Equity markets began the year in disappointing fashion, experiencing their worst start since 2009. In recent months, stocks have exhibited a higher-than-normal correlation with the price of crude oil, which hit a 12-year low on January 20th. Although crude oil has driven markets downward, lower oil prices should ultimately be beneficial to the economy as a whole. After 2.0% U.S. GDP growth in the third quarter, GDP rose just 0.7% in the fourth. The slower growth can be attributed to falling commodity prices, reduced inventories, a widening trade gap due to the strong dollar, and drops in non-residential investment. Although industrial and energy headwinds persist, a recession seems unlikely at this point given a reasonably strong consumer. Through the end of January just under half of S&P 500 companies had reported earnings, with 80% beating estimates. Consumer spending held up well in the quarter and consumer confidence rose to 98.1 in January from December’s 96.3 reading. Employment readings are positive with a 5% unemployment rate and a low and stable weekly claims report. Housing remains strong as new single-family home sales rose almost 11% in December coupled with a 0.9% November increase in the S&P/Case-Shiller home price index.
All major indices declined in January, with the S&P 500 and DJIA each down around 5% and Nasdaq down close to 8%. Seven of the ten sectors in the S&P 500 were negative, with the Materials and Financials sectors experiencing the largest declines. Beyond crude oil, markets were negatively affected by poor manufacturing data coming out of China and the decision by the Chinese government to further devalue its currency. Despite the January selloff, there was some positivity toward the end of the month as investors welcomed overseas monetary stimulus. European Central Bank President Draghi kept European rates unchanged and indicated further stimulus was likely. Moreover, the Bank of Japan established negative interest rates for the first time in the country’s history in an effort to achieve its 2% inflation target.
Yields on U.S. government debt fell in January as investors sought a safe haven away from volatile equity markets. In response, the yield on the 10-year Treasury fell back below 2%. Investment-grade bonds started the year showing a small positive return. The high-yield sector continues to struggle as default rates in cyclical industries such as energy, metals, and mining increase. Investors have reacted with broad-based selling, with $4.1B in high-yield-fund outflows occurring in January alone. Additionally, high yield issuance was just $6.25B in January 2016, compared to $17.6B in January 2015. The Fed kept rates unchanged at its most recent meeting, citing renewed concerns about financial market turbulence and slow overseas growth. The market’s expectations for a March rate hike are low, though Fed language did not rule it out.