January 2011 Monthly Recap

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Posted on February 8th, 2011

Market Update – A Recap Of January

January continued the equity market strength, with the Dow finally breaking 12,000, a milestone not seen since the summer of 2008. In addition, 72% of companies reported earnings in January beating expectations. Valid concerns persist about the bull market being a liquidity event orchestrated by the Fed; however, economic statistics show a continued pickup in the economy. Interestingly, we saw a divergence from the simple “risk on, risk off” market that has lately simply rewarded or punished stocks based on their riskiness; as we see larger cap stocks outperform small caps.

The fixed income markets continued their steady climb in yield that began this fall. The broad corporate bond market showed a slight negative return, while the high yield (low credit quality) bonds did quite well, consistent with expectations in a month of economic strength but rising yields. Municipal finances continue to be a lightning rod and individual investors in high tax brackets have historically been the major holders of muni bonds and the market therefore is susceptible to emotional “headline risk”. Institutions are typically less interested in the tax-free benefit, instead opting for higher yield taxable bonds. A 60 Minutes interview by Meredith Whitney (and later New Jersey Governor Christie) emphasizing the stress on state and municipality finances set off a firestorm of individual investors selling off their holdings in December and, to a lesser extent, in January. In addition, the expiration of the popular “Build America Bonds” program created a wave of issuance by municipalities in advance of the expiration. The selloff, combined with the extra supply continued pressure on municipal bonds.


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