January – Month in Review

• Unemployment was down for the fourth straight month; December’s 8.5% was almost a full percentage point lower than the previous December’s 9.4%. The Bureau of Labor Statistics said the biggest gains were in transportation/warehousing, retail, and manufacturing.
• The U.S. economy grew at an annual rate of 2.8% during 2011’s final quarter. The initial estimate, which could be subject to revision, was higher than Q3’s 1.8%, but the Bureau of Labor Statistics said higher inventory levels were a major factor.
• Standard & Poor’s downgraded its long-term ratings on nine eurozone countries as well as the European Financial Stability Fund. The downgrades had little impact on financial markets, which seemingly chose to focus on the renewed possibility of a deal on Greek debt. However, an agreement with bondholders had not been reached by month’s end. Meanwhile, yields on Portuguese 10-year bonds exceeded 16%, a euro-era record for the country, while Italy was able to auction 10-year bonds at just over 6%.
• The Federal Reserve said it expects to keep interest rates at “exceptionally low” levels through at least late 2014, longer than previously anticipated.
• Inflation at the consumer level was unchanged in December, helped by declining energy costs, but food and energy costs helped push consumer inflation to 3% in 2011, almost twice 2010’s 1.5% increase but still within the Fed’s comfort zone. At the wholesale level, food and energy costs cut inflation by 0.1% in December, but for all of 2011, wholesale inflation was up 4.8%, an increase from 2010’s 3.8%.
• Interest rates on 30-year fixed-rate mortgages hit a new all-time low of 3.88%, according to Freddie Mac, marking the seventh consecutive week below 4%. According to the National Association of Realtors®, home resales were up 5% in December, and the Commerce Department said new housing starts of single-family homes rose 4.4%. However, the Commerce Department also said December sales of new homes were 2.2% below November and 7.7% below December 2010. Home prices continued to fall; the 20-city S&P/Case-Shiller index was down 3.7% from a year ago.

Eye on the Month Ahead

As Greece draws closer to the scheduled date for receipt of its next bailout installment, an agreement with private bondholders will become increasingly critical. As the Q4 corporate earnings season comes to a close, investors will try to gauge whether the results can be sustained into the new year, and whether large caps will continue to be eclipsed by the Nasdaq and small caps.