January saw US stocks record their first losing month since last August. After reaching new record highs at the end of December, the Dow Jones shed almost 1,000 points in the last half of the month and the decline continues. Analysts attributed the sell-off in large part due to troubling news from several emerging nations, in particular to the so-called “Fragile Five”– Turkey, India, Brazil, Indonesia and South Africa.
These countries and others –including Argentina, Ukraine, Thailand and even China–have seen their currencies come under pressure due to capital flight, and most have had to raise interest rates significantly and drain reserves to support their monetary systems.
No doubt, this mini-storm is partly a reaction to the Fed’s decision to begin “tapering” its monthly purchases of Treasury bonds and mortgage-backed securities starting in January. At its latest policy meeting last week, the Fed moved to reduce its QE purchases by another $10 billion in February. Obviously, the Fed is serious about ending QE and this, too, weighed heavily on stocks last month and again yesterday. Is this the much-awaited “correction” or something worse?
Next, we take a look at some of the latest economic reports. We got our first look at 4Q GDP last Thursday, with an advance estimate of +3.2%, about as expected. What was not expected was a huge drop in the manufacturing sector in January based on yesterday’s weak ISM Index report.
Finally, if you watched the 2012 film documentary “2016: Obama’s America,” you may be interested to know that Obama’s Justice Department recently indicted the film’s producer, Dinesh D’Souza, on two alleged felony charges related to campaign-finance irregularities. Such violations, if true, are rarely prosecuted, but in this case, they want to ruin his life. You can read the story at the end of today’s letter.