US stocks churned above and below January 1 st values for most of the month, slumped 3.0% in the last week of January to close 3.0% down on the year. European markets, meanwhile surged 9.1% in Germany, 7.8% in France, 2.9% in the UK. Emerging markets also did well with Shanghai up 3.8%, India up 6.9% and Brazil up 5.9%. See US and International stock markets and other statistics here.
Didn't we say just last month that the US economy was strong, emerging market countries were on slow down, and Europe was a basket case? We did! And not much has changed in the last month. But, as we have said so many times in the past, stock markets are not about current conditions, but expectations about future conditions, usually 1-2 years in the future. The 48.4% gain in US stocks over the last two years was in anticipation of the current benign environment of low inflation, low interest rates, expanding jobs market, gently rising wages, robust consumer spending thanks to cheap gasoline, and GDP growth in the 2.5% range. Now what? The stock market will take a breather while investors figure out what is next in store. Their attention is on: commodities - does last weeks surge in oil signal a bottom? Interest rate policy - is this the year that the Federal Reserve finally raises the baseline rate from 0%? Can the current anemic growth rates in earnings (+5.5%) and revenues (+1.7%) support current stock market valuations?
Meanwhile, economic statistics for China, India, and Brazil are perking up as the strong dollar draws imports to the US. European stocks jumped on anticipation that bankers and regulators are finally getting serious about boosting those economies. We wondered at year end whether 2015 would be the year that the US economy returned to its traditional role as locomotive for the rest of the world, or whether the world would pull the US back into recession. So far, the locomotive appears to leading.