Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
The economy showed a mixed bag of data in January as the nation’s industrial sector has been in steady decline, but strengthening housing and labor markets underscored the general health of the economy. Cooling demand from overseas markets and a stronger US dollar led to persistent weakness in the manufacturing sector. The Institute for Supply Management’s (ISM) factory barometer contracted in January for a fourth consecutive month driven by a drop of exports. However, the gauge of new orders, which is a leading signal for production, climbed for the first time in three months, suggesting some stabilization on the horizon for the sector.
Purchases of existing homes in the US climbed as solid job gains and low mortgage rates enticed more buyers into the market. Figures from the National Association of Realtors showed home sales jumped 14.7% in December, to a 5.46 million annualized rate as home prices rose and inventories eased. Housing markets are tight, as the number of previously owned homes on the market dropped to 1.79 million in December which at the current sales pace would take 3.9 months to sell, the lowest since January 2005.
Additionally, the labor market continued to show improvement as US payrolls climbed 151,000 in January while December job gains were 262,000. The jobless rate fell to an almost eight year low of 4.9% from 5.0% in December. Additionally, the further tightening of labor conditions sparked wage gains. Average hourly wages increased 2.5% from a year earlier, after a 2.7% jump in the 12 months ended in December.
The Federal Reserve (Fed) kept interest rates on hold in January and maintained a cautiously optimistic US economic outlook. However, they acknowledged recent turmoil in financial markets had “significantly” tightened financial conditions and could weigh on the level of economic activity. Meanwhile, the European Central Bank (ECB) signaled it could increase and/or lengthen its quantitative easing program as needed in support of its targets for inflation. Also, the Bank of Japan (BOJ) in a surprise move, cut policy rates into negative territory.
US equities performed poorly in January whipsawed by fears of slowing global growth and lower oil prices that dominated the tone of the markets. The S&P 500 opened the year with a 6.0% decline in the first week as poor Chinese manufacturing data caused a selloff in Chinese equities that permeated across the globe. From that point forward, uneven reports on US economic growth and fourth quarter corporate earnings kept volatility at the forefront. With 70% of S&P 500 companies reporting for Q415, 71% have beaten estimates while 18% have missed analyst estimates. The S&P 500 closed January down 5.0%, the worst January since 2009 (-8.4%) as the materials and energy sector lagged driven by fears the slump in commodity prices would negatively impact earnings. The financials sector declined as market expectations moderated for the number of times the Fed would increase rates in 2016. More defensive, higher yielding sectors (Utilities, Consumer Staples) posted positive returns. Small companies underperformed as the Russell 2000 posted its worse month since August 2011.
Global markets had broad-based declines amid fears of slower economic growth that overshadowed accommodative central bank actions in developed markets. European equities experienced a volatile January with the MSCI Europe posting a loss of 6.6% (USD) weighed heavily by losses in the financial sector. Japanese equities were weak, but slightly recovered on the final day of trading after the BOJ implemented negative interest rates. Chinese stocks underperformed, leading emerging market stocks lower, as continued weak economic growth and the removal of selling restrictions on Chinese mainland stock markets hurt performance.
The Bloomberg Commodity index was down 1.7% for the month with oil negative for January, while gold returned a positive 5.3% as investors used it as a safe haven asset.
High levels of stock market volatility led to sharp declines in risk appetites as investors rotated toward the safety of high quality sovereign bonds. US Treasury rates dropped in January as markets discounted the probability of higher interest rates despite the Fed’s projection of four hikes in 2016. The 10-year Treasury yield fell from 2.27% to 1.92%, while the 30-year Treasury yield declined 27 basis points (bps) to 2.74%. US Treasuries posted positive gains, as the BofA ML US Treasury index rose 2.2%. High grade US corporate bonds rose modestly, while US high yield bonds closed lower.
European sovereign bond yields dropped amid anticipation of further ECB policy stimulus after ECB President Mario Draghi said additional measures may be implemented at its March 2016 meeting. German 10-year bond yields fell 30 bps to 0.33%, and peripheral 10-year bond yields in Italy and Spain declined to 1.42% and 1.51%, respectively. The BOJ reduced its benchmark policy rate from +0.10% to -.10% helping drive 10-year Japanese bond yields down 17 bps to 0.10%, the lowest since 1994. The BofA ML Global Government index jumped 1.4% in January.
Emerging market debt (EMD) yields initially spiked early in the month before the higher yielding assets attracted capital, recovering most of the initial losses. The JPMorgan EMBI Global Diversified index of USD bonds fell 0.2%. The local currency JP Morgan GBI-EM Global Diversified index rose 0.3% (USD). In corporate bonds, the USD CEMBI Diversified index dropped 0.3%.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. HighTower/GFP shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.