a new year's stock story so dumb it might be wise.

A New Year's Stock Story So Dumb It Might Be Wise: Chet Currier

Dec. 31 (Bloomberg) -- Happy New Year, all you investors with an eye for numerology.


According to a popular financial folk tale, there's no need to worry much about Federal Reserve policy or corporate earnings growth in 2005. The stock market, and stock mutual funds, will do just fine because they always prosper in years that end with a five.


Look at 1995, which gave us a 34.1 percent gain in the Standard & Poor's 500 Index. Or 1985, which was up 26.3 percent. Or 1975, up 31.5 percent. Or 1965, up 9.1 percent. Or 1955, up 26.4 percent. Or 1945, up 30.7 percent.


The average gain for years ending in five over the past 12 decades, dating back to horse-and-buggy times, was 30.7 percent, according to calculations by the newsletter No-Load Fund Investor in Brentwood, Tennessee.


What to make of this? Nothing!, the newsletter hastens to declare. ``This is simply a random pattern,'' it says. ``It's no different than a coin coming up heads 12 times in a row. It happens sometimes. `Seers' who advise investing by this pattern are data mining.''


Sound reasoning, that. Investors bring untold trouble on themselves looking for patterns where none exist. In this case, as any fool can plainly see, there is no plausible reason why stock market behavior should correlate with the way the numbers happen to progress in our arbitrary system for keeping track of time.


Smarter Idea?


If you insist on looking for order in a system characterized by disorderliness, better to stick with theories that at least have some grounding in rationality, such as the political-stock market cycle.


This way of looking at things casts 2005, a post-election year in the U.S., as a scary proposition. In post-election years, political leaders are most likely to take whatever painful policy steps are necessary to curb economic excesses. Hark back to 1929, or 1973, or 1981 -- or 2001, for that matter. All were troubled years in the stock market.


There, that's settled. Just for fun, though, let's consider whether there is any way the fools might come out ahead of the smart people in a situation like this. When confronted with reasonable thinking, markets have been known to turn it on its head.


The trouble with a forecasting system such as the political- stock cycle is that it makes enough sense to appeal to a wide range of market participants. This one has in fact gained widespread recognition and respectability.


Too Late


That recognition implies, alas, that whatever effect it was going to have on the markets may already be incorporated into current market prices. Since all investors act as anticipators, the crowd is habitually too late in expecting whatever reasonable thing it expects.


As for the Year-5 indicator, on the other hand, no serious investor has acted upon it. It's as random as it always was. In the stock market, by the way, that does not make it a mere 50-50 proposition.


Tethered as they are to an economy that grows over time, stock prices rise more often than they fall. According to my Bloomberg, in the past 60 years the S&P 500 has been up 42 times, down 17 times, and unchanged once.


The past 60 years may not be typical, what with all the dazzling economic progress that period has witnessed. Let's be conservative and posit that in the next 60 years the ratio will be more like, oh, 36 up years to 24 down.


Strange Odds


In such an environment, a bear on 2005 has a 40 percent chance of being correct, a bull 60 percent. Hmm, that means that the bull's chances of being on the right side are half again as good as the bear's.


And lo, it is the followers of the Year-5 theory that are bullish, while followers of the political cycle theory are bearish.


Never mind which camp has the better logical case behind it. Under the peculiar rules that govern the stock market, ``good sense'' is frequently not sense enough.


With a regularity that has been known to infuriate many a disciplined mind, what looks like hardheaded analytical thinking about stocks can lose out to blind faith. So it could turn out in 2005.