In the following piece, Fifth Third’s Investment Management Group recaps the market and how it reacted to various events in the month of January. I hope you find this Financial Market Roundup helpful and informative.
Once, when asked what the stock market would do, J.P. Morgan famously quipped that “It will fluctuate”. U.S. equity investors can attest to this as stock prices saw violent moves in January; setting a schizophrenic tone where markets experienced knee-jerk reactions to incoming economic data and headlines. Disappointing earnings reports and slowed growth in the fourth quarter were offset by announcements of “Americanized”, open-ended, QE from the ECB and falling crude prices, as competing capital flows whipsawed markets in January.
- The MSCI World Index, a broad measure of developed world’s stock markets declined 1.81 percent for the month.
- The S&P 500, a measure of large U.S. companies, declined 3.00 percent for the month.
- The MSCI Emerging Market Index, a broad measure of the emerging world’s stock markets, rose 0.59 percent for the month.
- The MSCI REIT Index rose 6.76 percent for the month.
- Gold rose 8.07 percent during the month.
U.S. markets began 2015 much like 2014, characterized by falling stock prices and plunging interest rates. Reacting to a lackluster fourth quarter GDP estimate, global investors sought the safety of U.S. government bonds, sending the yield on the 10-year Treasury note to its lowest level since May of 2013. This translated into a return north of 4%, as the yield for this issuance fell more than a half a percentage point for the month.
Treasury yields remain anchored to European bond markets, as the ECB’s announcement for a an open-ended QE program sent Eurozone interest rates even lower, even negative in many cases. U.S. stocks responded positively to the prospects for additional global liquidity, and limited losses from missed earnings and a disappointing durable goods report earlier in the month. For domestic multinationals, the stronger dollar environment proved more punitive towards the bottom line than many had expected, making exports less competitive and diluting overseas earnings.
At month’s end, breaking a six-month downward trend, U.S. oil prices surged over 8% after data showed a steep drop in the number of rigs drilling for oil in the country, a sign that crude production may be slowing. This flies in the face of the otherwise bearish numbers we’ve been seeing as of late, which include a consensus belief that production will continue to increase (especially here in the US in the first half of the year), and concerns that global demand will continue to stagnate, especially if China continues to slow. Many predict that downward pressure on crude will likely recede in the second half of the year as American production decreases in response to low prices. However, in the near-term, production momentum can continue as some wells have already been drilled and simply need to be tied in, and hedges can keep production going for a number of large producers. OPEC is unlikely to reduce its production, as the Saudis are hoping that low prices will put U.S. frackers out of business and significantly reduce energy capital spending today, which could put the Saudis back in the driver’s seat in a year or two.
That being said, we still have a difficult time understanding why so many investors continue to argue that the drop in oil prices is a bad thing. Yes, the drop in prices will cause employment and capital investment to be scaled back in the energy sector, but the affects of this scale-back will be less painful than most people realize.
Global decoupling and mounting deflationary pressures (ex-U.S.), against the backdrop of a self-sustaining U.S. recovery, blurs the path towards Fed policy-rate normalization. Given the strength of the U.S. economy, we believe that the Fed has much to gain by starting to raise short-term interest rates towards neutral levels. This will give Janet Yellen more weapons with which to fight slowing economic conditions down the line, but Doves, fearing a tightening tantrum, continue to assert that markets are not yet ready to stand on their own†.
†Market commentary provided by Fifth Third Bank. *Source of
statistics is Bloomberg.com. Returns are calculated from market close on 1/1/15 through 1/30/15. This information is current as of the date of this
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