share when it reports its earnings after Thursday’s session. The technology consultancy earned 28 cents per share a year ago.
  • Health insurer Wellpoint Inc., reporting Thursday afternoon, is expected to earn $1.70 per share for the quarter, compared to $1.43 per share a year ago.

On Tuesday, Ford Motor Co. and General Motors Inc. will hold conference calls to discuss their December sales, and other automakers are expected to release their sales data as well. Overall, auto sales are expected to rise slightly in December, but individual automotive stocks could fluctuate depending on their sales results.