Jan. 14 (Bloomberg) — Over the course of more than three decades in finance, I got into the habit each January of developing investment themes for the coming year. Some habits are hard to break, and even though investment strategy is no longer my day job, my mind has turned to the same task. Usually I come to a pretty strong view, one way or the other, about the year ahead. This year, things don’t look so clear.
To begin with, there’s an odd little thing called the five-day rule — an unlikely guide, you’ll think, but one I came to value as an aid to confidence. The rule simply states that when the main U.S. stock-market indexes show a combined positive return after the first five days of trading, the year as a whole is very likely to be a good one; if the return after the first five days is negative, it’s a coin-toss whether the market will be up or down for the year.
Usually, stocks rise in the first five days — as you’d expect, because over the long term they return about 8 percent to 9 percent a year. This year they didn’t rise, despite the consensus among market analysts that 2014 is going to be a good year.
Jose Ursua, a former colleague of mine at Goldman Sachs, has run these numbers all the way back to 1928. He finds that when stocks rallied during the first five days, there was a 75.4 percent chance of a rally for the year. For the period since 1950, the probability rises to 82.9 percent. Few rules in finance are as unambiguous as that. So when the first five days has been net positive for the Standard and Poor’s — and I’m feeling bullish in any case — I’m especially confident.
This year I’m still feeling pretty bullish, but the five- day rule is against me. U.S. stocks fell 0.5 percent — nothing drastic, but down nonetheless. Over the whole period since 1928, a negative start implies a 47.8 percent chance of a negative year; since 1950, the figure’s about the same, 46.4 percent. In both cases, call it 50-50.
As I say, I’m in the bullish camp for the world economy in 2014. I’m expecting gains in the so-called developed economies and in a number of so-called emerging economies — including some of my old friends the BRICs (Brazil, Russia, India, China) and some of my newer ones in the MINTs (Mexico, Indonesia, Nigeria and Turkey). I think there’s a decent chance that world gross domestic product growth will exceed 4 percent this year. And that would be good news for financial markets — right?