Economic Backdrop

The monetary policies of global central banks remain accommodative and are expected to continue as such, while global growth builds momentum. According to the International Monetary Fund (IMF), global activity increased in the second half of 2013, receiving a boost from higher inventory demand. Expectations from the IMF of 2014 growth are an increase to 3.7% from 3.0% (2014), with notable improvements from developed economies. Economic improvements led the U.S. Federal Open Market Committee to begin reducing its bond purchases this month with a further monthly reduction of $10 billion announced at its latest meeting.

In the U.S., reports were largely positive outside of housing, where negative momentum intensified. The first estimate of fourth-quarter U.S. economic growth from the Department of Commerce was 3.2% – slightly better than consensus but slower than in the third quarter with the partial federal government shutdown in October weighing. Manufacturing growth, as measured by the Markit’s Purchasing Managers’ Index (PMI), also slipped in January on severe weather, but remained in positive territory. The Conference Board’s consumer confidence index remained healthy, rebounding from its interim low in November to post better than expected results. The employment data was mixed as the unemployment rate fell to 6.7%, but December nonfarm payrolls disappointed. The drop in the unemployment rate was attributed to a significant drop in people actively seeking employment. Housing momentum slowed significantly in January, rising only 0.1% from a month earlier, according to the Federal Housing Financing Agency House Price Index. Constrained supply, elevated prices and higher mortgage rates appear to be limiting sales.

The Eurozone continued its slow recovery with gains in industrial and manufacturing data, while Eurostate confirmed its prior estimates of near-zero third-quarter economic growth. Industrial production rose sharply in November, reaching its best level since mid-2012. Germany led the way as most countries posted positive growth. Markit’s Eurozone-wide PMI hit the highest point since early 2011, marking the seventh straight month of economic expansion. The European Commission’s Economic Sentiment Index rose again in January and now stands at levels last seen in mid-2011. However, inflation in the region unexpectedly dipped in January to match the recent October 2013 low of 0.7%, to support fears of deflation. Finally, unemployment declined for the third straight month in December, with a much-needed drop in youth unemployment.

Market Impact

Global bond yields declined in the month with investors favoring the security of fixed income over equities. Concerns related to the U.S. Federal Reserve tapering of bond purchases, sustainability of corporate profits and Chinese output resulted in shifting investor sentiment and a solid start to the year for global fixed income. Risk aversion in January favored government bonds (based on the Barclays Global Treasury Index return of 1.34%) over general credit exposures (Barclays Global Aggregate ex Treasury Index return of 0.73%). U.S. fixed income markets were notably strong (Barclays U.S. Aggregate Index return of 1.48%), outperforming the broad global bond market return of 1.06% (Barclays Global Aggregate Index). High-yield bonds, as measured by the BofA ML U.S. High Yield Master II Constrained Index return of 0.74%, failed to keep pace with investment-grade debt, while emerging-market debt continued to struggle and posted a loss in the month.

Global equity markets retreated to start the year with stocks in emerging markets suffering a more dramatic setback than developed stocks. After a difficult 2013, emerging market stocks, as measured by the MSCI Emerging Markets Index, fell 6.49%, while developed markets (MSCI World Index) fell 3.70%. Performance was negative across most equity sectors of the MSCI AC World Index, excluding the health care sector, which posted a modest gain. Along with health care, relative performance was led by the utilities and information technology sectors, while lagging market areas included energy, consumer staples and telecommunications. Across developed market equities, smaller stocks outpaced larger stocks, which is not typical in an environment of risk aversion. In general, aside from differentiation by market capitalization, most developed markets performed in similar fashion. In emerging markets, select areas of Europe and Latin America again struggled.

Index Data

  • The Dow Jones Industrial Average Index returned -5.19%.
  • The S&P 500 Index posted a loss of 3.46%.
  • The NASDAQ Composite Index fell 1.70%.
  • The MSCI AC World Index, used to gauge global equity performance, fell by 4.00%.
  • The Barclays Global Aggregate Index, which represents global bond markets, returned 1.06%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” increased in the month as a whole, moving from 13.72 to 18.41.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $98.42 a barrel at the end of December to $97.49 on the last day in January.
  • The U.S. dollar slightly strengthened against the euro and sterling, while it weakened versus the yen. The U.S. dollar ended January at $1.35 against the euro, $1.64 versus sterling and at 101.99 yen.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.