Over the last 5 years we have seen the Dow Jones index grow from a low of 6547.10 on 03/09/2009 to a recent high of 16,576.66 on 12/31/2013[2].  Quite frequently our scope can become narrowed to the current view of what’s going on, but sometimes it’s good to look back and see the 127.99% cumulative return that the market has brought over the last 5 years (3/9/2009 to 12/31/2013).

Headwinds persist, as they have for much of the past 5 years, however they have greatly diminished; a federal budget is in place for the next 2 years, sequester spending cuts have abated, corporate profits are soaring, and corporate revenue is beating long term averages for growth, which signals that profits are coming from healthy sales as opposed to spending cuts.

If we have these greatly improved factors, then why have we seen such a poor performance for the month of January, (4.52%)[3]?  As discussed last week, it appears a bubble created by low rates and strong liquidity in the US has formed in the emerging markets region.  This bubble is going through pains in order to deflate calmly as opposed to popping.

This is not a bad thing for our market, as it has not had a meaningful correction (in excess of 10%) for 26 months.  It’s just not enjoyable to go through.  Here is some of the data from last week:

–        US 4^th Qtr GDP showing the economy expanded at a rate 3.2% and 3.7% for the second half of 2013, the best second half growth since 2003[4].

–        Consumer confidence increased from 77.5 to 80.7 in January; which was reflected in consumer spending, up 3.3% in the 4^th quarter, per US Dept of Commerce.

–        The S&P Case –Shiller US Home Price Index grew by 13.7% through November, year over year.

–        It’s not all rosy, US Manufacturing PMI decreased to 53.7(over 50 indicates expansion) in January. This is not too surprising as, much has been made of heavy inventories from the 3^rd quarter and harsh weather across much of the nation.

There are several signs that point to continued expansion during 2014; however, it appears that due to valid concerns in the emerging markets region, the markets have taken a much needed breather from the growth rate it has seen over the last 26 months, 55.57%[5].

Internationally, Japan’s continued fight to move towards inflation and away from the deflation continues to show strength.  Last week it reported Core CPI at 1.3% year over year in December.  German business sentiment rose to 110.6[6], its highest level in 2.5 years. Turkey increased their key interest rate in an attempt to lure investors back.  An interesting move, usually an indicator of tightening an over-heating economy; this should have long term negative implications for Turkey if it does not succeed in generating the interest it’s after.

If you would like an in-depth analysis of your current positions and allocation, please feel free to call Jason Roque at 719-313-7536 to schedule an appointment.

Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.  Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.

Sources: mfs.com, oppenheimerfunds.com, investing.com, yahoo.com, and morningstar.com