January, the Super Bowl and Emerging Markets
That’s not a combination that would usually come to mind but, during this past week in the markets; those were the main topics of conversation.
January effect
CNBC had a headline Friday touting the fact that January was the “worst month for US stocks in more than a year”. This reinforced all kinds of comments suggesting that since January wasn’t so hot, we can just write off the year.
This is due to the so-called January effect. According to data from S&P/Dow Jones Indices, over the past 35 years, the S&P500 has followed what happened in January 71% of the time.
Dan Greenhaus, chief strategist at BTIG, says the theory is easily refuted by data. “Since 1960, 12 of the 21 Januarys had stocks trading lower. In those 12, we’ve seen the subsequent 11 months trade higher, including four of the last five instances.”
Randy Frederick, managing director of active trading and derivatives at Charles Schwab, said., “If you look at years when January closes down, the odds of an up year are only 46 percent, based on patterns going back to 1951. That’s basically a coin flip.”
Super Bowl theory
Speaking of coin flips…
Howard Silverblatt at S&P Dow Jones Indices reports that if the Super Bowl is won by an NFC team (like the Seattle Seahawks, for instance) or a team with original pre-conference NFL roots (like last year’s Baltimore Ravens), the market is likely to go up. While it’s an arbitrary barometer, he said that the indicator has been correct 37 of the last 47 years, or 78.7% of the time, on a total return basis for the S&P 500. So, go “Hawks…
Emerging markets
I never cease to be amazed at the conclusions and commentary put out by the media regarding economic topics. They’re trying to put the cause of the market drop and volatility at the Fed’s feet, equating this with the Euro challenges of a couple years ago. I wonder if they know that the countries in question have very little overall effect on the global economy? If conclusion jumping were an Olympic sport, these media folks would sweep the medals.
We had high volatility in the markets this past week due to concerns about these emerging market folk, As one result, we saw the 10 year US Treasury rates drop as foreign money sought a safe haven.
The actors causing the troubles included Turkey, South Africa, Argentina and, to an extent, Russia and Australia. China lurked in the background as a cause too. A drop in consumption suggested that their imports would remain low.
These countries (not China) saw the value of their currencies drop. All (ex-China) had to raise their local interest rates to support their currencies. Countries such as Mexico and India were tarred by the same “emerging markets are bad brush” and they’re fine.
In fact, the real reasons are local. South Africa and Australia, for instance each have economies very closely tied to commodities, especially metals. Metals haven’t done very well since mid-2011 so, at some point, there had to be a reckoning. Argentina has a dysfunctional government – even more than ours, can you believe…
Turkey had the biggest currency drop. Their lira had been held back by their Prime Minister’s public opposition to any rate hikes. In other words, all are local causes.
The media brain trust had all this turmoil occurring due to the effect of the Fed’s tapering. Excuse me, but one of the Fed’s main jobs is to be the lender of last resort for US banks – not act as a stabilizer for other world banks.
I applaud the Fed for not giving in to media pressure and, in announcing an increase in the amount of tapering it’s planning, for moving closer to getting rid of the QE policy that has hampered growth.
Conclusion
Given the underlying strength, resilience and flexibility of our economy, I remain positive on the markets going forward.
We’ve seen record bailouts from stock funds over the past few weeks. Don’t be short-sighted like those people. Stay with your strategy, stick with quality and mute those 10 second, “the world is ending; film at 11” spots…
Cheers!
Mike
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Securities and Investment Advisory Services offered through KMS Financial Services, Inc.
To get an overview of economic conditions, use this link. It’s updated monthly.http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx
Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment. Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
