Monday, 1 February 2010

Stocks down despite positive economic data

A series of positive economic reports in the last week of January could not save stock markets around the world from ending the month in negative territory.

Last week provided mostly positive data on the economic front.

In the United States, an advance estimate showed that the economy grew at an annualised rate of 5.7 percent in the fourth quarter of 2009. This was the fastest growth rate in six years.

In the euro area, confidence in the economy improved for a tenth consecutive month in January. The European Commission's Economic Sentiment Index rose to 95.7 in January from 94.1 in December.

In the United Kingdom, the economy returned to growth in the fourth quarter. Real gross domestic product increased 0.1 percent in the fourth quarter after having declined 0.2 percent in the third quarter.

Meanwhile, Japan's economy probably maintained its expansion in the fourth quarter for the third consecutive quarter. Japanese industrial production rose 2.2 percent in December, its tenth consecutive monthly increase.

In spite of the positive tone of the economic data, stock markets around the world fell last week.

In the US, the Standard & Poor's 500 Index fell 1.6 percent to 1,073.87 last week. This was the third consecutive weekly decline, its longest losing streak since July last year.

In Europe, the Dow Jones STOXX 600 Index fell 1.2 percent to 246.96 last week. This was also its third consecutive weekly decline.

In Asia, the Morgan Stanley Capital International Asia Pacific Index fell 4.5 percent to 116.83. This was its biggest decline since the week ended 20 February last year.

The weakness of stocks last week in the face of positive economic data suggests that investors have mostly already discounted the economic data and are now more focused on policy moves that could negatively affect markets such as US President Barack Obama's plan to curb risk-taking by banks and China's measures to cool its economy (see "Stock markets dip into the red for the year"). On-going sovereign debt worries in Greece and a few other European countries also surely contributed to the negative sentiment among investors.

The decline in stock prices last week leaves all the major national stock market indices in negative territory for the year.

Stock market performances year-to-date
 End 2009Close on
29 January
S&P 5001,115.101,073.87-3.7
FTSE 1005,412.885,188.52-4.1
CAC 403,936.333,739.46-5.0
Nikkei 22510,546.4410,198.04-3.3
Hang Seng21,872.520,121.99-8.0

The decline in stock prices last month, of course, brings to mind the adage: As January goes, so goes the year. Years in which the market was down in the first month tended to be years in which stocks underperformed.

This does not always hold true though. Stocks performed very poorly in January last year but went on to record big gains for the rest of the year.

Nevertheless, the weak performance of stocks last month does raise the odds that we will see a major market correction this year.

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