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January 2012 Market Update

By SEI Investment Management Unit

  • Credit rating downgrades and mixed economic news in Europe undercut optimism, but strong economic data releases from the U.S. and continued central bank support boosted sentiment.
  • Equity and fixed-income markets gained, with risky assets among the strongest performers.

Stock and bond markets continued the year-end rally into January. Eurozone government debt credit rating downgrades and generally mixed economic news in Europe served to undercut optimism to a degree, but strong economic releases from the U.S. and continued central bank support boosted sentiment. In particular, measures taken by the European Central Bank (ECB) to support the banking system and progress toward resolving Greece’s sovereign debt troubles helped fuel a hopeful outlook. Investors generally remained positive and market volatility calmed. Consequently, assets that are perceived to be riskier were favoured during the month.

Economic Backdrop

Actions made to support banks and stabilize the finance sector in the eurozone were publicized by the ECB in December 2011. The announcement included the introduction of three-year loans, known as long-term refinancing operations, which are intended to help ease short-term money supply pressures on the region’s banks. This provision had a positive impact on sentiment in January as additional funding began to filter through to banks. It is now expected that the ECB will announce an extension to the program in the coming weeks.

Canadian economic releases were mixed in January. A report issued by Statistics Canada during the month noted that real gross domestic product dropped 0.1% in November after posting no growth in October. The decrease was mainly attributed to lower output in the Energy sector. Canada’s composite leading index increased 0.7% in January, gaining for the seventh consecutive month. The rise was concentrated in manufacturing, housing and services employment. The country’s unemployment rate increased for the third time in the past four months, rising to 7.6% in January from 7.5% in December. Canada Mortgage and Housing Corp. reported that housing starts fell to a seasonally adjusted annualized rate of 197,900 units in January from 199,000 in the previous month.

While economic data for Europe improved slightly in January, the picture was still a mixed one. U.K. gross domestic product (GDP) showed a small contraction in growth during the final quarter of 2011, but indices that measure productivity and sentiment (Purchasing Managers Indices) suggested marginal improvements in U.K. services and manufacturing (in which the pace of declines slowed). Eurozone business confidence levels improved, and while unemployment in the region remained high, the pace of job losses slowed during December 2011. Central banks remained accommodative and the ECB voted to maintain interest rates at 1.00% in January, while the Bank of England once again left U.K. rates at 0.50%.

The U.S. Federal Reserve (Fed) indicated that the country’s current low interest rates would continue until the end of 2014. This was longer than the markets expected (the Fed previously stated that interest rates would remain near zero until mid-2013), so the news was received positively. U.S. economic data releases in January further helped to foster an upbeat mood. Fourth quarter 2011 annualized GDP readings showed that growth in the U.S. economy rose to 2.8%, up from 1.8% in the third quarter. Unemployment numbers fell and consumer and business sentiment indices gained. However, U.S. annual inflation for 2011 rose by 3.00%, December retail sales disappointed and housing starts declined.

January was a busy month for credit rating agencies Standard & Poor’s (S&P) and Fitch Ratings (Fitch). On January 13, S&P downgraded its credit ratings on several European governments, including France, Italy, Spain and Portugal. While the action generated significant media attention, the actual market impact was minimal as most of the rating downgrades had been largely expected. Fitch followed suit on January 27 when it announced rating actions on five eurozone governments, including Italy and Spain.

Market Impact

Investor optimism at the start of the year resulted in fixed-income assets, which are perceived to be riskier, performing best for the month. High-yield bonds did particularly well, followed by corporate and emerging markets debt. Global government bonds generally fell out of favour and credit spreads tightened. Within government bonds, U.S. Treasurys did best, pushed higher by positive economic data releases and news of continued central bank support. The government debt of Portugal struggled in particular, largely due to the S&P downgrade, which pushed the rating to below-investment grade, or “junk” status. This led to concerns that Portugal could run the risk of defaulting on its debt, and that the country could soon follow Greece down the restructuring road.

Volatility continued to slow throughout January, as the degree of calm that returned to the markets at the close of 2011 continued into early 2012. Global equity markets benefited from this stability, and cyclical sectors performed well once again. Materials and Financials recorded the highest returns for the month, while more defensive sectors, such as Consumer Staples and Utilities, lagged. In line with a preference for riskier assets, emerging market equities did well for the month, as did smaller companies. Greek equities rebounded strongly, pushed higher by the favourable reaction to progress in talks surrounding the country’s debt restructuring process.

Index Data

  • The S&P/TSX Composite Index increased by CDN 4.37%. 
  • The DEX Universe Bond Index returned CDN 0.51%. 
  • The Dow Jones Industrial Average index gained USD 3.55%.
  • The S&P 500 Index returned USD 4.48%.
  • The NASDAQ Composite Index increased USD 8.06%.
  • The MSCI AC World Index, used to gauge global equity performance, gained USD 5.81%. 
  • The Barclays Capital Global Aggregate Index, which represents global bond markets, rose by USD 1.67%.
  • The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” fell from 23.40 to 19.44. 
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, remained relatively stable, falling from USD $98.83 a barrel at the end of December to USD $98.48 by January 31. 
  • The U.S. dollar weakened against most currencies, while sterling strengthened. The U.S. dollar fell against the euro, sterling and Japanese yen. It ended January at $1.58 against sterling, $1.31 versus the euro and at 76.25 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 is for educational purposes and 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 is no assurance as of the date of this material that the securities mentioned remain in or out of the SEI Funds. There are risks involved with investing, including loss of principal. Diversification may not protect against market risk. There are other holdings which are not discussed that may have additional specific risks. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Bonds and bond funds will decrease in value as interest rates rise.

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