Let’s not read too much into one trading day. However, the start of a new year holds special significance. For trading desks at banks, the P/L statement is reset to 0, and each trader now starts from scratch in building up trading profits. For hedge funds, the P/L statement is also reset to 0, and trades are on a tighter leash than usual as everyone looks to build up a profit cushion. For mutual funds, the performance benchmark is the key barometer (S&P 500 index for large cap, Russell 2000 for small cap, etc.), so managers are closely tracking movements in individual names and sectors relative to the indices to start 2014.
With so much performance measurement reset to 0, traders are especially incentivized to follow early year performance. That’s likely part of the reason why the January move has historically been a good barometer for how the year ends 11 months later. Now, the “slow” money is not beholden to such constraints. “Slow” money is less likely to follow the herd, but since it also transacts less frequently, its effect is generally less pronounced in the time frame of weeks or months.
Finally, tax considerations play a big role, especially after a large gain for the indices like what we saw in 2013. Rather than pay taxes on those capital gains in the 2013 cycle (so by April 15, 2014), investors hold on to stocks that they’re looking to sell until the calendar hits 2014. Once they sell in 2014, they won’t have to pay taxes on those gains until April 15, 2015. That is sometimes cited as a potential reason for weakness after a very strong year.
Caveats aside though, the first week and month of a trading year are likely the most important due to those performance incentives I cited at the start. So here’s what has stood out to me in the first 2 trading days so far (counting tonight’s overnight action):
- All major equity indices start the year down. The U.S., down nearly 1% yesterday, is actually a relative outperformer vs. the Euro Stoxx 50 (-1.2% in dollar terms) and the Hang Seng (-2.24%) so far.
- In Asia-Pacific, Thailand (-5.7%) and South Korea (-3.24%) are the worst performers in so far, and New Zealand and Australia the best performers (+0.75% and flat). The Aussie and Kiwi currencies are also the best performers to start the year in FX.
- In Europe, Germany is the worst performer (-1.5%), while Greece (+3.83%), Italy (+0.8%) and Portugal (+2.03%) are three of the best performers so far.
- In the Americas, Brazil was the worst performer to start (-2.26%), while Peru and Colombia both started the year in the green.
- Euro is lower, Yen is higher, and emerging market currencies are lower
- Gold and silver are higher, while oil and copper are lower
- Utilities, industrials, and utilities were the worst performers. Financials, health care, and consumer discretionary were the best performing sectors among the majors.
- C, BAC, COF, and biotech stocks were the main winners in the S&P top 100
- F and GM both closed higher, while most industrials got hit hard.
- Precious metals stocks and solar stocks were big winners
One broad theme (though only broad, as not true in all cases) is losers trading places with winners to start 2014, vs. 2013. We’ve seen that most notably in macro-land (gold, oil, Euro, Yen, DAX, SPX, Aussie dollar, etc.), whereas it is less true among sectors and single stocks.
We’ll be tracking year-to-date performance very closely over the next few weeks, with an eye towards where portfolio managers might lean throughout 2014. At the moment, the themes above are simply quick leads off the starting blocks.