Equity investors awoke from their 30%+ dream in 2013 to a mini-nightmare in January. After rising steadily throughout last year, with only one decline of 5% or more, U.S. stocks came out of the gate slowly and continued to fade throughout the month. Then, the Dow Jones Industrial Average fell 300 points on February 2, leaving it 7.2% below its 2013 close. At the same time, last year’s laggards such as municipal bonds, gold, and real estate investment trusts all posted solid gains.

What caused such a dramatic turnaround in sentiment? And what does January’s action tell us about the prospects for the remainder of 2014?

Things started off poorly with the release of the December jobs report in early January, which came in at less than half of economists’ projections. Most observers wrote off the weak performance to the very harsh December weather experienced in many parts of the country. However, the jobs report was followed by a series of weaker-than-expected reports on existing home sales, auto sales, and manufacturing activity, which had investors questioning the recent pickup in economic growth that began in the third quarter of last year.

Overseas, tensions were rising due to fresh concerns about the strength of the Chinese economy, and the impact of the continued “tapering” of the Fed’s monetary stimulus efforts. Investors, suddenly wary of the impact of the Fed’s actions on many of the weaker emerging market countries, began liquidating positions in favor of the safer haven of U.S. Treasuries. Sharp declines in the currencies of Argentina and Turkey, in particular, heightened fears of a broader financial crisis across the emerging markets.

The confluence of these events, coupled with the normal desire to protect last year’s outsized gains, led to the sharp sell-off we experienced in January. Although shaken, confidence began to return again as selling pressure in the emerging markets subsided and investors began to adopt the view that the weakness would be short-lived. Even another weak jobs report in early February was dismissed as not reflective of the underlying trend. By mid-month, equity benchmarks were within striking distance of their old highs.

It may be some time before we are able to determine the extent of the economic damage caused by the brutal winter in the Northeast. We believe the U.S. economy is still poised to deliver more growth in 2014 than it did last year, and we continue to view U.S. stocks as attractive. Broad emerging market indices are likely to face another tough year, so selectivity (the right countries and the right industries) will be critical to success.

History buffs may be comforted by the fact that January was a down month in both 1996 and 1998, and each followed a year in which the S&P 500 was up by more than 30%, just like last year. Despite the slow start, the S&P finished both of those years with 20%+ gains. Many of the same economic conditions – low inflation, weak job growth, and dysfunction in Washington – were present in both years, a sign that the early months of 2014 may not necessarily be indicative of what is to come.

Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value

 

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by thirdparty sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly-owned subsidiary of City National Bank.