NEW YORK (CNNMoney.com) -- The bears seized control of the market in January. But so far, the bulls are making a claim for victory in February. Who will win out for the remainder of the year?
Stocks had a rough first month. The Dow Jones industrial average and S&P 500 each fell about 3.5%. Yet in only two days, blue chips gained almost all the ground they lost in January, with each index rising more than 2%. (The market was down slightly in early morning trading Wednesday.)
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| The Dow, S&P 500 and Nasdaq took a nasty hit in January but have been back on the upswing so far in February. |
Still, there is an axiom on Wall Street that "as goes January, so goes the year." But this so-called January barometer has a spotty track record at best.
The Dow fell between 2% and 4% in January 10 times in the last 100 years. And during those ten years, the median annual drop for the Dow was about 3%, Jack Ablin, chief investment strategist with Harris Private Bank in Chicago, pointed out in a note Monday .
But that's only the median, not the average. Ablin also noted that the range for these ten years is wide enough for a Mack truck to fit through: a 37.5% rally in 1935 to a 33% plunge in 1937.
You also don't need to bone up on your Great Depression history to understand how unreliable January returns can be as an indicator of future performance. Last year, the Dow dropped almost 9% in January. The Dow finished 2009 with a more than 20% gain.
Doug MacKay, chief Investment officer with Broadleaf Partners, an investment firm in Hudson, Ohio, said he thinks that this scenario will repeat itself this year. The market will finish the year in the black despite January's woes.
But, he said, investors shouldn't expect returns to be as stunning as last year. The reason? The economy does seem to be on the mend. But that's what everybody was betting on last year -- even before there was concrete evidence that the recession was, in fact, over.
"Last year, we had a lousy economy and great stock market. This year we may have a better economy and the stock market doing just okay," MacKay said.
Of course, whether or not the economy is getting better enough for the average consumer still remains to be seen. And after last year's explosive rally, investors may need to be hit over the head with economic data that is not merely "less bad" but really good.
"It's become trite to say that the easy money has been made. But it has. Stocks do tend to do the best when times seem grimmest," said Quincy Krosby, a market strategist with Prudential Financial. "This may be the start of a new bull market but there are concerns that this economic recovery is still fragile."
We'll have a better idea of just how fragile once the government reports its latest monthly jobs figures on Friday.
If the unemployment rate can finally dip below 10% and employers begin to slowly but surely add jobs again, that could serve as a big psychological boost to both Main Street and Wall Street.
But significantly better days for the job market may not be in the cards just yet. If that's the case, it will be tougher for banks, retailers and other big market winners of 2009 to keep rallying.
"Consumer debt and credit issues still exist. The real unemployment rate when you include people not counted is much higher than being reported," said Sean Kraus, chief investment officer with CitizensTrust in Pasadena, Calif.
With that in mind, it's probably going to be a gut-wrenching year for investors. Expect more triple-digit up days for the Dow like we had Monday and Tuesday -- but more big daily drops as well.
"The tug of war is going to continue. This is still a trader's market: a day-by-day market," said Krosby.
Kraus agreed. He said that stocks are likely to undergo some sort of market correction later this year but that when all is said and done, we may wind up right where we ended 2009.
"The markets are going to remain volatile. By the end of the year, stocks are probably going to wind up being relatively flat," he said.
-- The opinions expressed in this commentary are solely those of Paul R. La Monica. 
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