This is getting to be infectious — the S&P has now rallied for six straight weeks to start a new year, which is the first such occurrence since 1971 and the first time for any six-week period since last August. And to make this advance even more improbable, at the same time that the winning streak has been underway, the S&P also declined on every Monday of 2013 (there were only five as the financial markets were closed on January 21 in observance of the Martin Luther King holiday).
This brings to mind the old Wall Street axiom that says: “As January goes, so goes the rest of the year.” Last month was the 12th best January since 1950 and the 19th opening month in that period when the index rose by more than four percent. Only once since 1950 has the S&P fallen in the last 11 months of a year when it rose by more than four percent in January. Ironically that was in 1987 which began with the best January in history, an advance of 13.2 percent, and ended with the worst one-day plunge ever, a 21 percent decline on Monday, October 19 of that year.
There is, of course, no guarantee that history will repeat itself this year as, for instance, during the Great Depression of the 1930s, the market rose sharply during January on four occasions only to plunge the rest of the year; on one occasion, the S&P started the year with a decline and ended it with an excellent rally. Hopefully, this type of opposite to the usual pattern will not repeat itself this year.
One of the reasons for the steady market advance has been that fourth-quarter earnings have generally surprised to the upside, as with 350 S&P companies having reported, 72 percent of them have beaten the earnings consensus and 66 percent have beaten on the revenue side as well. Earnings are now projected to show a gain of 5.2 percent and readers of this column have observed the steady advance every week in this percentage, as profits were projected to be ahead by only 1.9 percent as the reporting period got underway a few weeks ago.
The percentage of companies that have beaten consensus earnings estimates has been 65 percent over the past four quarters and 62 percent since 1994, which is further testament to the strength of this reporting period.
Better economic reports have been a factor behind the market’s rise as well, and even though this past week was light in this category, the ones that were released did show an economy that is on a slow, steady growth path, as the January ISM Non-Manufacturing Survey, which covers more than 80 percent of the economy, maintained itself at 10-month highs and the December trade deficit narrowed to $38.5 billion, its lowest level in three years. This was the result of record exports and lower imports into this country, and this will most likely result in an upward revision to the next estimate of fourth-quarter G.D.P. that was originally reported to be -0.1 percent, which broke the streak of 12 consecutive quarterly advances. The next estimate will now probably show a 0.3 percent gain based on this narrower trade balance.
Then, of course, on days when the market hesitates, the “explanations” turn back to the E.U., which had been quiet for months but which has now become a focus of attention once again. Late last week, E.C.B. President Mario Draghi signaled that policymakers there are concerned that the euro’s recent strength might hamper their efforts to pull the region’s economy out of recession. In an attempt to weaken the euro, he said that “The exchange rate is not a policy target, but is important for growth and price stability” after the bank kept its benchmark rate at a record low 0.75 percent. To give the currency a push lower, he added that “We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”
While the 17-nation E.U. is starting to stabilize after the sovereign debt crisis drove it into a recession last year, the common currency’s recent gains could stymie a recovery before it has begun by limiting exports and pushing inflation too low through the import of what will now be cheaper-priced goods from abroad.
The euro has appreciated by 11 percent on a trade-weighted basis since Draghi pledged last July to do “whatever is needed” to preserve Europe’s monetary union, a comment that cooled off the unrelenting rise in bond market yields in huge debtor nations like Spain and Italy. And just when the euro seemed to be running into resistance on the upside, on Monday a top E.C.B. official said that discussions about an overvalued euro are just a “diversion” from individual governments’ task of sorting out their economies, which was a case of resisting political pressure to weaken the currency.
Perhaps the most important reason for the ongoing upward movement in stocks this year is that the Federal Reserve is still aggressively stimulating an anemic economic recovery that has failed to bring rapid progress on employment. The U.S. economy’s pause in expansion so far in the fourth quarter is seen as temporary, as it continues to grow at or below two percent, which is far below the rate that economists say is needed to bring down the current 7.9 percent jobless rate. In response to the financial crisis and recession of 2007–2009, the Fed lowered interest rates to near zero and bought over $2 trillion in mortgage and Treasury securities in an attempt to keep long-term interest rates at low levels. And last September, it began a new, open-ended round of $85 billion monthly bond purchases.
And what would another week be without some political drama ahead of the president’s State of the Union message last night. There was a report that Senate Democrats are getting close to proposing a $120 billion plan for a 10-month delay to the sequester, which are the across-the-board spending cuts that are scheduled to begin on March 1. This proposal would ostensibly cover half the cost of delaying these cuts through revenue increases and the other half would be taken care of by spending reductions.
Ahead of the president’s speech, polls found that Americans were eager to hear his address on the U.S. economy and federal deficit, with more than half still convinced the nation is in a recession, a poll released on Monday found.