Rising Rates Sink Stocks

Investor gloom was widespread in 1994. From New York to Hong Kong to Mexico City, stocks fell. Blood spilled in the U.S. bond market. The dollar’s value dropped sharply against the yen and mark.

Rising interest rates wrote the scripts for the blah U.S. markets and incited the worst setback in bonds since before the Great Depression. The Dow Jones industrials survived the bond bloodbath and finished up 2.1 percent for the year, but most broader measures declined.

Talk of a 4,000 reading in the Dow - a common topic at the beginning of the year - wound up as wishful thinking.

The overall value of stocks traded in the United States fell $117 billion over the course of the year, according to the Wilshire index. By the end of November, two out of every three stocks were at least 10 percent below their high price for the year, according to First Albany Corp.

Veteran market forecasters were virtually tongue-tied as stocks meandered in the doldrums after tumbling from a record of 3,978.36 last January, arousing talk of a so-called correction or worse, a bear market.

The growing bearish sentiment perked up contrarians, however. They’re hopeful that the phenomenon known as the January effect will be especially strong in 1995.

For decades, many stock pickers and pundits have bet on the January effect, the tendency of small stocks to outperform larger issues in the first month of the year. Low-priced stocks have outdistanced the Standard & Poor’s 500 by an average of 5.7 percentage points in 37 out of the past 40 Januarys, according to market analyst Yale Hirsch.

Since small stocks significantly lagged behind their larger counterparts in 1994, they could be set for a comeback.<