January market review: A reversal of 2013 market trends

In January, we saw a reversal of 2013 market trends with diversifying assets – bonds and commodities – posting positive returns while their growth-oriented equity counterparts cooled off. With news of more Fed tapering, stagnating growth in China and selloffs in emerging markets, market volatility (as represented by the CBOE VIX Index) jumped to 18.4 by month end after hanging out well below average in 2013 (averaging 14.2 vs. 10-year average of 20.2).

Developed equity markets pulled-back after a strong run in 2013. The U.S. equity market posted a negative return for the quarter. Size still mattered; the further down the cap spectrum you went, the stronger the return. Large cap (Russell 1000® Index) was down -3.2%, small cap (Russell 2000® Index) was down -2.8% and microcap (Russell Microcap® Index) was only down -0.6%.

A similar story played out with non-U.S. developed markets posting negative returns. In Japan, the Abe government continued their stimulus program in an effort to end deflation.3

But in January it was emerging markets that took center stage. The asset class dropped 6.0% for the month. News of stagnating growth and weaker-than-expected economic data from China along with currency turmoil in Argentina and Turkey rattled these markets.4 As a result, a balanced portfolio finished slightly down for the month appreciating the hedging qualities of diversifying assets like bonds and commodities.

Sources: U.S. Equity: Russell 3000 Index, Non-U.S. Equity: Russell Developed x-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays Aggregate Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: DJ UBS Commodities Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities

As of January 31, 2014. Sources: U.S. Equity: Russell 3000 Index, Non-U.S. Equity: Russell Developed x-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays Aggregate Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: DJ UBS Commodities Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities

Despite the lackluster returns, economic data in the U.S. continued to show improvement paving the way for the Fed to announce another $10B reduction in its bond-buying program.1 As well, the U.S. government approved a $1.1T budget bill avoiding any shutdown risk.2

Chart of the month

While the ups-and-downs of market pullbacks may cause heartache for investors, they are more common than uncommon. Our chart of the month shows the largest annual pullback (peak-to-trough) in each calendar year in the U.S. (Russell 1000® Index) from 1980-1Q2014. Over this time, the average annual pullback measured near -14%. Last year posted the smallest market drawdown since 1995. Diversified investors should take January’s 4% pullback as an opportunity to reassess risk and return in their portfolios.

January market review: A reversal of 2013 market trends

Source: Russell. Returns calculated with dividends included. Maximum peak-to-trough represents the return difference between the largest peak-to-trough of the calendar year.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

The bottom line

As Russell’s investment strategist team suggested in their annual outlook, investors should expect volatility this year as markets continue to validate the rally we saw in 2013. Holding a globally diversified portfolio of stocks, bonds and real assets may help them to weather the volatility.

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