Market Minute: Stocks Started Off the Year Strong -- Maybe Too Strong


By JONATHAN FAHEY

NEW YORK -- The stock market may have packed much of its fun for the year into one exhilarating January.

The market charged to its best start in decades even though the U.S. economy and corporate profits haven't broken out of a three-year pattern of slow, steady improvement despite record-low interest rates and billions of dollars of stimulus and tax cuts.

This steady growth will likely make for a good year for stocks, but January may account for much of the year's rise, analysts think.

"We thought this was going to be a good year for equities, we just didn't think we'd get it all in the first month," says Barry Knapp, head of U.S. equity strategy at Barclays Capital. "I'd love for the market to keep going up but when I look forward I see a lot of headwinds."

Corporate earnings growth is expected to slow dramatically early this year. Higher taxes will probably crimp people's spending. The relief that prevailed after the fiscal cliff was averted will likely turn to anxiety as Congress bickers over a package of spending cuts. Job growth is steady, but unemployment has ticked up to 7.9 percent.

Adding to those worries is the economy's unexpected retreat in the fourth quarter. The slowdown resulted from one-time factors like lower defense spending, but it shows how vulnerable the economy is to government spending cuts and political fights.

"There's much more downside risk," says Doug Cote, chief market strategist at ING Investment Management. "Right now there's momentum behind the market and it seems to ignore bad news."

Markets surged as soon as the calendar turned to 2013 and kept rising for much of the month, pushing the Dow Jones industrial average to within a whisper of a record and pushing the S&P 500 past 1,500 for the first time in 5 years. The DJIA logged its best start to the year in almost two decades. The Standard & Poor's 500 finished the month 5 percent higher, its best start to the year since 1997.

February started off on the same foot: The DJIA finished up Friday 149 points to 14,010 and the S&P 500 rose 15 points to 1,513.

But the market may have gotten ahead of itself.

Now that half of companies in the S&P 500 have reported fourth-quarter earnings, profit growth is expected to be up 5.8 percent, according to S&P Capital IQ. While solid, that's a smaller gain than a year earlier, and the slowdown could continue. Earnings growth is expected to slow to 1.7 percent for the first quarter.

Corporations continue to lower investor expectations. Of the companies that have issued earnings guidance for the first quarter, 82 percent have reduced estimates, according to FactSet. In response, analysts have sharply cut earnings growth expectations over the last month -- by half for the first quarter and by 16 percent for the second quarter.

"Earnings are not a reason to be buying stocks right now," Knapp says.

Talley Leger, investment strategist at Macro Vision Research, notes that the stocks that have helped propel the market higher in January are companies in so-called "defensive" sectors -- such as health care providers and consumer staples producers. Those industries continue to perform well when the economy slows down because people still need to buy medicine and basic goods like shampoo and diapers.

"The market is slowly starting to realize that an air pocket opened up between where stocks thought the economy was and where the economy actually was," Leger says.

Leger and others predict a dip in the market sometime in the next three months as investors realize economic and corporate growth aren't quite as strong as predicted.

But that could allow the stock market to grow again in the second half of the year. While the economy might not yet be ready to accelerate quickly, analysts remain confident that it will keep growing.

And even if the market rises only modestly from here, it could still make for a strong year. As Howard Silverblatt, an analyst at S&P, notes, January performance is a good indicator of annual performance. In 61 of the last 84 years the direction of the market in the first month matched the direction of the market for the year.

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7 Comments

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dencuddy

Really Daily Finance? If Romney were elected you'd be telling us the exuberance of the markets, but Obama wins and the markets are too strong?

February 04 2013 at 4:36 PM Report abuse rate up rate down Reply
jyatt7

The market is a scam ! How can it break 14,000 with our economy in the toilet?? Its manipulated by insiders to extract money from the stupid !

February 04 2013 at 1:03 PM Report abuse +1 rate up rate down Reply
1 reply to jyatt7's comment
dembaitnswitch

Ben Bernanke

February 04 2013 at 1:35 PM Report abuse +1 rate up rate down Reply
Albert Gazalooch

Gee... what's going on here? Is Barry's rosy picture of the economy not as sweet as it looked on Friday? LOL.

February 04 2013 at 12:52 PM Report abuse rate up rate down Reply
1 reply to Albert Gazalooch's comment
dembaitnswitch

I really think it's sad, Obama made gunho speaches at three companies in America for photo-ops and since they have all gone bankrupt. The guy's a jinx, along with being a piss poor leader.

February 04 2013 at 12:56 PM Report abuse +1 rate up rate down Reply
dembaitnswitch

Ben Bernanke's funny money is floating the market.

February 04 2013 at 12:15 PM Report abuse +3 rate up rate down Reply
mrspelosi

dumbgop
negativity?........I bet ur a republican.

______________________________

You of all people have alot of nerve commenting about negativity dear.

February 04 2013 at 12:05 PM Report abuse +3 rate up rate down Reply
moretrorun

All talk aside, I guess those in the know feel that the re-election of the President is good for the economy after all.

February 04 2013 at 11:02 AM Report abuse -1 rate up rate down Reply
rkeeeballs

I think the big money creates these rumors just to see the weak and scared sell off so they can start buying everything up again at bargain prices. Remember, it's the big buyers that raised the market value up to begin with....It's called manipulation !.....They hope the sheep will all fall off the cliff.....BUY and HOLD !

February 04 2013 at 11:02 AM Report abuse rate up rate down Reply
donhellbound

who care's,been there done that.

February 04 2013 at 10:45 AM Report abuse rate up rate down Reply
ddstan1120

The libs are cackling about the Dow going over 14,000, but it can be assured that it will fall.
This euphoria will not last, and of course, it will be Bush's fault, as usual.

February 04 2013 at 10:28 AM Report abuse -1 rate up rate down Reply
1 reply to ddstan1120's comment
granthamplaster1

I agree with you-ddstan; The fact that the capital gains tax was about to kick-in I am not surprised by the "housing increase" nor am I shocked by the stock market rising- the real test is when during the 1st and 2nd quarter of 2013 when everything will free fall due to the Obamacare 3.5 surcharge (for each buyer & seller)that will be tagged on the homeowner seeling and the howmowner purchasing as well as the capital gains tax that is now effective. One thing also to consider- is the new rule for small businesses who will now be fined $75k for not sending out a 1099 for those who now make less then $600 instead of te previous $1,000.

Beleive the "mass hysteria" that the media is putting out there- for me, I will deal with the reality of it not the hype.

February 04 2013 at 11:01 AM Report abuse -1 rate up rate down Reply
Doug

It's guaranteed the stock market will go down or even crash. Investors are too much in a hurry to get rich off the profits of companies, which isn't going to happen, so they will start the sell offs soon to make their money. Part time work, temp jobs, and seasonal work is not enough to get the consumers to go out and spend or use their credit cards. There are still a lot of Americans out of work who have exhausted their unemployment compensation, and are eking out a mere existence. There are too many Americans who filed bankruptcy and don't have any extra money to put into the economy. It is a 3 ring circus. The capitalists, the consumers, and the government who all have over extended them selves, and now is not the time to get the economy going until debt is paid off and more money is put away in reserve. Yes the elite wealthy have their money in Swiss bank accounts. I am referring to the majority of Americans who want to spend but simply can't. We have to go though the next decade to pay off debt and save before the economy will roar back like it did after Reagan got the economy going after the lib Carter did nothing.

February 04 2013 at 10:14 AM Report abuse rate up rate down Reply