Markets take a roller-coaster ride
After a strong January, the markets started February in much the same way but ran into trouble in the middle of the month. In the end, U.S. markets still finished in the black, although international markets were not as lucky. The S&P 500 Index rose 1.36 percent, closing at 1,514, somewhat below its mid-month high of 1,530 but well above its low of 1,487. The wide swings reflected investor recognition of the continuing risks in Europe and in Washington, DC. The results of the Italian elections, pending sequester spending cuts, and uncertainty surrounding the recent Federal Open Market Committee (FOMC) meeting minutes all contributed to the volatility.
U.S. corporate earnings remained strong, with about two-thirds of S&P 500 companies beating expectations and about one-fourth of them missing the mark, which was in line with previous quarters. Valuations continued high based on longer-term metrics, but they also appeared fair based on shorter-term metrics. Given the rise in valuations, investors will likely begin to look to earnings growth rather than multiple expansions as a source for continued stock gains.
Technically, the S&P 500 remained above its 50- and 200-day moving averages, and, despite the dips in the middle of the month, there doesn't seem to be any technical reason to expect a decline. There does, however, appear to be a resistance level at 1,565, the index's high-water mark, which it reached in 2007, suggesting that future gains might be challenging. As of month-end, the S&P 500 was only 3.4 percent below its 2007 high.
International markets got hit harder than U.S. markets, reflecting their greater exposure to European political and economic problems. The MSCI EAFE Index posted a loss of 0.95 percent for the month, while the MSCI Emerging Markets Index declined even more, losing 1.35 percent. Among the factors affecting foreign markets were the results of the Italian elections, which were interpreted as a vote against the country's austerity-based economic stabilization plan. This raised the possibility that the eurozone might face another political crisis.
Events in Asia also contributed to weak performance in the international markets. The Japanese plan to boost inflation and weaken its currency pushed the Nikkei average higher. China, however, led emerging markets downward, as manufacturing slowed and investors worried about central government efforts to contain property prices. Temporarily, both the MSCI EAFE and the Emerging Markets indices fell below their 50-day moving averages. Although both bounced back, this suggests that further weakness is possible.