January Goes Off the Script

Ending his final day as Fed chairman Friday, one imagines that Ben Bernanke likely kicked back with glass in hand and breathed a sigh of relief. After dealing with the problems of the past eight tumultuous years, he could return to a semblance of a normal life, which one assumes isn’t like what was portrayed in a New Yorker cartoon a few months ago. (From Mrs. B: “And if you think that every time you open your mouth around here everyone is going to dance to your tune, you’ve got another thing coming, Mr. Federal Reserve!”)

For Janet Yellen, the new chair, monetary policy seems set on autopilot after the Federal Open Market Committee last week trimmed another $10 billion from the central bank’s monthly bond purchases, as it had in December, and appears likely to again at the March 18 to 19 confab. Based on that “measured” pace, to use the panel’s description, the Fed should be done with quantitative easing by the end of the year, leaving only its words — in the form of “forward guidance” about its future interest-rate intentions — as its main policy tool.

That is, unless something unexpected happens.

So far in 2014, not much is playing to script. Contrary to virtually all investors’ expectations coming into the year, stocks have taken hits, while bond yields have fallen sharply. Emerging markets are in turmoil, which has spilled over into other risk assets. Meanwhile, the economy appears to have lost a bit of steam coming into the new year. Perhaps it’s just the frigid weather or maybe something more; we’ll see soon enough.

As for U.S. stocks, broad measures showed a loss of approximately 3% for January, which is a poor portent for bulls in 2014. According to the Stock Trader’s Almanac, authored by Jeffrey and Yale Hirsch, January has called the tune for the year some 88.9% of the time since 1950. Big misses were in 1966 and 1968, which they write was affected by the Vietnam War; in 1982, a major bull market began that August; 2001 was distorted by two January rate cuts, followed by 9/11; 2009 saw the beginning of the bull market in March after the second-worst bear market ever, and in 2010, the second round of Fed quantitative easing, QE2, turned the tide in August.

Clearly, emerging markets have been weighing on the developed markets, if for no other reason that global portfolio managers will sell what can be sold when they need to raise cash, and many EMs still are proverbial roach motels — you can get in, but you can’t readily get out.

The actual impact of the most besieged emerging markets is small; exports to Argentina, Venezuela, Turkey, the Ukraine, and others account for 1.5% of U.S. gross domestic product, so a 20% drop would shave just 0.3% off U.S. growth.

Still, that doesn’t count the potential impact of the ongoing shadow banking problems in China, even after a default was averted on the trust product discussed here last week. In any case, there has been an exodus of more than $8 billion in January from the two biggest equity ETFs, reports our colleague Brendan Conway on the Focus on Funds blog (Barrons.com).

The limited direct impact of emerging economies helps explain why the FOMC made no mention of the EM woes in its statement.

But Yellen is apt to be asked to elucidate the Fed’s views on the overseas turmoil when she testifies before Congress for the first time as chairwoman on Feb. 11 before the House Financial Services Committee. And besides the usual questions on the economy, perhaps the representatives might elicit her views on the myRA retirement account announced by President Obama in last week’s State of the Union address. The account, he said, was supposed to provide a “decent return with no risk of losing what you put in,” which Potomac Research Group’s Greg Valliere quips, sounds awfully like what Bernie Madoff promised.

In the meantime, this week’s main event promises to be the January employment data, due on Friday. Estimates cluster around a 190,000 increase in nonfarm payrolls, following December’s much-weaker-than-expected 74,000 rise that was probably distorted by the severe cold. The unemployment rate is forecast to remain at 6.7% as the end of jobless benefits for more than 1 million recipients may not show up in this report.

But the curtailment of transfer payments is being felt in the economy, as Wal-Mart Stores (ticker: WMT) noted the impact of cutbacks in food stamps in warning that its sales will fall short of projections. Expect Yellen to be quizzed on that as well.

IN CASE YOU HAVEN’T noticed, it’s Super Bowl weekend (on the presumption that you are reading this ahead of the Feb. 3 issue date imprinted on the paper edition ofBarron’s). Not that you could avoid the big game if you happen to be anywhere near the environs of the New York metropolitan area; the contest actually will take place in New Jersey, as denizens of the Garden State are tireless (and tiresome) in reminding everybody.

For investors, of course, there’s the hoary old Super Bowl indicator, which says that when a team from the old NFL wins, the stock market has a winning year, while a win by an old AFL team portends a down year for the market. The AFC champs, the Denver Broncos, would be favored by the bears (with a lowercase “b”), while bulls would be rooting for the NFC’s Seattle Seahawks.

But Seattle, the only franchise to change conferences while staying put, started out in the AFC, so it’s hard to identify the Seahawks with old-time NFL stalwarts, such as the New York Giants, Chicago Bears, Green Bay Packers, and so on. Given the stock market’s performance so far in 2014, and given that both Denver and Seattle have their roots in the AFC, the bearish portent of the Super Bowl indicator may play out, regardless of which team wins on Sunday.

Of course, the Super Bowl indicator mainly proves that any two variables can be correlated. The late Lawrence Ritter, a New York University economics professor who doubled as a baseball historian, once wrote that he found a variable, W, that perfectly tracks the stock market. W happened to equal the number of times the old Washington Senators baseball team struck out in a season. (I don’t recall which version, the one that left for Minnesota in 1961, or its successor, which fled to Texas in 1971; they were both dreadful.)

But there is another Super Bowl indicator with some predictive powers that actually stands to reason. And it is exclusive to this column, although I cannot claim that it is totally new or owes any originality to me. It comes from Doug Kass, who heads up Seabreeze Partners and is an oft-heard voice on the market across many media, and was noted first in Barron’s by my illustrious, late predecessor, Alan Abelson, before the weekend of 2000’s Super Bowl (whatever Roman numeral that was).

Dougie finds that spending on commercials in the Super Bowl correlates with a top for the stock groups running the advertisements, “very similar to the cover of Time magazine.” As Paul Macrae Montgomery has detailed in his Universal Economics newsletter over the years, when an economic or investing trend finally catches the attention of the editors of general-news weeklies, it is largely played out and often reverses in a matter of days or weeks.

Back in 2000, Dougie alerted Alan to the preponderance of ads for the high-flying dot-coms, which were just starting their sickening plunge. And, in case you haven’t noticed, the tech-heavy Nasdaq still remains more than 900 points shy of its bubble peak of 5048. That’s even with the likes of Apple (ticker: AAPL) and Amazon.com (AMZN) selling at multiples of their dot-com dizziness highs (despite hitting air pockets last week), or the emergence of newer growth darlings, such as Google (GOOG) and Tesla (TSLA), among others.

Last year, Dougie noted that the food and beverage sectors constituted an “outsize” 41% of Super Bowl ads. “And, on cue, this defensive group was an underperformer in 2013’s sharp U.S. stock advance.”

The preponderance of such consumer-product companies anteing up for 30- and 60-second spots this year is significant, he continues. “But auto advertisers are close behind—combined, [the two groups] represent the lion’s share of Super Bowl ads,” he points out.

“Of the 30 2014 Super Bowl advertisers,” he adds, “12 are consumer-products related (accounting for 11½ minutes of advertising or 40% of the total number of advertisers) — and that doesn’t include PepsiCo (PEP), a beverage-and- snack company that is sponsoring the halftime show. Eight advertisers are automobile-related (accounting for 8½ minutes of advertising or 27% of the total). Between consumer-product and auto companies, the two sectors account for 20 out of 30 advertisers, or 67% of the total (representing a total of 20 minutes of all Super Bowl commercials).”

Based on history, Dougie thinks that both the consumer-product (especially food and beverage) and auto-manufacturing stocks will face head winds in 2014. The autos are off to an even rougher start to the year than the overall market. In round terms, General Motors (GM), Ford (F), Toyota (TM), and Honda (HMC) are off an average of about 11% from their peaks of late last year. (For another view of GM and Ford, see “Ford or GM: Which One Is the Better Buy?”) General Mills (GIS), a food stock not in the drink and snack categories that are football staples, but that will run an ad in Sunday’s game, has been a weak defense against the bears lately.

As for the game itself, to me the real significance is that spring training is only a few weeks away.