Published January 5, 2009

WALL STREET INSIGHT
Market off to rousing start with surge

Rise may sputter when the pros get back on the saddle

By ANDREW MARKS
NEW YORK CORRESPONDENT
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IF US stock market investors were looking for a good omen with which to start the new year, they couldn't have asked for a much better one than the first trading day of the new year.

Glamour on the street: Singer/actress Liza Minnelli at the podium for the closing bell at NYSE last Friday. The Dow soared to close above 9,000 for the first time in nearly two months

The market got off to a rousing start with a one-day surge in the face of more weak economic data that indicated investors were ready to put 2008 behind them and happy to welcome in the 2009 trading year.

If only Wall Street had been around to enjoy, and more importantly, participate in the rally that took place on Friday and for most of the holiday week between Christmas and New Year's Day. But with most of the professional investment and trading world away on vacation last week - or at home licking their wounds - as evidenced by the slim trading volume, the few market analysts around to observe the action cautioned that the market's recent surge may very well sputter once fund managers and institutional investors get back to work today.

'The Santa Claus rally came after all, albeit following a four-week losing streak beforehand, and the low volume throws up a big question mark if you're hoping that the rally has any legs to it,' said Marc Pado, chief market strategist at Cantor Fitzgerald.

End-of-year rallies are often the product of the market being left in the hands of small, retail investors, who tend to embark on optimistic buying sprees as the old year rolls over into the new. 'Then when the pros come back, reality tends to reassert itself,' he said.

Still, no one was complaining about the stock market's 8 per cent climb that began on Dec 24, featuring 2008's lowest number of shares changing hands, which helped bring the S&P 500's losses for the year under 40 per cent. Nonetheless, the 38.5 per cent loss for the year was the biggest since 1937, when the US was in the midst of a depression.

On Friday, investors showed that they were still willing to remain hopeful for 2009 in the face of bleak conditions. Getting the crucial first month of the year off to a rousing start will be a good omen for the stock market, if one recalls the saying, 'As goes January, so goes the year.'

Wall Street traders remember all too well that last year's first day of trading started with a big loss, which carried through to a 6 per cent plunge the rest of 2008's first month.

The Dow Jones Industrial Average soared 258.30 points or 2.9 per cent on Friday, to close at 9,034.69, the first time it went above 9,000 in nearly two months. The S&P 500 jumped 3.16 per cent, or 28.55 points, to close at its highest level since early November at 931.80. The Nasdaq composite index rose 55.18 points, or 3.5 per cent, to 1,632.21.

For the holiday-shortened week, the Dow gained more than 500 points, or 6.1 per cent, snapping a four-week losing streak. The S&P had the best weekly performance, up 6.76 per cent, while the Nasdaq rose almost as much.

If the rally is to continue, analysts believe investors will soon need to see some signs that economic conditions are at least hitting bottom in crucial sectors such as housing, where all the problems began.

But as indicated by last week's S&P/CaseShiller Home Price Index, which slumped a year-over-year record 18 per cent in October, the bottom is a ways off yet.

In the meantime, it will be up to government intervention and spending programmes, such as last week's announcement that the US Treasury would make a US$5 billion investment in GMAC, and would lend General Motors another US$1 billion to participate in a GMAC rights offering that supports GMAC's reorganisation as a bank holding company.

'The problem with relying on government moves like that is they can't go on forever, or if they do, investors will stop taking heart from them if there's nothing positive to show for all these billions of dollars,' said Mr Pado

There have been limited signs that the government's efforts are working. Mortgage rates have dropped, yields on Treasuries have risen and spreads on corporate bonds, while still wide as the Grand Canyon, have narrowed somewhat.

Any and all help coming from Washington will be welcomed on Wall Street, as the professional class of investors gets the New Year going with a full plate of data likely to be heaped with grim details of the economy's continuing swoon.

'The big number everyone will be keying on is the December employment report. It's been pretty awful and the hope has to be that it's not much worse than what we've been seeing the last couple of months,' said Mr Pado.

Fourth quarter earnings has another two weeks before it takes the spotlight, but Wall Street might get a boost from the corporate side in the technology sector this week - the Consumer Electronics show and Mac World, Apple's big gathering, could produce some interesting news.