US equity markets ended the old year with a bang and opened the new one with a whimper as investors cleaned the slate following a rousing 12 months.
The Dow Jones Industrial Average and the S&P 500 on Tuesday closed the year at fresh all-time highs, but a pullback on Thursday and mixed trade on Friday tilted the week into the red.
The Dow suffered the smallest loss this week, slipping 8.42 (0.05 percent) to 16,469.99, while the broad-based S&P 500 declined 10.03 (0.54 percent) to 1,831.37 and the tech-rich NASDAQ Composite Index fell 24.68 (0.59 percent) to close at 4,131.91.
Analysts advised not giving too much weight to the weak start to the year, in part because trading volumes are still depressed, with some money managers still on holiday and others away due to a major snowstorm in the northeast.
Also, many investors likely took profits once the calendar changed and a new tax season began.
Some portfolio managers “did not want to take gains and have to pay [last year’s] taxes on those,” Wedbush Securities managing director Michael James said.
Investor sentiment toward the new year remains generally positive in light of strengthening US economic indicators and a relatively clear strategy from the US Federal Reserve on unwinding its stimulus.
Tempering that optimism is a sinking sense that equity markets will not be able to top the barn-busting run last year, in which the S&P 500 rose nearly 30 percent and broke its all-time record 45 times.
“I don’t think it’s going to reach last year’s gains,” said Lee Munson, chief investment officer at Portfolio LLC, which expects the S&P 500 to post a 5 to 10 percent rise this year.
Munson said that a recent stream of positive data on jobs and manufacturing activity has persuaded the US market that the recovery is real.
BTIG chief global strategist Dan Greenhaus said that the markets recording an 8 to 10 percent rise this year should be an “easily achievable” goal, in light of the strengthening economy.
Greenhaus said the industrial sector — an outperformer last year — should continue to do well in an improving economy. He also likes technology companies, but said some financial stocks still face regulatory and litigation risks.
S&P Capital IQ chief investment officer Sam Stovall offered an old adage in handicapping sectors: “Let your winners ride, but cut your losers short.”
The axiom suggests loading up on consumer discretionary stocks (up 41 percent last year), health care (up 38.7 percent) and industrials (up 37.6 percent), while going light on telecommunications (up 6.5 percent) and utilities (up 8.8 percent).
Additionally, materials stocks, which climbed 22.7 percent over the past 12 months, could be braced for a bigger year if emerging market economies rally, Stovall said.
Meanwhile, Goldman Sachs highlighted 40 stocks with low valuations as good bets in the first part of the new year, including Wal-Mart Stores Inc, Ford Motor Co, Target Corp, Tenet Healthcare Corp, Citigroup Inc and Cisco Systems Inc.
The flow of corporate news is to pick up again next week with the first earnings reports of the season from Monsanto Co and Alcoa Inc, as well as some likely announcements from other companies that have either beaten or fallen short of expectations by a wide margin.
Technology and electronics companies are also expected to be in the news at the annual CES trade show.
Also due next week is last month’s service sector activity, to be delivered tomorrow, with November’s trade balance set for Tuesday and the jobs and unemployment report for last month due Friday.
Tomorrow, the US Senate is expected to confirm Fed Vice Chairwoman Janet Yellen to lead the US central bank.