As the stock market moved between negative and positive territory on the last day of January, 2012, the Dow Jones Industrial Average was nevertheless poised to close with their biggest January gain in 15 years – despite closing down a few points for the day. In fact, it could be the best January for Standard & Poor’s (S&P) and Dow since 1997 and since 2001 for the Nasdaq.
“Everyone is cautiously waiting for the close today to see if we can put this on the board,” said Frank Davis, director of trading at LEK Securities. “It would be a pretty darn good foothold to start the year.” Stocks initially rose after European Union leaders agreed to strengthen their financial firewall. Additionally, most members have agreed to sign a new fiscal compact. Even so, 2012’s first summit ended without new solutions to resolve Greece’s debt crisis. “There’s positive news coming out of Europe, but it’s still very tenuous with Greece,” said Jeffrey Phillips, chief investment officer of Rehmann Financial. “Every time we see something positive there, we seem to see it reverse in four or five days.”
The S&P 500 rose 4.3 percent in January, which is its best performance since the 6.1 percent gain that occurred in January of 1997. One year ago, the market added a respectable 2.3 percent in January. Following a trying 2011, investors had such low expectations that it’s easy for the year’s earliest reports to come in better than expected, said Jerry Harris, chief investment strategist at the brokerage firm Sterne Agee. “I don’t see anything really glamorous or tremendous about the economy or earnings,” Harris said. “But I think they’re very acceptable, and things are grinding along.”
“Longer-term investors should not be fooled by what appear to be attractive valuations for financials,” said Brian Belski, Oppenheimer & Co.’s chief investment strategist. Any investor should look three to five years into the future and invest less money in these stocks than their S&P 500 weight would suggest because they account for roughly 14 percent of the index’s value. The financial index was recently valued at 12.4 times earnings, which is about twice as high as it was two years ago. “Most of these companies operate in a ‘whole new world’ of increased scrutiny and regulation,” Belski wrote, noting that more restrictive capital requirements, imposed as part of that shift, will hurt profitability.
The European debt crisis is a major culprit in the market’s volatility. Confidence that American markets can remain relatively unaffected by Europe’s difficulties has fueled gains in 2012. Money managers, some of whom missed the upward move, seem to be willing to buy on day-to-day declines. “The action that we’ve seen today is very similar to what we’ve seen throughout most of the year so far,” said Ryan Larson, head of equity trading at RBC Global Asset Management. “We see the resilience showing in U.S. markets and I think that’s a theme that we’ve seen throughout 2012. The U.S. appears to be slowly, slowly in the early stages of a decoupling from the Eurozone,” he said.
Chris Cordaro, chief investment officer at RegentAtlantic Capital, a wealth management firm, believes equities will finish sharply higher this year as Europe’s problems are resolved and investors buy into stock valuations that were beaten down through much of last year. “We could definitely end the year much higher on equities,” he said. “We have been favoring equities in our portfolio. We have just increased our exposure to emerging markets.”
More bad news came January 31 when the Conference Board’s consumer confidence index fell to 61.1, missing the forecast 68. December’s level had experienced a slight upwards tick to 64.8 from 64.5. “The US consumer has still seen a very firm turnaround since October, this also is likely to reflect the increase in gasoline prices since the start of the year,” wrote David Semmens, U.S. economist with Standard Chartered. “While the U.S. consumer is feeling better, the turnaround is still likely to be volatile.”