It was bound to happen. With the last couple of Indiana winters being pretty mild, we were due for some record temperatures and snowfall. Mother Nature delivered with possibly the worst Indiana winter since 1979. Stocks were also due for an unfortunate change. The S&P 500 broke its uphill trend and finished January down nearly 3 ½%, which makes it the worst performing month since May 2012. This is also the worst January performance for the index since 2010. As you might expect when stocks get volatile, bonds ended up doing well last month and, according to our portfolio barometer below, made up for most of the losses bonds experienced in 2013.
The change in course could be caused by the concern over slower growth in China and general concerns about emerging market countries. It could also be due to the Fed tapering its quantitative easing programs for the second month in a row. You could also argue that a down month for stocks is just a healthy, yet unpleasant, part of investing in a normal bull market. JP Morgan created the accompanying chart that shows just how common intra-year drops can be during both good times and bad. Last year we barely witnessed any volatility, but this year we have already seen the volatility index (VIX) inch above 20. We believe stocks are still attractive, but are also convinced that 2014 is going to be a change back to normalcy.
This means we believe the economy will continue to improve, unemployment will most likely break through that magical 6.5% level, corporate earnings will stay at all-time highs, interest rates will remain relatively low, and the stock market could still have more than a few bad months this year. 2013 may have spoiled stock investors with only 2 out of the 12 months posting negative returns for the S&P 500. This cold January has quickly snapped us back into reality.
In regards to the tapering led by Ben Bernanke (and now Janet Yellen), the Fed is simply decreasing the amount of bonds that they have been purchasing since they believe the economy has improved. This move could be viewed as a precursor of the Fed eventually increasing interest rates, and you might have expected to see the bond market react negatively. In actuality, we saw the 10 Year Treasury drop from 3.03% down to 2.65% in January as investors were apparently more concerned about equity risk than interest rate movements hurting their portfolios. Just another example of how the markets don’t always follow a steady stream of logic.
We expect stocks to turn around and get back on track soon. In the meantime, bundle up for the onslaught of cold weather that continues to hit the Midwest in February. If you are lucky enough to be staying in the warmer states, try not to rub it in!
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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