INVESTING: Market’s first week dive doesn’t mean year-long slump

The first week of the new year was pretty lousy. All the major indexes are now in the hole for the year, with some industries down 5 percent or more.

So is that it for 2005? Should we just pack up and come back again in 12 months?

The media is jampacked with stories about how the first week’s performance determines the rest of the month’s outcome, which determines the rest of the year. And most experts had high hopes for the first week, claiming new fund flows due to bonuses and retirement planning would move the market a lot higher.

It turned out the opposite.

While January is typically an up month, there are more than a few notable years when indexes during the first week were down and the rest of the year turned out to be just fine.

In 1998, according to Lowry’s Reports in Palm Beach, Fla., the first week was down but was followed by a 24-percent gain in the Dow Jones industrial average over the next six months.

Other examples from Lowry’s:

* 1993: The first week was down, but quickly recovered with a 16.6-percent gain for the year.

* 1991: The first week was down, then, a 21.4-percent gain in the DJIA in the next two months occurred. Overall, it posted a 21.9-percent gain for the year.

* 1990: The first four weeks were down, followed by a 17.6-percent gain in the DJIA over the next six months.

* 1988: The first two weeks were sharply lower, but the DJIA gained 16.5 percent for the year.

Don’t put too much emphasis on what happened last week. I’ve been saying that the market was due for a correction.

A correction, of course, can take many forms. There is a good chance this one needs a few more days. But I still see a lot to make me optimistic about equities for the near future.

I recently spent some time looking at a chart of the Standard & Poor’s 500 going back to 1960. I love seeing the past in such a visual form. It reminds me again how important it is to time your investments.

From 1966 until 1982, the U.S. market went nowhere. There were some serious ups and downs along the way, but the end had nothing to show for itself. Then from 1982 until 2000-wow!

But this caught my eye: The 1998 peak shows the S&P hit 1187 while the S&P closed last week at 1186. Another way to look at it is, that’s six years of no net movement.

Speaking of timing, a lot of people are asking about interest rates. I think it’s interesting to note that despite five increases by the Federal Reserve last year, the 10-year note ended 2004 the same place it started. And the Fed should keep raising rates at least a few more times before they rest.

But I don’t think inflation is about to go on some kind of tear. If I were thinking about borrowing money, I would be locking in right now, but I don’t see the need for any major concern for the long term.

Still, who knows? In five years, those rates may be the same place they are now.