The Standard & Poor's 500 Index returned 5.2% in January. The last time U.S. stocks had a better start was in 1997, when the S&P 500 climbed 6.1% and finished the year with a 31% gain. The MSCI All-Country World Index of shares in 45 nations returned 4.6%, including dividends.
Stocks rallied from the first week of the year after lawmakers reached a temporary deal to sidestep drastic spending cuts and tax increases. Share prices then moved higher against a backdrop of low borrowing costs, tame inflation reports, optimism about the housing market, decent corporate earnings and positive unemployment data. Though we can never truly know the real causes of short-term price momentum in stock prices, we do know that beginning-year price spikes are virtually worthless as a predictor of where stock prices will be at the end of the year.
While a strong January is promising, during the Great Depression, the market rose sharply during the first month of 1929, 1930, 1931 and 1934, only to plunge the rest of the year. Undoubtedly, economic clouds are still hovering. In the U.S., data released January 30 for the fourth quarter of 2012 showed a decline in GDP of -0.1%.
How to react to the possibility of continued growth—or sudden market decline? As always, the key to long-term investment success isn’t placing the right bets at the right time. Rather, it’s an investment plan based on sound passive and index investment philosophy and your own personal risk tolerance, time horizon, and investment objectives. And of course, appropriate diversification and rebalancing.
In Europe, financial markets remain vulnerable to both renewed setbacks in the euro area and risks of excessive fiscal cuts in the US. Hence, in the short-run, stock prices may struggle to build on their recent gains as investors turn their attention back to Washington budget negotiations which could be protracted, prove negative for the economy, and increase stock market volatility. Nevertheless, investors poured more money into stock funds in January than at any time in the last nine years.
The DJ AIG Index of 20 commodities added 2.4%, representing its biggest increase since August. Barclays US Aggregate Bond Index lost 0.70%, its first substantial decline since last March. Barclays U.S. Corporate High Yield Index gained 1.34%. S&P’s National AMT Free Municipal Bond Index gained 0.68%. Barclays US TIP index fell 0.68% and Barclay’s Long-Term Treasury Bond Index lost 3.5%.
European stocks capped their eighth month of gains with the MSCI Europe Index, including dividends, returning 5.85%. The MSCI Pacific Index gained 3.67%. The MSCI Emerging Markets Index gained 1.38 %. The MSCI China Index added 4.12 %.
In January Mary Jo White was nominated as Chairwoman of the Securities and Exchange Commission. In the words of Andrew Sorkin, let’s hope Mary Jo can put her previous client relationships aside and work to make America a safer place for all of us to invest.