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Market Perspectives – January 2014

We wanted to take some time to reflect on the first month of the year in the stock market.  In order to do so, we have turned to several sources who have provided their insights towards the latest happenings.

Our first source was an interview reported through Horsesmouth with Wharton finance professor Jeremy Siegel:

After delivering an extraordinary 32% return in 2013, the U.S. stock market has had a shaky start in the new year. But in an interview with Knowledge@Wharton, Wharton finance professor Jeremy Siegel says corporate earnings are strong, and the U.S. economy is likely to grow at a healthy rate in 2014. An edited transcript of the conversation appears below.

Knowledge@Wharton: It’s late January, and everybody’s getting their year-end statements from 2013 and seeing the stupendous gains they made in the stock market, and they are getting ready to pay taxes on them. And now, all of a sudden, we seem to be falling off a cliff. The S&P 500 is down about 3% year-to-date, after being up 32% last year. What is going on?

Siegel: It shows you how used to gains we are. After being up 32%, we call being down 3% “off a cliff.” I regard it as a little bump. No bull market goes up in a straight line. We haven’t had a correction—which is defined as a 10% decline in the market—for at least two years, which is pretty remarkable. I don’t think this current reaction is going to move that far. In fact, many technicians say it’s healthy for a bull market to have this [kind of] correction, because it blows off the excess bullishness that sometimes accompanies rising prices.

Knowledge@Wharton: What has triggered this now? Why not a month ago or a month from now?

Siegel: Ostensibly, it was the [trouble in] emerging markets…. The [Federal Reserve] “tapering” was announced in December. So, if markets are at least even partially efficient, why is it reacting four weeks later to something that we knew in December? Well, we [also] had a very disappointing labor market report.

Earnings are coming in so-so. Actually, the percentage [of companies] that are beating earnings, at least at this point, is actually a little bit more than average. But the [beating of analysts’ forecasts] is a little less, and some of the forward [earnings] guidance isn’t too good.

That’s been a little disappointing, because we know that the second half of 2013 had better economic growth than the first half. Many of us thought that maybe the fourth quarter would surprise us more on the upside. But it’s still early. Let’s wait until we get more data on that.

Knowledge@Wharton: How does the economy look to you? Is it getting stronger, as it seems to be to the rest of us?

Siegel: I still think so. Despite the fact that we, again, had that poor employment report for the last month, in December. I think we have a chance for 3.5%-plus…GDP growth for 2014 [given] the better financial markets, the better…balance sheets of the consumers, the rise of the housing market and the rise of the stock market. And that should give a boost to consumer confidence. That could also boost business capital spending, which has been also very, very sluggish. And with housing moving up to, I think, over a million units sold…I think that that has the capability of giving us a 3.5%, or [more, economic growth].

Now, again, that certainly may not happen. And I have been overoptimistic on economic growth over the last two years. But, I think the stars are better aligned for such an acceleration this year.

Referenced from Horsesmouth 2/4/14

Our next perspective comes from David Moenning who is the Chief Investment Officer at Heritage Capital Management.  Dave is also the proprietor of StateoftheMarkets.com, which provides research, analysis and performance services.  Here is his latest commentary:

Over the past 64 years, the S&P 500 has closed lower for the month of January 25 times. The average loss during those loser January’s has been 3.9 percent. So, it is worth noting that this year’s decline of 3.6 percent was actually better than most. However, it is the next part that is a bit worrisome.

Since 1950, when January has been down, the average return for the rest of the year has been… drum roll please… 0.0 percent. The takeaway from this brief history lesson is first that a bad January does indeed have negative implications for the rest of the year. When January has been down, the market has been down 46 percent of the time. And during those down years, it has been pretty ugly.

The good news is that since 1950, the February through December period following negative January’s only produced losses exceeding 10 percent on five occasions. And three of those took place during secular bear market periods (1974, 2002, and 2008). Therefore, one could argue that it is really the overall state of the market that may have more meaning than the result of a single month.

Referenced from State of the Market, David Moenning, 2/5/14

Our final perspective comes from Liz Ann Sonders who is responsible for analyzing and interpreting the economy and markets on behalf of Charles Schwab’s entire client base.  She is also the chair of Schwab’s Investment Strategy Council.  Her range of responsibilities spans from market and economic analysis to investor education, but she is always focused on the individual investor.  Here is her latest commentary:

Shorter term, economic readings have been mixed. There were 21 economic reports last week; with nine stronger than expected, nine weaker than expected and three in line with forecasts. And this week is a biggie, with both ISM readings (manufacturing and services) and Friday’s jobs report. As of this writing, we already have the ISM manufacturing report, which was quite a bit weaker than expected, although still in expansion mode. My personal view is that many of the recent weaker economic readings are more weather-related than they are EM-related.

There are (eventual) positives that will accrue to the US economy and market; not least being a stronger dollar and lower commodity prices. Both are beneficial to a consumption-oriented economy like the United States’. The contagion of EM weakness to the US economy is likely more through financial markets channels than the economics of trade. US exports to the top five nations within the MXEF (China, South Korea, Taiwan, Brazil and South Africa) represent only 2% of US gross domestic product (GDP). About 30% of S&P 500 sales are international and Barclays estimates that about 10% come from EM.

Testament to global market weakness is the breakdown of performance among the US market’s capitalization segments. The S&P 100 Index, which incorporates the mega-cap stocks, is down 4.1% year-to-date; worse than the S&P 500. The Russell 2000, the index for small caps, is down a lesser 2.8%; while the Russell Micro-Cap index is barely down, at -0.6%.

In addition, cyclical sectors have been underperforming more defensive sectors, while value is underperforming growth. These are signs of a deteriorating economic growth outlook and possible continued market weakness. We still think the US economy and stock market ultimately get through this, but for now rough sledding is likely to continue.

Referenced from Liz Ann Sonders, Charles Schwab, 2/3/14

As you can see there are several different opinions as to what will happen in 2014.  We will continue to monitor the markets closely and provide guidance and advice where appropriate.  A diversified investment portfolio is always best to help reduce risk and mitigate fluctuations in the market.  As always, please feel free to contact our office if you have any questions or if we can provide any additional help.