/perspectives/weekly-viewpoint/as-january-goes-so-goes-the-year

As January Goes, So Goes the Year?

The Dow Jones Industrial Average (Dow) fell 2.87, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.58%, the Standard & Poor’s 500® Index (S&P 500) finished off 2.77% and the NASDAQ Composite Index (NASDAQ) shed 2.58%.

 

February 02, 2015    |    By Mike Schwager

Performance for Week Ending 1/30/15:

The Dow Jones Industrial Average (Dow) fell 2.87, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.58%, the Standard & Poor’s 500® Index (S&P 500) finished off 2.77% and the NASDAQ Composite Index (NASDAQ) shed 2.58%. Sector breadth was negative with all 10 of the S&P sector groups finishing lower. The Technology sector
(-4.11%) led the way lower followed by Consumer Staples (-3.47%) and Financials (-3.28%).

Index* Closing Price 1/30/15 Percentage Change for Week Ending 1/30/15 Year-to-Date Percentage Change Through 1/30/15

Dow

17164.95

-2.87%

-3.69%

Wilshire 5000

20678.93

-2.58%

-2.87%

S&P 500

1994.99

-2.77%

-3.10%

NASDAQ

4635.24

-2.58%

-2.13%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 1/26/15-1/30/15

The major market indices finished the week lower on fears of slowing economic momentum in the U.S., mixed earnings reports, and growing concerns over the political situation in Greece. A second month of falling consumer prices in the Eurozone also sparked fears that the European Central Bank may be falling behind the curve in their battle against deflation.

FOMC Meeting:
The Federal Reserve (Fed) gathered last week for their first meeting of the year. While no policy changes were expected to emerge from the meeting, all eyes were focused on the tone and adjustments to the after meeting communiqué. While the overall statement was very similar to the one from the December meeting, a few minor tweaks were notable. In regards to their assessment on economy activity, they now see the economy "expanding at a solid pace." In the December statement they said the pace was just "moderate." Job growth is now seen as "strong" vs. "solid" before. In addition, they cited the drop in oil prices as having "boosted household purchasing power." While the changes were subtle, in Fed parlance the terms “strong” and “solid” tend to signal a more robust environment. Despite the relatively upbeat tone, the statement was somewhat balanced as they noted that inflation has decelerated since December and would fall further "in the near term" due to the collapse in oil prices. In a new twist, the Fed stated that they will begin to include “international developments” as an additional factor in its assessment. This seems to be a reference to the dollar, which has soared versus other currencies.

As expected, the Fed maintained the term “patient,” which has been defined by Fed Chair Yellen to mean no rate hikes for at least the next two meetings. While the consensus expectation is for the Fed to begin lifting rates at the June meeting, it may not be that simple. The Fed remains in a very difficult position as raising rates while most other global central banks are cutting, would likely add fuel to the dollar rally. A stronger dollar could further penalize corporate bottom lines as well as put additional downside pressure on commodity prices, which in turn may result in additional downward pressure on inflation.

Economic Growth Cools a bit in Q4:
On Friday the Commerce Department reported that the U.S. economy grew at a 2.6% rate in the final three months of 2014. This was down from 5.0% in Q3 and a bit lower than the 3.0% growth rate expected by economists. On a positive note, personal consumption jumped by 4.3% during the period. This was better than the 4.0% rate expected and marked the strongest gain since Q1 2006. The rise in personal consumption suggests an increasingly confident consumer who appears to be benefitting from lower gasoline prices and improvements in the labor market.

Q4 Earnings Roundup:
While expectations heading into the quarter were lowered significantly due to the plunge in oil prices and the impact of the stronger dollar, companies are showing modestly better than expected results. Through Friday, 227 members of the S&P 500 have reported results with 70.9% beating expectations and 18.9% falling short. The current “beat” rate remains solidly above the 63% long-term average. Overall reported earnings for the S&P are up 3.1%, although when the Financials sector is excluded, results are up 7.0%. When all is said and done, analysts expect earnings to grow by 2.7%.

January Barometer:
The old Wall Street adage “As January Goes, So Goes the Year” will likely receive much press in the coming days. According to Merrill Lynch Research, based on S&P 500 data going back to 1928, January has been a good predictor of full year performance. When January is up, the year is up 80% of the time with an average return of 13.0%. When January is down, the year is up only 44% of the time and the S&P 500 has an average decline of 1.9%. The Stock Trader’s Almanac points out that the January Barometer has a strong long-term success rate, however the S&P has not ended in line with January’s performance in three of the past six years. Last year, for example, the S&P finished off 3.56%, but the market still finished the year up by 13.7%.

The Week Ahead:
The focal point of the upcoming week will be Friday’s monthly payroll report. According to Bloomberg, nonfarm payrolls are expected to rise by 238K and the unemployment rate is forecast to hold steady at 5.6%. Wages are forecast to rebound by 0.3% after falling 0.2% during December. Other economic reports of interest include December personal income and spending, the January ISM manufacturing, December construction spending, December factory orders, the January ADP Employment Report, and the January ISM non-manufacturing index. Earnings will also remain in focus with upwards of 125 members of the S&P 500 scheduled to report results. The Fed calendar will also be busy with several Fed officials scheduled to make public appearances. The key speech will come from Atlanta Fed President Lockhart on Friday. The topic of Lockhart’s speech is U.S. outlook and monetary policy. He is also a voting member of the Federal Open Market Committee (FOMC) and this speech is scheduled to be delivered just after the jobs report.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor’s 500® Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

ISM Non-Manufacturing Index An index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

Past performance is no guarantee of future results. Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.

 

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