January’s stock market performance demonstrates how difficult it is for both experienced market gurus and novices to accurately predict short-term moves in the market. Case in point--when the stock market closed on Friday January 23, those who had predicted that the 10-month bull market was poised for a correction were proved right when both the Dow Jones Industrial Average and the Nasdaq slipped, shedding 32.22 points and 16.59 points respectively. Wall Street bears began to pronounce the latest bull run over-- noting that the deluge of solid earnings reports that began in mid-January had already been priced into stock valuations. It took just one full day of trading the following Monday to turn this prediction on its ear as stocks rose to their highest level in over two years--with the Dow gaining 134.22 points or 1.3 percent to reach 10,702.51 and the Nasdaq up 29.96 points (1.4 percent higher) to hit 2,153.83. The Standard & Poor’s 500 closed at 1,155.37 to reach its highest close since March 2002, when it hit 1,170.29. The market--widely viewed as tired and in need of a correction--proved yet again that it had more stamina. On the last week of the month, it opened down only to roar again on continued good news on the earnings front and on positive employment predictions from Federal Reserve Chairman Greenspan.

Greenspan generates optimism
A buying spree occurred after Alan Greenspan said during a conference in London that jobs lost during the recent economic slump could be replaced. Chairman Greenspan’s pronouncements were a welcome relief as concerns about employment statistics have dogged Wall Street for months. Economists ponder how a lasting economic recovery can be sustained in the face of persistently downbeat job reports. They point to recent statistics that show that the domestic labor market is not recovering and note that recent job reports have been sadly off-target.

Yet, despite evidence that recent economic advances have not yet fueled job creation and income generation, Greenspan’s positive outlook on the labor picture worked as a catalyst. Coupled with continued earnings triumphs, his prognosis helped send stocks higher as January drew to a close.

Let’s look at the various factors at play and their implications for future market performance. On the earnings front, analysts anticipate that fourth quarter corporate earnings will be almost 25 percent higher than the comparable period last year. Most concede that predicting earnings for 2004 is much trickier, but most expect profits to outpace economic growth. The consensus predicts a rise of about 13 percent over the year.

Further positive news came from the latest monthly Consumer Confidence Index published by the Conference Board. The index rose 5.1 points to hit 96.8, an 18-month high. In addition, sales of previously owned homes rose in December to levels approaching September’s gangbuster pace. This positive news suggests that companies involved in supplying goods and services - for example: plumbing supplies; kitchen appliances; home insurance, etc.-- to the housing sector should see increasing sales and more profits.

Despite the month-end stock buying flurry, increases in existing home sales and stellar earnings announcements, skeptical analysts urge investors to show some caution. They point to consumers increasingly saddled with debt, declining savings rates and widening trade deficits. Others note with alarm that the Congressional Budget Office predicts a record federal budget deficit of $477 billion this year and cumulative deficits of nearly $2 trillion for the ten-year period beginning with 2005.

On the upside, other Wall Street commentators warn against rushing to sell. They
note that it is true that the market cannot continue straight up and that-- without doubt-- there will be a correction at some time. However, optimists urge investors to bear in mind that there is
still some upside momentum and that an interim reversal may not mean that the party is over... just yet.

Whatever happens over the next month or so is any one’s guess. As always, your tolerance for risk and your specific situation should shape your investment decisions.