Markets slid considerably last week after investors were rattled by a confluence of events in emerging markets. For the week, the S&P 500 fell 2.63%, the Dow sank 3.52%, and the Nasdaq dropped 1.65%.[1. http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-january-21-2014.htm] What were the international events that fueled the sell off?
Chinese manufacturing activity contracted in January for the first time in six months, according to one important survey. While there are probably some distortions in the numbers due to the Chinese New Year holiday, the data indicates that all may not be well with one of China’s most critical sectors.[2. http://www.cnbc.com/id/101356861]
Political unrest in Turkey and financial turmoil in Argentina also stoked investor fears about these countries’ ability to maintain order.[3. http://www.latimes.com/business/la-fi-us-stocks-20140125,0,5540513.story#ixzz2rVwVluSH] Concerns about developing economies are being heightened by the Fed’s tightening of its easy money policies, which could hurt emerging markets. Loose monetary policy has helped keep interest rates low around the world. Countries that have relied on low borrowing costs to spur economic activity could face a period of painful readjustment to the new reality.[4. http://dealbook.nytimes.com/2014/01/24/a-worldwide-market-slump-gains-traction/?_php=true&_type=blogs&_r=0]
Investors seeking higher returns have also poured money into developing markets in recent years. The central bank’s tapering process now has investors scrutinizing the weak fundamentals that underpin many developing countries’ markets and wondering if their economies can stand on their own. If they pull their money out, developing economies could be hurt by damaged currencies, falling standards of living, and potential social unrest.
Fourth quarter earnings reports also drove some volatility last week. So far, results have been a mixed bag, with slightly more than half of the S&P 500 beating estimates. Of the 102 S&P 500 companies that have reported in, 63% have achieved earnings above expectations, as compared to 67% over the previous four quarters.
The takeaway: If any of last week’s headlines rob you of sleep, try to remember that it’s routine for economies and equity markets to cycle. While the selloff is troubling to some, it may also have created some opportunities to cherry pick investments with good upside potential at attractive prices. Investors buying the dip could spur another rally; disappointing data or a Fed surprise could cause the contraction to deepen. Whichever way markets move, we’ll be keeping our eyes on the trend and working to position our clients for long-term success.
Monday: New Home Sales, Dallas Fed Mfg. Survey
Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, Consumer Confidence
Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement
Thursday: GDP, Jobless Claims, Pending Home Sales Index
Friday: Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment
Data as of 1/24/2014
Standard & Poor’s 500
U.S. Corporate Bond Index
Data as of 1/24/2014
Treasury Yields (CMT)
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
2013 existing home sales highest in 7 years. U.S. home resales rose in December after falling for the previous three months as low interest rates and continuing demand pushed up sales. Despite the loss of some momentum, 2013 was still an excellent year for the housing market.[5. http://www.cnbc.com/id/101358564]
Weekly jobless claims creep up. While the number of Americans filing new unemployment claims inched upward last week, the overall trend suggests slow improvement in the labor market. The four-week moving average, a less volatile measure, fell 3,750 to 331,500 new claims.[6. http://www.cnbc.com/id/101358156]
Oil prices climb on cold weather. U.S. oil rose on expectations that cold weather would cause demand for heating oil to surge. Frigid weather also caused natural gas prices to surge to a multi-year high.[7. http://www.cnbc.com/id/101353404]
U.S. manufacturing growth slows in January. Falling new orders caused a slowdown in manufacturing growth for the first time in three months. Even so, the overall rate of growth remains robust.[8. http://www.cnbc.com/id/101358293]