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Why Investors Bought Bonds And Gold ETFs In January

By: Investor's Business Daily
Posted: 1/31/2014 8:05:00 PM
Referenced Stocks: EFA;GLD;IEF;SPY;VWO

ETFs tracking the major stock market indexes snapped a four-month winning streak the first month of the year as investors fled stocks and sought safety in bonds and gold.

A looming emerging-market currency crisis, the Federal Reserve scaling back stimulus and the Arctic chill stifling business across the country dominated the financial news headlines. Nonetheless, investing strategists believe the stock market will rise to new highs again as the uncertainty clears.

January Performance Of Major ETFs

SPDR S&P 500 ( SPY ) kicked off the new year with a 3.5% loss.

iSharesMSCI EAFE Index ( EFA ), tracking developed foreign markets, dropped 5.1%.

Vanguard FTSE Emerging Markets ( VWO ) plummeted 8.5%.

SPDR Gold Trust ( GLD ) -- the largest ETF tracking gold bullion -- popped 3.4%.

iShares Barclays 7-10 Year Treasury Bond ( IEF ) added 3.0%.

Interest rates on benchmark 10-year Treasury notes fell 33 basis points to 2.67% at month's end.

Bulls Vs. Bears Stock Market Outlook

Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, N.Y., forecasts the S&P 500 will rise to 1950 this year and 2025 next year (or $195 and $202.50 for SPY).

"Equities are not as cheap as they were, but they are not expensive," he wrote in a client note Jan. 24. "While some of the surge since 2009 has reflected a higher P/E (price-earnings ratio), much of that has reflected a rebound in earnings. Meanwhile, earnings are still growing."

With nearly one in five S&P 500 companies having reported fourth-quarter results, the index's earnings were estimated to grow 7% year over year, according to Thomson Reuters. S&P earnings are projected to expand 10.6% this year after growing 5.6% in 2013.

Bank of America Merrill Lynch strategists forecast the S&P will end the year at 2000, while benchmark 10-year Treasury yields rise to 3.75%. They favor investing in high-yield bonds, real estate, Japan and U.S. stocks, overweighting technology, energy and industrials, while underweighting consumer discretionary, utilities and telecom. They disfavor government bonds, commodities and emerging markets.

"We'll turn negative only once corporate and investor cash levels collapse, the U.S. dollar surges on the back of Fed tightening and G7 bond yields jump to much more attractive levels," Michael Hartnett, chief investment strategist at BofA Merrill, and his colleagues wrote in a client note.

A U.S. economic recovery is underway, they wrote. Home prices have rebounded 20% off their 2011 low, mortgage applications have increased 40% year over year, small business loans are rising for the first time since 2008, and small business spending plans are at their strongest levels since 2007. They project the global economy will expand 3.6% this year while the U.S. grows 3%.

The bears, on the other hand, argue the stock market is overvalued and that investors are overly optimistic, which is a contrarian warning as the crowd is usually wrong.

"Heavy buying climaxes have been occurring frequently during the past year. This activity indicates distribution in the marketplace, which is bearish," Brad Lamensdorf, chief investment officer of the Lamensdorf Market Timing Report in Westport, Conn., and co-manager of theRanger Equity Bear (HDGE) wrote in his newsletter Jan. 27.

Another contrarian warning sign is the new Federal Reserve Chair Janet Yellen appearing on the cover of Time magazine, suggesting the mainstream media is overly optimistic about the rally, Lamensdorf added.

Foreign Stock Market Performance

Emerging markets led a global sell-off as their currencies plunged on worries of debt downgrades and a slowdown in earnings. VWO fell for a third month straight. It broke below key price support at its 200-day moving average, confirming a downtrend. EFA has corrected 5% from its 52-week high, which is considered a normal pullback in an uptrend.

ETF And Mutual Fund Flows

Emerging market mutual funds and ETFs experienced $3.3 billion in outflow so far this year, through Jan. 31, while foreign developed market funds and ETFs absorbed $10.4 billion, according to Lipper Inc.

Emerging market funds experienced 13 straight weeks of outflow, marking their longest losing streak in 11 years. Should emerging market outflow climb to $20 billion to $25 billion over three or four weeks, it would suggest that investors have capitulated and that contrarian investors should start buying, according to BofA Merrill.

U.S. equity mutual funds and ETFs saw $816 million in net outflow in January, while bond funds absorbed $11 billion in inflow.

Top ETF Gainers In January And Percentage Return

1. Barclays iPath Natural Gas ETN (GAZ) 21%

2.C-Tracks Citi VIX ETN (CVOL) 20%

3. Barclays iPath Carbon ETN (GRN) 19.7%

4. Global X Gold Explorers (GLDX) 17.9%

5.United States Natural Gas (UNG) 16.9%

6.SPDR S&P Biotech (XBI) 15.4%

7.Market Vectors Egypt Index (EGPT) 15.2%

8. Barclays iPath Coffee ETN (JO) 14.6%

9. Market Vectors Jr. Gold Miners (GDXJ) 13.9%

10. PowerShares Dyn Bio & Genomic (PBE) 13.3%

Biggest ETF Losers In January And Percentage Loss

1.ProShares Short VIX Short Term (SVXY) -16.6%

2. Barclays iPath Lead ETN (LD) -16.4%

3.Market Vectors Russia Sm Cp (RSXJ) -14.8%

4. iShares MSCI Chile Capp (ECH) -14.5%

5. Global X FTSE Andean 40 (AND) -14.3%

6. Global X FTSE Colombia 20 (GXG) -14%

7. Global X Brazil Consumer (BRAQ) -12.9%

8. iShares MSCI Turkey Inv (TUR) -12.8%

9.Market Vectors Russia (RSX) -12.4%

10.Market Vectors Colombia (COLX) -12.2%

Follow Trang Ho on Twitter @IBD_THo .