Schroders: Negative returns for US-equities in January

US

The S&P 500 fell 3.0% in January on the back of a disappointing fourth-quarter earnings season, where worries about the impact of the strong dollar and slowing global growth were a recurrent theme. While the consumer may have remained in a buoyant mood, fragile business confidence - evident in disappointing durable goods orders - dominated sentiment. Even a dovish statement following the Federal Reserve’s monthly rate-setting committee could not dispel the gloom.

News of better-than-expected December housing starts and home sales was consistent with the Conference Board’s Consumer Confidence index striking a seven-and-a-half-year high in January, despite confirmation that December retail sales had disappointed. However, in the final trading days of January technology giant Microsoft, chemicals business DuPont, industrial conglomerate United Technologies, consumer goods leader Procter & Gamble and machinery manufacturer Caterpillar all produced disappointing results. The first four over these variously cited global growth headwinds and the strong dollar, while Caterpillar specifically pointed to the oncoming cut in energy sector capital expenditure plans resulting from the oil price collapse. The poor corporate results coincided with news that core durable goods orders (excluding defence) fell 0.6% in December, following a similar decline in November. The risk-off sentiment was reflected in a further retreat in the yield on benchmark 10-year Treasuries which ended the month at 1.33% versus 1.76% going into it. Worse-than-expected fourth-quarter GDP numbers did not help sentiment either.

Utilities was the month’s best-performing sector, as would be expected from a bond proxy at a time of falling rate expectations in anticipation of global disinflation and amid eurozone deflation. Healthcare was another strong performer, where the biotechnology names stood out. The banks performed poorly, particularly the investment banks, as with their preliminary results came news of further provisions to cover regulatory fines, while their fixed income, currency and commodity trading operations struggled with difficult market conditions.

Eurozone

Eurozone equities made a strong advance in January with the MSCI EMU index returning 7.4%. Share prices were supported by the ECB’s long-awaited announcement of a programme to buy sovereign bonds. The central bank’s asset purchases will total €60 billion per month, starting from March 2015 and running at least until September 2016. The programme is designed to boost growth and increase inflation back towards the ECB’s target of close to 2%. Figures for December confirmed that the single currency area had fallen into deflation with an annual inflation rate of -0.2% compared to 0.3% in November. The preliminary inflation rate for January was -0.6%. The ongoing decline in the oil price was largely responsible for the drop.

There was more positive economic news for the eurozone with the flash composite purchasing managers’ index (PMI) for January edging up to 52.2 vs 51.4 in December. Meanwhile, the German ZEW and Ifo sentiment surveys showed improvement, supported by the ongoing weaker oil prices. Spain posted Q4 GDP growth of 0.7% quarter on quarter, up from 0.5% in Q3. Germany’s Dax was one of the best performing indices over the month while Spain’s Ibex 35 was a laggard. All sectors posted positive returns, led by consumer staples and discretionary, while financials underperformed.

Concern over possible eurozone break-up risk was back on the agenda as Greece’s general election was won by the left-wing, anti-austerity party Syriza. However, the impact was limited in the wider eurozone with little change to Italian and Spanish government bond yields. Outside of the eurozone, the Swiss National Bank’s surprise decision to abandon the Swiss franc’s peg to the euro caused significant market volatility with a sharp appreciation of the franc and shares of exporters coming under particular pressure.

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