There Goes the January Effect – Are We Facing a Recession?

A week ago I wondered whether we will get to see the famous January effect making an appearance in the markets. I’m afraid the answer seems to be a definite no. January Isn’t over and still may surprise us but the January effect in all its glory has regrettably not made a grand entrance.

The Nasdaq has lost 6.5% the past week with the Dow Jones not far behind, again under 13,000 points. Several indicators support the general feeling the US economy is headed for a recession. Although it is still too early to determine we’re heading to a recession for certain more and more telling signs are available to investors:

1. US unemployment rate surprisingly jumped to 5% (from a previous 4.7%).
2. The Institute of Supply Management’s manufacturing PMI reading fell to 47.7% (from a previous 50.8%) which translates to decline in manufacturing activities.
3. The ’Fed’ announced a 50% increase in credit auctioned in January.
4. Investors currently estimate a 0.5% cut in fed funds rate is more probable then not, according to future contract prices. Apparently both Goldman-Zachs and J.P Morgan have updated their forecasts to a 0.5% cut in fed funds rate.

As I’ve quoted in a past post it appears, according to Globes.com, that since 1950's out of the 36 times the first 5 days of January ended positively 31 years have also generated positive results (The remaining 21 times the first 5 days of January ended negatively 11 years ended positively and 10 ended negatively).

What 2008 holds is yet a mystery but it seems chances of recession are growing stronger and stronger everyday.

More on the current economy:
1. Economic Indicators Take a Turn for the Worse @ Econbrowser
2. Do I Think a Recession is coming? @ The Wastrel Show
3. Tech Shares in Massive Selloff; Bracing for Recession @ Tech Trader Daily
4. Recession? Stagflation? @ Herb Greenberg’s MarketBlog