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US financial markets start year without a bang
But a spell of sluggishness is a small thing compared to previous years' turmoil
By CHET CURRIER
TO JUDGE by one early portent, a long, sluggish year may be in store for the US financial markets. That's the signal sent by the behaviour of stock prices in January, which some investors watch as an indicator of how things are likely to go in the next 11 months. 'As January goes, so goes the year,' say Yale Hirsch and Jeffrey Hirsch in their annual Stock Trader's Almanac, which has popularised what it calls the January barometer over the past 35 years. This January hasn't gone much of anywhere. The Standard & Poor's 500 Index, following through on last year's gains, did touch a six-year high last Wednesday. But it dropped back the very next day. By the end of the week, the S&P 500, the Nasdaq Composite Index and the Dow Jones Industrial Average showed a mixed bag of fraction-of-a-point gains since New Year's. Until it fell 1.13 per cent on Thursday, the S&P 500 had not moved as much as a percentage point, either up or down, in any trading day since November. The average year-to-date gain among all stock and bond mutual funds tracked by Bloomberg has been a rollicking 0.3 per cent.
'It's a low-return, low-volatility environment,' said Leo Tilman, senior managing director and chief institutional strategist at Bear Stearns & Co, attending the World Economic Forum in Davos, Switzerland. 'This uncertainty can last for a very long time.' The problem isn't the broad economic or business outlook, which most students of these matters consider bright. It's the state of the markets themselves, almost becalmed by complacency. One symptom: paper-thin pricing differences between top-quality and riskier investments, especially in the bond market. The markets have seen great structural changes in recent years, including the rising use of derivative securities such as credit-default swaps, and a fast-growing private equity market alongside the public stock market. A lively argument can be started at any time on Wall Street whether these new centres of activity, less widely understood than the traditional markets, have introduced excessive risk into the system. Nobody reports on the evening news how the private equity market fared today. In the case of derivatives, a presidential study group headed by Treasury Secretary Henry Paulson has been commissioned to gauge how much heightened leverage may have increased the markets' vulnerability to a shock. In the absence of definitive answers, the questions by themselves are enough to deter risk-takers - especially at a time when securities such as high-yield bonds and emerging markets stocks and bonds are priced so close to the top-quality stuff. 'The world isn't pricing risk appropriately,' said another Davos visitor, Steven Rattner, co-founder of the buyout firm Quadrangle Group LLC. 'Investors are simply not being paid for the risks they're taking.' Similarly, they get none of the usual extra inducement to buy longer-term bonds. After a general rise of interest rates this month, 10-year Treasury notes still yield less, at around 4.89 per cent, than two-year notes, at around 4.97 per cent as of early this week. Happily for stockmarket bulls hoping for a fifth straight year of gains, an uninspired showing in January does not absolutely guarantee a similar result for the year as a whole. In 2005, according to Bloomberg, the S&P 500 posted a 2.4 per cent decline including dividends in January, only to finish the year with a net gain of 4.9 per cent. In 2003, the index dropped 2.6 per cent in January. Yet, the full year turned out to be the best by far in the '00s to date, with a 28 per cent total return. A good January, conversely, doesn't automatically assure a good year. Look no further back than 2001, when a 3.5 per cent gain in the opening month dissolved into a 12 per cent loss by year-end. That, of course, was the year of the Sept 11 terrorist attacks in New York and Washington. In comparison to the turmoil of those days in the markets, a spell of sluggishness now may seem a small thing to complain about. - Bloomberg | ||||
