Best January for stocks: Thank the Fed

(MoneyWatch) 

The book is closed on January and the news is good for stock investors. The S&P 500 finished the session at 1,312.40, up roughly 4 percent on the month, the strongest performance in the first month of the year since a 4.1 percent gain in January 1999.

For believers in the "January Effect" (as goes January, so goes the year), remember that other months also have predictive powers. April and November possess even stronger "forecasting" abilities than January, for instance. But it's not as much fun as thinking that January market results presage the whole year.

The rise in stocks has occurred with little fanfare -- volatility has eased this year, after the wild ride in 2011. There have now been 19 consecutive days of moves of less than 100 points. It may not feel like a roaring bull of a market, but the S&P 500 has rallied over 20 percent since October 3, 2011.

Before you start partying like its 1999 (h/t Prince), the news of the day wasn't particularly encouraging. Home prices continued to fall in November for a third straight month, according to the S&P Case Shiller Home Price Index. The 20-city index fell 0.7 percent month-over-month and 3.67 percent year-over-year; it is now off 33.5 percent from its peak. Adjusted for inflation, home prices are now at 1999-2000 levels.

Home prices and consumer confidence fall
Consumer confidence wilts in January
Thoma: Fed is easing a little, more would be better

Most economists don't expect much improvement for housing in 2012, because foreclosures are likely to pick up after the "robo-signing" scandal is resolved and because of the "shadow inventory" cluttering the residential real estate market. That includes homes not currently on the market but that are expected to be listed in the future, such as bank-owned properties; homes in foreclosure; properties with delinquent mortgages; condos that were converted to apartments (and that will be converted back); investor-owned rental properties; and homeowners waiting (and praying) for a better market.

Maybe you think corporate earnings are what is driving up stocks. Actually, Apple (AAPL) notwithstanding, it hasn't been a stellar earnings season so far, and most analysts worry that corporate margins have far more downside than upside.

So why are stocks rising? Hint: Federal Reserve chief Ben Bernanke. For months, Fed officials have telegraphed what they said more explicitly after the most recent FOMC meeting. The central bank plans to keep rates low through 2014 or even early 2015 because the economic recovery continues to be pokey. In Fed parlance, "The economy has been expanding moderately; notwithstanding some slowing in global growth.... Strains in global financial markets continue to pose significant downside risks to the economic outlook."

That doesn't sound like a reason to buy stocks, but the Fed's persistent zero interest rate policy is a positive backdrop for stocks. And really, if things fall apart, won't our central bankers come to the rescue with a third round of quantitative easing? Golly, it really does feel like 1999 all over again!

[get_down]

Even though the Fed keeps the key interest rate close to zero, I have absolutely no intention nor slightest desire to play trading stocks on Wall Street.

[aheadace]

Every country in the world has spent money they don't have we could strike new money and let the 1% be like the 99%.

[texasjustice801]

NO, you do NOT thank the Fed, you thank the PRESIDENT.

[jollyjohnson]

Yes, thank the Fed, without the Fed's monetary policy we would probably be in recession. But what happens when the Fed's policies lose their effect? One analyst calls for a 5,000+ pt correction in the Dow and Joe Granville on Bloomberg says a 4,000 pt Dow correction is coming. The market hit an intraday high on Jan. 26, 2012, which was the highest that the Dow had been since BEFORE the Great Recession back in 2008. The global economy is in poor shape, with many countries sovereign debt near, at or surpassing GDP and debt is growing. The eurozone has now gone into recession. The forecast is that housing in the U.S. has not hit bottom and will continue to decline in value through 2012. GDP growth in the U.S. is forecast to decline from the 2.8% growth of fourth quarter 2011. Earnings aren't great and the forecast is not good. Little improvement is expected in the high unemployment in the developed world. In fact if the central banks weren't engaging in QE and ultra low interest rates it is highly likely additional countries would be in recession right now. So yes, I don't think dow 12,000+ is sustainable.

[TheVarsityClub]

"The economy has been expanding moderately; notwithstanding some slowing in global growth.... Strains in global financial markets continue to pose significant downside risks to the economic outlook."

A strain in the global market is putting it lightly! It's like having a flat tire and someone telling you your tire is a little low on air!

There is still a boat load of bad paper sitting on books. Greece is about to implode on itself, which will probably take a few other Euro members with it, and the Feds are trying to paint a rosy picture.

Yeah, this is going to be a great year for Wall St. and investors alike.