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.
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.
4 http://www.scmp.com/business/economy/article/1409527/stagnant-growth-adds-pressure-rebalancing-chinas-economy ; http://www.bloomberg.com/news/2014-01-23/argentina-s-peso-plunges-17-as-central-bank-scales-back-support.html ; http://www.reuters.com/article/2014/01/29/us-turkey-centralbank-rates-idUSBREA0R1W420140129