“As goes January, so goes the year,” is one of those investing clichés you hear this time of year. If it’s true, we’re in for a wild year. Fortunately, while there is some correlation between the first month of the year and the remaining 11 months, it is definitely not a given that we’re in for a bumpy 2014 and headed for losses. In fact, I expect fundamentally superior stocks to firm up as we get through earnings season.
The S&P 500 suffered through its worst January in four years, falling 3.5%. Taking a longer-term view, however, the index it is still up nearly 19% over the last 12 months.
Stocks remained on a roller coaster ride due to emerging market fears, a poor durable goods report and a Fed that continues to taper its quantitative easing (QE). Fortunately, a strong fourth quarter GDP report helped to alleviate any fears that economic growth might slowing.
Let’s start with the emerging markets, which have been the big fear.
On Monday, Turkey temporarily stopped the slide when its central bank announced that it would hold an emergency meeting. Then on Tuesday, the same central bank shocked observers by unveiling interest rate hikes, including more than doubling its key interest rate to 10% from 4.5%.
Additionally, in a move to help banks, the central bank boosted its overnight lending rate to 12% from 7.75% and also lifted its overnight borrowing rate to 8% from 3.5%. The Turkish lira, which has declined 11% relative to the U.S. dollar this year, immediately rallied, so it temporarily helped to stem the flight of capital out of Turkey.
We saw similar moves in other emerging markets. On Tuesday, the Reserve Bank of India surprised economists by raising its benchmark rate 0.25% to 8%. Then on Wednesday, South Africa’s central bank raised its key repo rate 0.5% to 5.5%.
Many emerging markets continue to suffer from eroding currencies that can only be combated with higher interest rates and more responsible fiscal policies. It appears that the emerging market panic, which also affected Chinese stocks, seems to be stabilizing, but I will continue to monitor the underlying volatility.
