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Market's message: January plunge says avoid stocks in 2009

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If you still hold stocks, should you use the recent plunge to buy? Should you hold? or Should you just get out of stocks altogether? The answer depends on how soon you need your money and your outlook for stock prices. The first question is easier to answer than the second one -- which is virtually impossible to get right. As I posted last October, if you need your money in the next six years, it probably makes sense to sell.

How bad was January 2009? After falling 38.5% in 2009, the S&P 500 lost another 8.6% of its value last month. And the January barometer effect -- the idea that as goes January, so goes the year -- has a pretty good track record. In 60 of the last 80 years, the S&P 500's performance in January has reflected the index's annual result. For example, in January 2008, the S&P 500 fell 6%. And this January was the worst ever for the market. So maybe 2009 will be even worse than 2008.


Stocks seem to be retracing the pattern of the 1930s during which they fell about 80% from their high. If history repeats itself, and it probably will just rhyme, the Dow -- which peaked at 14,093 on October 12, 2007 and has lost 43% -- could fall an additional 65% from its current 8,000 to about 2,818 by 2010 or 2011.

So what should you do with your money -- if you have any? I put most of my money in money market funds in early 2001. Others are following -- for example, in January 2009, there was $3.9 trillion in money-market accounts up from $3.3 trillion in January 2008. I think this is a good place to put money that comes along -- (although if you can find government-backed Certificates of Deposit (CDs) -- they might have higher yields.)

Money market funds could be a good place to park your money unless those funds break the buck. Fortunately, the government is guaranteeing some of those funds. And I hope that the guarantee is a solid one.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio recently published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing.

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Symbol Lookup
IndexesChangePrice
DJIA+144.9510,463.11
NASDAQ+33.162,179.20
S&P 500+17.501,108.88

Last updated: November 23, 2009: 11:58 AM

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