Equities began the month of January with a slight increase across major indices. There was news across all major economic fronts, and some of the news was quite negative. The fiasco surrounding the Enron bankruptcy continued to be the biggest news story in financial markets, as it seems that the story is turning into a quagmire. Fed Chairman Greenspan and his fellow Fed governors took turns in trying to brighten the investor outlook, as their speeches throughout the month seemed more positive than usual. With the financial markets being driven chiefly by economic news and earnings reports, these Fed officials appeared to create an optimist tone in the equity market. Despite these attempts, equity indices generally declined through most of January. The best news the markets received during the month was the announcement after the FOMC meeting that the Fed would leave the federal funds rate target untouched. This led to an end-of-month rally, although not enough to reverse the negative monthly trend. All major indices moved lower throughout January.

Technology and telecommunications companies that had paced the economy in past months continued to drop as the earnings picture was mixed despite an improved outlook for the future. Retailers performed well for January. Discount retailers led this move up in the retail sector, and carried the overall retail market to a better holiday season than last year. Energy stocks began to fall in January after a fairly healthy December. Health care stocks performed well yet again, although financial stocks were down, specifically those dealing in the aforementioned bankruptcy fiasco. Companies in the leisure and travel industries again performed poorly in January. Transportation stocks in the airline industries dominated the negative movers, with the automobile sector finally coming back to earth as zero-percent financing deals came to an end.

Some days of the month were particularly strong, mostly the last two days of January. Market players kept the Dow above the 10,000-point mark for only the first few trading sessions of January, and then stayed below this key level for the rest of the month. Mixed corporate earnings grounded investors, and pessimists again dictated the market's movement for much of January. As the month drew to a close, a few more companies reported bankruptcies and losses accompanied the same shady accounting practices which led to the Enron fiasco. January 29th brought all the nervousness from market players into trading, as major indices reported heavy losses. Investors were worried that more big names were following in the footsteps of Enron with regards to their accounting practices. This was followed by the FOMC announcement, which left interest rates unchanged and was a positive move for equities. The last two trading sessions of the month recovered the losses of the 29th as optimistic investors again hope for an earlier economic recovery. Days of decline outnumbered days of increases, a reversal from December's positive trading. The Dow closed the month with a loss of 1.0 percent, while the NASDAQ recorded a decline of 0.9 percent. The S&P 500 also decreased, finishing down 1.6 percent for January. The Russell 2000 recorded a loss of 1.1 percent, while the market encompassing Wilshire 5000 index decreased 1.3 percent in January.

The Treasury Market

From Weakness to Strength and Back Again...

Equities continued to perform better than the previous month despite some long term signs which should have negative repercussions. Economic reports and investor optimism are both pointing towards a faster recovery, despite some continued pockets of weakness. In fact, these pockets of weakness continue to cause problems in equity markets, which brings market players back towards Treasuries in a flight to quality. The most important indicator that helped Treasuries this month was mainly the report on the employment situation. The report showed continued weakness in labor markets, this despite jobless claims falling for most of the month. Reports that showed more strength in the economy included manufacturing reports and consumer attitude surveys such as the consumer confidence survey. Throughout the month, key Fed officials commented on the economic situation and these more positive reports, which did worry Treasury investors. Market players had their worst fears met when the FOMC announced their decision on the 30th of January, and interest rates remained static.

The Fed decision did not take Treasury market players by surprise, but it did cause a sell-off in Treasuries. Market players were unhappy with no rate cut, and the accompanying comments from the Fed caused investors to worry that the easing cycle may be over. The days following the Fed announcement were accompanied by rallies in the equity market, which also negatively affected Treasury prices. Despite the end-of-month commotion, Treasuries performed poorly for the whole month of January.

As can be seen in the chart above, yields were mixed in January. The mid-month figure was lower than the final figure, which saw the aforementioned sell-off after the FOMC did not change interest rates at the end of the month. Yields were pushed gently higher in the middle of the month as equities were performing poorly. Yields were up for the most part across the maturity spectrum. The 30-year bond fell 6 basis points on the month, while the 10-year note fell 3 basis points. The short-end of the yield curve performed poorly, as the 5-year note increased by 6 basis points and the 2-year note increased by 15 basis points. The 3-month bill, which traded down in December, finished up 4 basis points in yield.

Damir Fonovich, Economist, Econoday