The Breakdown | Explaining Southern California's economy

Where is the January Effect in the stock market?


We got a nice bump in the markets at the dawn of the new year, but ever since then, results have been...well, pretty unremarkable. The Dow has been bumping along in a fairly narrow range, around the 12,400 level. So where's the vaunted "January Effect"— the idea that people sell stock in December to book some tax losses, then pile back in when the markets re-open after the holiday season.

The answer comes in one word: Europe.

Wall Street isn't going to budge until it either gets some great earnings news from U.S. companies or sees some progress on Europe righting its listing financial states. This is from AP, via the Washington Post:

Greece, Ireland and Portugal have all been bailed out but the fear in the markets is that much-bigger Italy and Spain may end up needing financial assistance. The yield on Italy’s benchmark ten-year bonds on Monday continued to hover around the 7 percent mark, widely considered to be unsustainable in the long run.

On the growth front, the two leaders told reporters that European nations should compare the continent’s best labor practices and implement them, as well as figure out how to use European funds to create jobs.

Their focus on the wider economy has come as mounting signs the 17-nation eurozone is heading for a recession have emerged over recent days, including figures Monday showing a bigger than anticipated 0.6 percent decline in German industrial production in November.

This is beginning to sound like a broken record. Wait, did I say broken? Make that broken, glued back together, and then broken again.

Economists on both sides of the pond are now predicting at the very least a brief recession in Europe this year. A grudging admission that growth, not austerity, should be the focus may have come too late. The uptick in Italy's bond yields to levels that were causing everyone to freak out last year isn't exactly a vote of confidence. When faith in a country's ability to make good on its debts is questioned, the cost of financing that debt goes up, expressed as the interest rate on bonds.

But is this just a problem for markets? I kind of think so. Wall Street is worried about a European banking crisis turning into a global banking crisis. Meanwhile, U.S. corporations are making money and even starting to pick up the hiring pace. There are indications that small businesses are beginning to do better, as well. 

So we may not see a particularly strong January Effect — if we see one at all. And if you want someone to blame, well...blame Europe. 

Follow Matthew DeBord and the DeBord Report on Twitter.