Stocks endure poor start to year

Stocks had a dismal January.

Despite a rebound in the last two weeks of the month, the Standard & Poor's 500 Index fell 5.1 percent for January as a whole, its worst start to a year in seven years.

The S&P 500 did jump 2.5 percent on the last trading day of the month for its biggest one-day rally since September. That came after the Bank of Japan annunced earlier that day that it was cutting its interest rate to -0.1 percent.

On 21January, the European Central Bank had also contributed to an improvement in investor sentiment. President Mario Draghi had said after the central bank's monetary policy meeting then that officials will “review and therefore possibly reconsider” the bank’s monetary policy at their next meeting in March, suggesting possible further monetary stimulus.

However, John Hussman reminded us in an article today that central bank stimulus when investors have turned risk-averse may not be able to sustainably boost markets.

Recall, as I noted in The Line Between Rational Speculation and Market Collapse, that the Fed did not tighten in 1929, but instead began cutting interest rates on February 11, 1930 - nearly two and a half years before the market bottomed. The Fed cut rates on January 3, 2001 just as a two-year bear market collapse was starting, and kept cutting all the way down. The Fed cut the federal funds rate on September 18, 2007 - several weeks before the top of the market, and kept cutting all the way down.

Hussman concluded: "When investors are risk-averse and internal support has dropped away, a small change in interest rates is simply not sufficient to encourage risk-seeking."