Calvert News & Commentary

Focus on Equities for January 2014

Was a soft start to the year due to bad weather or something more fundamental?


Untitled Document

By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.

Natalie Trunow, CIO of Equities Natalie Trunow,
CIO, Equities

Equities were down globally in January.

Following a 30%+ year in 2013, January 2014 proved to be a difficult month for equities, with most broad stock indexes finishing the month down across the board. Relatively speaking, US stock indexes fared better than foreign developed markets, which in turn lost less than emerging market indices, where bloodletting was particularly strong. Small-capitalization stocks did better than their large capitalization counterparts, and the growth end of the growth/value spectrum held up better than the value end did.

Figure 1: Total returns for Major Equity and Asset Class Indexes:  January 2014

Equities underperformed most other major asset classes, a reversal from 2013 when equities trounced virtually every other asset class. Fixed income, Real Estate Investment Trusts (REITs), the US dollar index, and gold all produced positive returns for the first month of the year. The Goldman Sachs Commodities Index (GSCI) did finish the month down – most likely due to continued contraction in China – but was still down less than any of the major equity indices shown above.

A risk-off environment dominated in January...

"Safer" asset classes performed better in January as worries about a hard landing in China were on investors' minds once again.

A number of other factors likely drove the decline in risk-taking. Following a historically strong year for equities, profit-taking and tempered expectations for a repeat performance likely drove down portfolio risk tolerance in January. Finally, the Fed's tapering of long-term asset purchases and change of Chairpersons took place in January, both of which may have temporarily dampened investor enthusiasm.

The key question for investors is whether January's drawdown (which was only about 3.7% off of mid-December's all-time highs) was simply part of the normal ebb-and-flow of markets, or whether it signals the beginning of a more enduring trend. We believe that the underlying economic fundamentals in the U.S.are still compelling and are likely to support investor enthusiasm around equities in 2014, although we may have some short-term sell-offs similar to one in January.

...but the economic recovery in the United States is likely to continue and support positive market sentiment.

We think the underlying trend of economic acceleration in the United States will continue, and consumers will find that they have more assets to put to work as the economy recovers, hence supporting equity prices. The contrast in economic conditions in the US versus Europe and China (and other emerging markets) should draw more investment to the United States, and Fed tapering will most likely add to this effect, both in equities and in other asset classes. We expect the dollar to strengthen slowly, which may provide another reason for foreign investors to favor US securities over investments available in their domestic markets.

Table 1: Equity Sector Performance vs. Russell 1000: January 2014

Index / Sector


Return minus R1k

Russell 1000 (R1k)



R1k : Utilities



R1k : Health Care



R1k : Information Technology



R1k : Financials



R1k : Telecommunications



R1k : Industrials



R1k : Materials



R1k : Consumer Staples



R1k : Consumer Discretionary



R1k : Energy



Source: Bloomberg

Table 1 shows sector total returns compared to the Russell 1000 large cap index in January. Overall, the sectors that have performed well are the sectors we rank as having higher ESG scores, whereas the bottom performing sectors tend to score lower on ESG factors.

Healthcare's positive performance may have more to do with the increased customer base created by the Affordable Health Care Act.

Bad weather may have been behind the economic softness with unexpectedly weak employment numbers and softer economic activity...

The two largest economic news points for the US in January were the start of Fed tapering (announced in December) and an unexpectedly weak employment report for December (74,000 jobs reported expected number close to 193,000).Unusually cold weather in December and January may have affected hiring, on top of the regular noise in a normally noisy data series.

Employment gains for October and November were revised upwards at the same time, somewhat dampening the net economic effect.While it is easy to point to the employment report as the trigger for January's market losses, the decline did not begin in earnest until nearly two weeks after the release of the employment report. Nevertheless, there is no way around the fact that the report was a disappointment.

...but as better weather picks up, U.S.consumer activity will likely recover...

We continue to expect the US economy to continue to strengthen and expand in 2014.The exceptionally cold and snowy weather may have diminished consumer activity in the consumers stayed indoors, but more normal rates of consumer activity will likely return as winter turns to spring, and some lost consumer activity will most likely be recovered later in the year.

In theory, the Fed's tapering should slow down the economy by pushing interest rates higher and making long-term credit marginally harder to obtain. A successfully managed taper would wean the economy off of easy credit gently enough to keep from reversing the recovery, the idea being that economic growth should have sufficient momentum to continue despite headwinds created by higher interest rates.

Despite the taper, long-term interest rates dropped...

However, despite the taper, long-term interest rates actually dropped by -0.35% in January as investors searched for safety in Treasuries. This indicates that despite the Fed's reduction in long-term asset purchases, private sector demand for long-dated Treasurys and other assets was high enough to push rates down anyway. Some of this effect may come from reduced Treasury issuance in the wake of the sequester, but there is no way around the fact that private demand for safer assets has increased in 2014. Still, it is important to keep an eye on the bond market, because the opposite can also occur if bond investors decide to exit the asset class.

There are a number of reasons that interest rates could have declined in spite of tapering: portfolio rebalancing, reduction of risk-appetites, or the repatriation of capital following a flight from emerging markets. The unwinding of so called "carry trades" in anticipation of higher rates in developed markets may well continue to put downward pressure on emerging market currencies while helping the U.S.dollar.

...but the move may not last; still, the resiliancy and stability of interest rates is a positive sign for continued economic recovery in the U.S.

On the whole, the resiliency and low volatility of interest rates in the wake of Fed tapering is a positive sign, since it indicates that – at least for a while – tapering need not produce the kind of jump in interest rates that many analysts had feared.Should this behavior continue, then equities could indeed recover from their recent setbacks quickly.

This commentary represents the opinions of the author as of 3/7/14 and may change based on market and other conditions.These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice.The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed.Neither Calvert Investment Management, Inc.nor its information providers are responsible for any damages or losses arising from any use of this information.Calvert may have acted upon this research prior to or immediately following publication.In addition, accounts managed by Calvert Investment Management, Inc.may or may not invest in, and Calvert is not recommending any action on, any companies listed.

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