There is nothing worse than a trading day that starts with the promise of big gains but instead results in a sell-off. Such was the fare of stocks on the last day of January. Buyers started lining up after government reports showed that GDP grew at a faster than expected rate and on news that Fed Chairman Bernanke was reappointed for another term. But the rally just wasn’t strong enough to last, and stocks ended the day down about 1%. U.S. equities ended the month with a -3.6% loss.
It’s easy to see why investors are nervous. China has tamped down on growth by cutting lending. The federal deficit is large, and will get even bigger until budget cuts force it down. Housing has yet to show tangible signs of support, and the foreclosure rate is still problematic. Add a high unemployment rate and political uncertainty, and jitters caused by a 6% drop in stock prices from their highs on January 19th until month-end, and a recipe for losses is nearly complete.
Fortunately, there are still some positives to found. With extremely low interest rates and recent gains in the credit market, there is little competition for risk capital that needs to make an 8-10% return. This earnings season has been a good one, and the economy is rebounding from improvement in personal income. The recovery might be slow, but it seems to have steady if unimpressive pulse. The bottom line: stocks have more room to run in 2010.
The Monthly Index Report for January 2010 Index Jan-10 QTD YTD Description S&P 500 Index* -3.7% -3.7% -3.7% Large-cap stocks DJIA* -3.5% -3.5% -3.5% Large-cap stocks Nasdaq Comp.* -5.4% -5.4% -5.4% Large-cap tech stocks Russell 1000 Growth -4.4% -4.4% -4.4% Large-cap growth stocks Russell 1000 Value -2.8% -2.8% -2.8% Large-cap value stocks Russell 2000 Growth -4.5% -4.5% -4.5% Small-cap growth stocks Russell 2000 Value -2.9% -2.9% -2.9% Small-cap value stocks EAFE -4.4% -4.4% -4.4% Europe, Australasia & Far East Index Lehman Aggregate 1.5% 1.5% 1.5% U.S. Government Bonds Lehman High Yield 1.3% 1.3% 1.3% High Yield Corporate Bonds Calyon Financial Barclay Index** -1.4% -1.4% -1.4% Managed Futures 3-mo. Treasury Bill*** 0.0% 0.0% 0.0% All returns are estimates as of January 29, 2010. *Return numbers do not include dividends.** Returns are estimates as of January 28, 2010.
Jan-10
QTD
YTD
-3.7%
-3.5%
-5.4%
-4.4%
-2.8%
-4.5%
-2.9%
1.5%
1.3%
-1.4%
0.0%
All returns are estimates as of January 29, 2010. *Return numbers do not include dividends.** Returns are estimates as of January 28, 2010.
Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.
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