U.S. stock prices rose last week for the first time in the past four. After another sharp loss to begin the week on Monday, the S&P 500 reversed direction and posted a gain of 0.8%. Although it still leaves stocks 2.8% lower on the year, the relative stability provided a welcome relief from the anxiety of steadily falling prices between Jan. 22 and Feb. 3, which trimmed 5.6% off the index. A similar trading pattern and similar return occurred in most European equity markets.
That was not the case in Japan, where stocks fell 3.0%, despite rising over the second half of the week. The Nikkei index is lower by 11% in local currency terms to start the year.
Emerging markets suffered only fractional declines, as gains in Europe, the Middle East and Africa offset weakness in Asia and Latin America. Turkey, in particular, rallied strongly after the sharp losses of the previous three weeks, as the lira stabilized. Overall, the MSCI Emerging Markets index fell 0.3% for the week and is down 4.8% for the year. The MSCI All Country World Index rose 0.5% in local terms, leaving it lower on the year by 3.0%.
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The better tone in equities seemed to derive less from any positive news than from the absence of bad news. But it was enough to result in an almost 30% decline in the VIX index between Monday and Friday.
Jobs Report Inconclusive
The headline economic report of the week in the U.S. was the January employment report, which was ambivalent at best. The 113,000 new non-farm jobs created fell well short of the expected 180,000 and kept alive the discussion of whether the softer data lately represents a genuine slowdown, or rather has been distorted by the weather.
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Most of the shortfall in jobs came from a contraction in government payrolls, as the private sector added a decent 142,000. The unemployment rate fell to 6.6%, inching ever closer to the Fed’s threshold of 6.5%, and the recently much-discussed labor force participation rate actually rose. Elsewhere, there was also stability in the emerging market currencies which had been under such pressure two weeks ago.
Bond yields traced a similar pattern to stocks. After bottoming at 2.58% on Monday, its lowest rate since last October, the yield on the ten-year note climbed to 2.68% by week’s end, as the better sentiment toward equities drew money away from bonds. The Barclays U.S. Aggregate Bond index was fractionally positive on the week, and is higher by 1.6% on the year, while the High Yield Index also rose slightly to bring its return on the year to 0.9%. Municipal bonds even rose fractionally on the week, shaking off the high profile downgrading of Puerto Rico to junk status by both S&P and Moody’s.
The economic calendar in the week ahead contains several closely watched January releases, including retail sales and industrial production, and preliminary consumer sentiment for February. None are expected to be particularly robust, nor to settle the issue of the extent of weather influence.
Looking ahead, the latest period of weakness in equities has moderated some of the concerns over valuation and sentiment. But whether stocks can mount a sustained period of strength will depend on whether the economic data firms. Earnings season has been acceptable, but guidance has been cautious. And we likely need a little more time to be clear of the influence of weather on the data. For stocks to mount a renewed period of strength will ultimately depend on whether that data firms sustainably.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
MSCI-All Country World is an unmanaged index representing 48 developed and emerging markets around the world that collectively comprise virtually all of the foreign equity stock markets.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
The Barclays Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity.
The Barclays U.S. Corporate High Yield Bond Index is a market value-weighted index which covers the U.S. non-investment grade fixed-rate debt market. The index is composed of U.S. dollar-denominated corporate debt in Industrial, Utility, and Finance sectors with a minimum $150 million par amount outstanding and a maturity greater than 1 year. The index includes reinvestment of income.
It is not possible to invest in an index.
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