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US Stocks Leap on First Day of New Year

Wall Street Bull
Flickr user BK and EP

The stock market got a big jump on a better year.

Stocks rose sharply Tuesday in the first trading of 2012 as investors returned from the holiday and found encouraging economic reports from the United States and around the world.

The Dow Jones industrial average rose more than 260 points in morning trading and maintained most of the gains. At about 3:30 p.m. EST, the Dow was up 205 points, or 1.7 percent, at 12,418.

The Standard & Poor’s 500 index was up 21 points at 1,278. The S&P, a broader gauge of the overall market than the Dow, finished 2011 almost exactly where it started — down a sliver, 0.04 of a point.

The market could be getting an extra boost this year from what’s known as the January effect: Investors sell stocks at the end of the year to lock in losses for tax purposes, then come back in January and buy stocks to reinvest.

And the effect could be more pronounced this year because the stock market was so volatile in 2011 and more investors were forced to take losses, said Sam Stovall, chief equity strategist at Standard & Poor’s Capital IQ.

Those investors are back hunting for bargains, he said: “Investors are a lot like dieters and look to January as a new beginning.”

January is a fairly good predictor of the year to come for U.S. stocks. Only seven times since 1950 has January turned out to be a “major error” in predicting the year to come, according to the Stock Trader’s Almanac.

In other words, whichever direction the market has gone in January, the rest of the year has usually followed. The “major errors” are usually extraordinary events, the almanac points out. In 2001, for example, the S&P 500 rose 3.5 percent in January, but the market was rocked by the Sept. 11 attacks and finished the year down 13 percent.

The first day of the year is less useful for fortunetelling than the first month. If you were to bet on whether the market would finish the year up or down based on how it performed the first day, you would be right only about half the time.

And there’s no special power to January. A strong market in any single month makes it more likely that the market will be higher over the 12 months to come, Dan Greenhaus, chief global strategist at the brokerage BTIG, pointed out in a note to clients.

“As goes any month, so goes any 12-month period,” he said. “This is not the exclusive province of January.”

Predictive ability aside, Tuesday was on track to be the fourth time a row the market rose on opening day. On Jan. 3, 2011, on its way to flat-lining for the year, the S&P rose 14 points.

Bank stocks and materials and industrial companies posted the largest gains. Alcoa, which produces aluminum, and JPMorgan Chase bank each rose more than 5 percent, making them the biggest winners among the 30 stocks in the Dow.

The market’s gains were broad. All but two of the 30 Dow stocks were higher by 2 p.m. Of the 10 major categories of stocks in the S&P 500 index, one, utilities, was lower. Utilities are traditionally conservative stocks to own.

In the latest sign of strength in the U.S. economy, manufacturing expanded in December at the fastest pace in six months. Construction spending jumped in November as builders spent more on single-family homes, apartments and remodeling projects. Germany, Europe’s largest economy, reported that the average number of people unemployed last year was the lowest in two decades. Germany has an unemployment rate of 6.6 percent, compared with 8.6 percent in the United States.

And a Chinese manufacturing index rose in December, reversing a November slide and raising hopes that China’s economic slowdown is under control.

The economic reports overshadowed, at least for a day, concerns in the global markets about the European debt crisis, which will probably be the main catalyst for markets in the weeks ahead.

Earlier Tuesday, the government of debt-crippled Greece warned that it would have to ditch the euro currency if the details of a second international bailout worth $169 billion can’t be worked out.

Investors have been afraid that a Greek exit from the euro currency union would further disrupt the Greek economy and cause heavy losses for European banks that hold Greek government debt, perhaps triggering a global financial crisis.

The second Greek bailout was approved last October, but Greece still has to persuade its creditors, including banks and investment firms, to take steep losses on their holdings of Greek debt.

Greece also says more tax increases and spending cuts may be required. A spokesman for the Greek government, Pantelis Kapsis, said negotiations in the next three or four months with international debt monitors will “determine everything.”

U.S. investors were also reacting to news they had missed out on during the holidays:

– On Dec. 30, a federal court delayed the implementation of new air-pollution regulations. Coal stocks did well Tuesday: Peabody Energy Corp. and James River Coal Co. soared 9 percent and Alpha Natural Resources Inc. 7 percent.

– Last week, a JPMorgan analyst told clients that two wireless companies, Leap Wireless International Inc. and MetroPCS Communications Inc., could be targeted by AT&T or T-Mobile for takeovers. MetroPCS rose 8 percent Tuesday, and Leap rose 5 percent.

In other corporate news:

– Chesapeake Energy Corp. rose 4 percent after the energy company sold a part of its Ohio oil and gas business to a unit of French energy company Total SA for $2.32 billion.

– Rambus Inc. jumped 8 percent after the technology licensing company raised its fourth-quarter revenue forecast to $83 million from an earlier range of $66 million to $71 million.

(Copyright 2012 by The Associated Press. All Rights Reserved.)

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