After a blistering rally that took stocks to record highs last year, January could not have been more different, as the Dow Jones Industrial Average (^DJI) fell more than 5%.
In the first month of the year, traders worried the financial health of both the U.S. and smaller nations meant stocks were too dangerous to continue owning for the time being, especially after a nearly uninterrupted rise that began in early 2009. Those jitters continued on the first trading day in February, driven by weakness in a manufacturing index from the Institute for Supply Management.
By the close of the market's session, stocks had crumbled, with the Dow dropping 326 points, ultimately finishing 2.1% lower. The S&P 500 (^GSPC), a broader measure of U.S. companies, ended down 2.3%. The worst of the three big stock averages was the Nasdaq (^IXIC), which fell 2.6%
Jeff Hirsch of the Stock Trader’s Almanac says the downtrodden start to the year has delivered three messages to investors:
1) The strong vs. the weak
Looking through January’s winners and losers, it’s hard to ignore the distinct weakness in retailers. Whether it was Amazon.com (AMZN), Home Depot (HD), Starbucks (SBUX), Coach (COH) or Best Buy (BBY), this sector that's sensitive to consumer moods took a hard hit last month. Same for insurers, who suffered their biggest monthly drop in over two years, with names such as Travelers (TRV), Chubb (CB) and Progressive (PGR) all down sharply.
On the plus side, gains during the month were limited to stocks viewed as capable of withstanding selloffs and doubts, such as the utility sector and health-care stocks that are seen as poised to benefit from Obamacare.
2) What's the Fed's role?
The Federal Reserve's announcement that it will pare its long-running bond-purchasing program came in mid-December, but the actual implementation didn’t begin until January. However, contrary to commonly held expectations, the scale-back didn't cause rates to rise.
What happened instead? Fear won out, sending traders to "save havens" such as gold that are viewed as less risky than stocks in times of angst.
3) Shaky ground
That return of fear — and its cousin volatility — are the predominant takeaways in the early weeks of 2014. After a period of relative calm, the CBOE Volatility Index (^VIX), viewed in general terms as a measure of how spooked the market is, screamed higher. Its 25-plus percent pop was not only the biggest such move in two years, but it underscored the tensions running alongside the nearly half-decade-old bull market.
That the source of our fear was tied to currency trading in places like Thailand, Turkey and Brazil is a reminder that we're in a global economy — and that won't ever change now. A problem overseas, either real or perceived, can be a problem for U.S. stocks in a matter of minutes.
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