Commentary ¨C January 2011
January was in many ways a continuation of the positive economic and market trends that emerged in the last few months of 2010.
The Institute for Supply Management (ISM) manufacturing and non-manufacturing indices both recorded surprisingly strong readings for the month. In fact, the pace of growth for both of these indices was at multi-year highs. Seeing growth continue at a more rapid pace to start 2011 for both the manufacturing and non-manufacturing areas of the economy is a positive development that bodes well for the continuation of the economic recovery. Employment data, while still a bit mixed, continued to move in an encouraging direction. The unemployment rate saw a surprise drop to 9.0% for January when an increase was expected. While there were substantially fewer-than-anticipated private payroll additions for January, the data was negatively impacted by winter storms, which made this data less informative.
European sovereign debt concerns, which had a clear impact on capital markets at different points during 2010, seemed to ameliorate somewhat in January. Although this continues to be an issue that is a lingering uncertainty for 2011, January saw some relief in this situation. While debt concerns in Europe got a reprieve for the month, problems in Egypt erupted. Massive protests broke out in major cities in Egypt demanding that President Mubarak resign. From a market perspective, concern seems to center around the impact this crisis might have on oil prices and whether protests might spread more broadly across the Middle East. Oil prices had been rising as the pace of economic recovery picked up over the last few months of 2010. With prices already elevated, the oil market is sensitive to any potential disruptions in supply. This crisis was still very fluid at the end of January and it will be important to monitor how this situation unfolds.
The equity market rally that began in the last few months of 2010 continued into the first month of 2011. However, the character of the rally was somewhat different. After being the clear leader in 2010, the small-cap Russell 2000 Index declined slightly in January, off 0.3% on a total return basis. Large-cap stocks enjoyed the strongest returns for the month with the Dow Jones Industrial Average up 2.9% and the S&P 500 Index gaining 2.4%.
After a powerful rally over the last two years, emerging market equities pulled back to begin 2011. The broad MSCI Emerging Markets Index declined 2.7% in January on a gross-return-dollar basis. Although faster economic growth rates and better financial positions are clear positives for emerging markets, the threat of higher inflation and a rising interest rate environment are negatives. On the other hand, developed markets enjoyed positive returns for the month with a weaker U.S. dollar providing a tailwind for U.S.-based investors. The MSCI EAFE Index rose 2.4% in January. After lagging other markets in 2010 with the overhang of sovereign debt concerns, Europe led the broad developed markets higher with improved sentiment in January. The MSCI index for Europe excluding the United Kingdom gained 5.0%.
The broad fixed income index barely inched into positive territory during the month, rising just 0.1% as measured by the Barclays Capital U.S. Aggregate Bond Index. January¡¯s results continued the trend from the fourth quarter of 2010 with the more cyclical areas of fixed income performing relatively better than the more defensive areas, especially U.S. Treasuries, which declined for the month.
While the momentum that propelled equities higher in the latter part of 2010 continued into the new year, leadership shifted to large caps from small caps and to developed markets from emerging markets. Fixed income returns in January mirrored for the most part the returns seen at the end of last year. Overall, the broad global economic recovery at the start of 2011 appears to be intact if not accelerating and U.S. and developed equity markets gained in January reflecting these improvements, while the bond market lagged.
Market date courtesy of Bloomberg. The indices mentioned are unmanaged and not available for direct investment. Past performance is no guarantee of future results.
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