Lisa Black, Head of Global Public Fixed-Income Markets
Fixed-income and equity markets alike posted strong returns in January amid a steady stream of favorable economic data and some signs of modest progress in addressing the debt crisis in Europe. The generally positive news extended into the first few days of February, making the past week another good one for investors.
The resilience of the U.S. economy was evident in better-than-expected manufacturing activity, which expanded in January for the 30th consecutive month, as well as rising auto sales (up 11% in January versus a year ago, the fastest rate of growth in almost four years), and increased construction spending (up 1.5% in December 2011, well above consensus forecasts). The labor market also showed signs of continued improvement: first-time unemployment claims dropped to 367,000 for the week ended January 28, while 170,000 jobs were added to private payrolls in January, according to the monthly ADP Employment Report. Optimism about the job market was further reinforced on Friday morning, with the Labor Department’s nonfarm payrolls report showing the economy added 243,000 jobs in January, nearly double consensus forecasts of about 125,000. The national unemployment rate fell to 8.3%, its lowest level since February 2009.
In fixed-income markets, demand for “spread products” (higher-yielding, non-U.S. Treasury securities) has been strong, as the improved economic climate has led to an increase in investors’ appetite for risk. As a result, spread sectors broadly outperformed Treasuries in January. Based on the respective Barclays Capital bond market indexes, U.S. high-yield corporate bonds returned 3.04% for the month, while investment-grade corporate bonds gained 2.21%, commercial mortgage-backed securities rose 2.05%, and global emerging market bonds returned 2.50%. The Barclays U.S. Treasury Index was up only 0.42%.
Meanwhile, almost all government bond markets in the eurozone rebounded in January, as fears about the region’s sovereign debt crisis abated somewhat. The Barclays Capital Euro Treasury Index returned 2.83%, with lower-rated issuers such as Italy (+6.38%), Ireland (+7.79%) and Spain (+2.97%) leading the pack, while Germany (+1.01%) and France (+1.35%) trailed.
Equity markets also finished the month on a very upbeat note. The S&P 500 Index gained 4.5%, marking its best January in 15 years. Based on MSCI index performance, 42 out of 45 global equity markets had positive returns, with only Ireland, Portugal and Spain declining. Interestingly, Greece advanced 24.68% and Italy rose 6.36%.
Looking ahead, there is general agreement among the Federal Reserve, the Obama administration, economists, and market participants that the housing market remains a missing link in the U.S. economic recovery. The administration’s recently proposed refinancing program, however, faces a daunting path to implementation, given the current political gridlock in Washington. In the meantime, even with home prices at or near their bottom and mortgage rates at record lows, further declines are possible due to the number of foreclosures still making their way through the system. Only after home prices have stabilized can we expect to see a return of confidence to the housing market, which should help relieve pent-up demand—ultimately contributing to job creation in mortgage finance, home goods, and residential construction, along with a broader psychological lift to consumer confidence and related spending patterns.
In addition to housing, other key issues on the horizon include an active political calendar leading up to the 2012 elections, details about the emerging fiscal pact among European Union members, the direction of oil prices, and ongoing economic releases out of the U.S., Europe, and China. If economic conditions continue to improve, the recent rally in fixed income markets may have further legs. Equity markets may also have room to rise, especially as U.S. earnings estimates have begun to perk up again.
The information provided herein is as of February 3, 2012.
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Past performance is no guarantee of future results.