Starting the Year With a Bang

Volatility returned to the markets in January, taking the investors on a wild ride that concluded with handsome gains for stocks and a nail-biting slide for bonds.

At the beginning of the month, stocks were off to races. But they soon ran into strong headwinds as blue-chip profit warnings began to disappoint and concerns over Iran’s renewed nuclear ambitions mounted. Reports that GDP only grew at an annual rate of 1.1% in the fourth quarter further encouraged the markets to put on the brakes. Just when the carnage seemed over, the S&P 500 suffered a drop of nearly 2% amid weak earnings and higher energy prices.

Small caps shone the brightest in January, out-performing large cap stocks by a huge margin as the Russell 2000 index finished the month up nearly 9%. Most likely, this was an example of the January Effect, in which small caps that have had a down year tend to be aggressively sold in December to generate losses to offset capital gains tax liability. The removal of downward pressure abates in January causing small caps to appreciate.