The bull market is still here! After five consecutive weekly increases, the S&P500 closed at 1,513 - the highest level of the index since December 2007. The January monthly gain was 5.04%, and if we look at the S&P500 history, we will see that the 11 times the index has risen by 5% or more in January, the result has been an average yearly gain of 24.3% and has finished the year with an increase in all 11 cases. The Dow Industrial Average also posted solid gains and had its best January since 1994. The strong inflow into stock mutual funds continues, and a good portion of it is coming from cash, not fixed income, suggesting that retail investor may be starting to buy in. Further, the payroll employment numbers revealed that the economy has added on average 225,000 jobs per month in Q4. The unemployment rate increased slightly to 7.9%, but markets were not disappointed because it implied that the Fed might keep its foot on the gas pedal longer due to its unemployment target of 6.5% before raising rates.
Q4 real GDP declined by 0.1%, but the number is not as bad as it sounds because it was mainly driven by a decline in inventories and defense spending. You be the judge whether or not there was a political motive to postpone the drop in defense spending until after the November election. In either case, if we look at the last two quarters combined, the economy grew at a rate of 1.5%, which is in line with expectations. Consumer spending and residential investment posted significant gains.
The most likely scenario for the U.S. economy in 2013 is to see moderate real GDP growth, a healing housing market, and equity prices that remain strong, although the current growth rate is unlikely to be sustained. The Fed is expected to continue its QE3 asset purchases as long as unemployment remains high and stubborn. However, markets remain vulnerable to short-term risks due to fiscal issues, and long-term risks due to inflationary pressures and structural imbalances.