New York: Stock investors were hit from all sides in January. Concerns about the global economy and US company earnings, as well as turmoil in emerging markets, led the Dow Jones industrial average to its worst start since 2009. However, many investors remain hopeful that the problems will not spill over into the rest of 2014.
They even see the downturn as healthy, given the US market’s rapid rise last year.
The Dow slid 5.3 per cent in January while the Standard & Poor’s 500 index fell 3.6 per cent and the Nasdaq composite declined 1.7 per cent.
Investors entered the year with some degree of scepticism and nervousness. The stock market went basically straight up in 2013. The S&P 500 index ended 2013 with a gain of nearly 30 per cent, its best year since 1997.
“No amount of negative news could derail the market last year,” said Jonathan Corpina, a floor trader at the New York Stock Exchange with Meridian Equity Partners.
But no stock market can go straight up forever.
Many investors expected 2014 to be a more muddled and volatile year for the market. Market strategists late last year were looking for the S&P 500 index to notch a modest gain of 4 per cent to 6 per cent, ending in the range of 1,850 to 1,900.
Investors were also looking for more pullbacks this year and possibly a correction, the technical term for when a stock market index like the S&P 500 falls 10 per cent or more. Three months ago, analysts at Goldman Sachs said there was roughly a 60 per cent chance that a correction would happen this year.
“People did look at these stock market valuations at the beginning of the year with a degree of nervousness,” said David Kelly, chief market strategist with JP Morgan Funds. “A correction would probably be healthy for the market.”
But many investors were surprised by January’s turbulence. With one exception, the Dow had triple-digit moves every trading day in January.
Still, with the broader S&P 500 index down just 3.6 per cent from its January 15 peak, the downturn is hardly severe.
“There’s been some negative news out there — the economic data, corporate earnings and what’s now going on in emerging markets — but I’m not convinced the headlines are bad enough to be a catalyst to push us into a correction,” Corpina said.
Investors point to the December jobs report, released on January 10, as the event that started the troubles. The US government said employers created only 74,000 jobs in December, the worst month for job creation in since 2011 and far below expectations.
Up until then, weeks of data showed the US economic recovery was accelerating. US companies were selling record levels of goods overseas, layoffs had dwindled and the Federal Reserve was pulling back on its economic stimulus programme, citing an improving economy.
Many investors called the December jobs report as a statistical fluke. But the report has weighed on stocks all month, investors say.
“It set a negative tone for the market,” Kelly said.
Other economic reports also painted a picture of US economic growth possibly flattening out instead of accelerating.
Investors combined these economic worries with mixed signals from US companies.
Wall Street is in the middle of earnings season, when the country’s major corporations report results for the final three months of the year. Half of the members of the S&P 500 have reported, and the results have been mixed. While fourth-quarter corporate earnings are up a respectable 7.9 per cent from a year earlier, companies have been cutting their full-year outlooks and reporting weaker sales, according to data provider FactSet.
Wal-Mart, the nation’s largest retailer, said Friday that earnings may come in at the low end or below its prior forecasts. It also expects sales at stores open at least a year to be flat. The company previously forecast that sales would be modestly higher.
Wal-Mart’s forecast echo the comments from Macy’s, Target, Best Buy and other retailers.
Of the companies who have reported so far, 44 companies have cut their full-year profit outlooks while 10 have increased their outlooks, according to data from FactSet.
Adding to concerns about the US economy and earnings were problems in overseas markets.
The bad news started with China. A recent report showed manufacturing activity in the world’s second-largest economy unexpectedly contracted in January. The report added to other recent signs that the Chinese economy was slowing down after years of massive growth.
Then came currency troubles in smaller emerging markets, particularly Turkey, South Africa and Argentina.
All three saw their currencies fall sharply against the dollar, as investors began to pull out of emerging markets and return their money to less-risky parts of the globe.
“These governments were financing themselves with [foreign investor money], and now that these investors are looking to go home, there’s no source of money to replace them,” said Krishna Memani, chief investment officer at Oppenheimer Funds.
On Friday, the US stock market closed out January on yet another down note. The Dow fell 149.76 points, or 0.9 per cent, to 15,698.85. The S&P 500 dropped 11.60 points, or 0.7 per cent, to 1,782.59 and the Nasdaq lost 19.25 points, or 0.5 per cent, to 4,103.88.
Investors shouldn’t panic yet, money managers say.
They will get the January jobs report next week. Also, another 93 members of the S&P 500 are scheduled to report earnings.
“A 5 per cent decline in equities is not an earth-shattering event by any measure, particularly after last year,” Memani said. “It’s still way too early to give up on equities.”