January 15. 2013
Stocks’ Strong Start to 2013 Continues The stock market rally that began the year continued last week, as the Dow Jones Industrial Average climbed 0.4%, the S&P 500 Index advanced 0.4% to 1,472 and the Nasdaq Composite rose 0.8% to 3,125. After only two weeks, US stocks are up between 3% and 3.5% for the year. European stocks have posted similar gains and equities in Japan have advanced even further. What’s Behind the Market Rally? The rally can be attributed to three factors, the first two of which are likely to be temporary. The first is obviously the relief over the US fiscal cliff deal. By the end of 2012, investors had become increasingly nervous over the fate of the fiscal cliff and were selling off stocks. Given that the January 1 deal averted a worst-case scenario, some of these same investors have moved back into the markets. As a related point, some investors began selling winning investments in December in an attempt to generate capital gains in 2012 before capital gains taxes were scheduled to increase in 2013. Because capital gains rates did not change for most Americans, however, many investors are now buying back the stocks they had sold. Second, stocks are benefitting from a normal period of seasonal strength. While the socalled “January effect” may not be as significant a trend as some would believe, there is a modest historical tendency for stocks to advance in the first month of the year. This year, we have been seeing inflows into equities, with much of the money moving into higher-risk areas of the markets and into emerging markets equities in particular. The third factor is that economic data has generally been better than expected globally. Manufacturing data from China is confirming that an economic hard landing has been avoided and there are some similarly positive signs from the US financial services sector. The global economy is starting 2013 with some momentum. Bonds Spanish bond prices advanced over the week, pushing two-year yields to their lowest since October 2010. This advance followed the first debt auction of the year, in which it sold more securities than planned. German 10-year bund prices fell after the ECB left rates unchanged and pointed to economic recovery as the year progresses, damping demand for the region’s safest assets. Overall, the Merrill Lynch Over 5 Year Government Bond Index gained 0.3%. Currencies
The euro strengthened sharply against almost all of its major trading partners as European policymakers signalled optimism for the eurozone’s economy. Sterling slipped to a ninemonth low against the euro after the UK Prime Minister predicted a difficult year for the UK while. Further to this, manufacturing production unexpectedly fell in November. The €/$ rate finished the week at 1.34, a strengthening of over 2%. Oil The West Texas oil price rose marginally over the week. These gains, however, were pared following China’s inflation data. Its inflation figure unexpectedly accelerated, increasing concerns that economic stimulus may be curbed. The price finished the week just below $94 a barrel, a weekly gain of 0.5%. Source: Bloomberg, Zurich Investment Managers, Aviva Investment Managers & Blackrock