Afternoon Review

January Recap *please contact for full monthly report*

In January, equity markets moved lower in response to more bad news from major banks, gloomy economic data and disappointing earnings reports reflecting the difficulties ahead. The Dow lost 8.65 percent, its worst January in 113 years. The S&P 500 gave up 8.43 percent this month, eclipsing the 7.36 percent drop at the start of 1970 and adding to last year’s 37 percent plunge.

As more financial institutions required additional government assistance, investors found themselves in the same unfortunate position as in November, depending on solutions from Washington. The uncertainty over the government’s role in the U.S. financial system, use of TARP funds and details of the stimulus bill was detrimental to confidence. Also weighing on sentiment were poor job reports and GDP data suggesting even greater production drops in the current quarter are likely. The buildup of unsold inventory shows that businesses could not slam on the brakes fast enough when demand dried up late in the quarter. As a result, many companies are withholding earnings guidance and hoping that visibility improves as the year progresses.

Utilities outperformed all other sectors, with investors seeking safety in their attractive yields and relatively stable revenues. Other strong performers included health care, energy and information technology. The health care sector, which is generally considered a defensive sector, benefited from Pfizer’s acquisition of Wyeth and expectations for increased consolidation. Crude oil’s 20 percent rally from its lows and positive reports from bellwethers Chevron and ExxonMobil helped buoy the energy sector. The technology sector’s pristine balance sheets and solid cash flows have earned these companies a premium among investors looking for less risky assets.

Treasuries suffered from fears of oversupply with various U.S. stimulus plans in need of funding, causing prices to drop and yields to rise. Yields on the two- and ten-year notes rose 0.19 percent and 0.65 percent, respectively, steepening the benchmark curve by 46 basis points.

The Federal Reserve Bank of New York began their agency MBS purchasing program in January, purchasing $70 billion dollars of the securities so far. The plan aimed at lowering borrowing costs for homeowners, helped mortgages outperform comparable Treasuries for the month.

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Peter Lazaroff, Junior Analyst