Market Commentary: Market Recap
Market Update for the Month Ending January 31, 2015
Markets start the year on a down note
U.S. stock markets dropped across the board in January, as investors reassessed their risk tolerances. Driven by unexpectedly slow earnings growth, caused by the strong dollar and economic weakness elsewhere, the S&P 500 Index was down 3 percent, the Dow Jones Industrial Average lost 3.58 percent, and the Nasdaq posted a 2.13-percent decline.
International markets fared better. Developed international markets, represented by the MSCI EAFE Index, gained 0.49 percent in January, while the MSCI Emerging Markets Index was up 0.55 percent. Part of the discrepancy in returns compared with domestic markets is that, although U.S. corporate earnings have suffered from the strong dollar, companies from Japan and Europe, where their currencies have weakened, have benefited.
Technically, the Dow and S&P 500 dropped below their 100-day moving averages, although they remained above their 200-day averages. International indices are still below their 200-day moving averages, suggesting continued risk.
Fixed income benefited from the weak month for stocks and rising risk perceptions. The Barclays Capital Aggregate Bond Index returned 2.10 percent. This strong performance was linked to a decline in the U.S. 10-year Treasury yield, which closed January at 1.68 percent, down from 2.12 percent at the start of the month.
U.S. economy remains strong despite slower growth
Gross domestic product (GDP) figures for fourth-quarter 2014 weren’t bad—with initial estimates at 2.6 percent—but this was a slowdown from the previous quarter. Though disappointing, the figure seemed to be the result of several one-time factors, rather than of a sustained decline.
Other factors looked good. The December employment figure was strong, at 252,000, and jobless claims remained low. Unemployment declined to levels that the Federal Reserve considers normal, driving debate over when and whether it will start to raise rates.
A significant positive factor has been the decline in oil prices. Lower prices at the gas pump have put more money in consumers’ pockets, aiding consumer spending growth and boosting consumer confidence readings to multiyear highs (see chart). The major concern is wage growth, which continues to lag expectations; however, even in this area, there have been positive signs.
U.S. Consumer Confidence, 2005–2015
In Europe, growth has remained low and unemployment high. Greece, one of the worst affected countries, had an election where the victors vowed to renegotiate the nation’s debt and talked of leaving the eurozone, which has made markets skittish.
The European Central Bank launched a bond-buying program, designed to stimulate growth and employment by lowering interest rates. This worked for the U.S., but it remains to be seen whether the various governments will give it sufficient time to work in Europe.
At the end of last year, Japan also launched a quantitative easing program. The results have been inconclusive so far on growth but have made its currency less valuable, driving up the value of the dollar. Finally, China reported its lowest growth rate in decades.
Although weakness elsewhere could hit the U.S. recovery, there are positive effects. For example, U.S. asset prices are benefiting as foreign investors move wealth here, and slower growth in other parts of the world is keeping commodity prices low.
Economic growth versus stock valuations
Risks in other areas of the world may provide benefits to the real U.S. economy, but they present a risk to domestic stock markets. The stronger dollar seems to be leading to a slowdown in foreign sales and earnings growth for U.S. companies. Such a decline could lead investors to reduce risk exposure, bringing down valuations.
Good fundamentals still in place but valuations higher
As we move through 2015, the economy should continue its recovery, with strong fundamentals supporting a healthy economic environment. At the same time, recent weak U.S. market performance suggests that investors may be reassessing their willingness to take risk. Offsetting this is the strong performance of traditional fixed income assets.
January’s events underscore the need for a diversified portfolio and maintaining a long-term perspective aligned with investor goals. Cautious optimism remains the appropriate stance, as history has shown that markets and economies consistently return to a growth path.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.