January was a difficult month for stocks as market participants weighed the impact of U.S. bank regulation, Chinese monetary policy, and Greece’s financial health.
Economic data for the labor market as well as housing demand was underwhelming, while fourth-quarter GDP – showing the U.S. economy grew at a 5.7% annual rate – lacked evidence of sustainable growth. Corporate earnings largely exceeded expectations, but investors seemed to "sell the news" and take profits rather than bidding up shares further.
Domestic equities fared better than their overseas counterparts. The hottest international asset classes of 2009 felt the most pain in January, with ETFs covering emerging markets and the MSCI Pacific Ex-Japan losing roughly 7-8% in January. This can be attributed to the pre-emptive removal of stimulus in China that included increased rates for short-term bills and higher reserve requirements for banks. There have also been rumors that the central banks ordered banks to stop lending.
The Technology and Materials sectors, which were also red-hot in 2009, posted the biggest monthly losses of the S&P 500 sectors. The next weakest sector was Telecom, where mounting price competition in wireless services is creating significant threats to profitability. Verizon cuts the price of calling plans with unlimited talk, which is likely to force AT&T to cut rates as well. The competition between wireless carriers was previously built around what handsets were available and for what price, but the competition between services costs is a definite negative.
The only S&P 500 sector to post a gain was the Healthcare sector. The stunning Republican victory for the Massachusetts Senate seat squashed the likelihood of the healthcare reform bill passing in its current form, sending Healthcare stocks soaring.
Yields pulled back in January from the end of the year selloff, and the curve set an all time record for steepness at 288 basis points on Jan 11 as expectations for a Fed rate hike in the first half of 2010 chilled out. The Barclays Aggregate Bond Index was up 1.53% after losing 1.56% in December, with no help from credit spreads, which actually had their worst month since Feb 2009.
--Peter J. Lazaroff, Investment Analyst
Cliff J. Reynolds, Jr., Investment Analyst
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