A drop in wages, slumping oil prices, and terror fears set the stage for a volatile month for the markets in January. Despite a fairly strong labor report at the beginning of the month—the U.S. economy added a better-than-expected 252,000 new jobs for December, investors initially focused on the drop in hourly wages, which to some suggested the economy was not starting to accelerate as many had earlier imagined. Some pundits felt the deceleration in wage growth could cause the Federal Reserve to postpone raising interest rates in June or even possibly later this year. Reports of a dual hostage crisis in France accompanied by a continued decline in oil prices placed a pall over the markets. Investors reeled on learning the Swiss National Bank decoupled the Swiss franc from the euro, further stoking fears of global deflation and perhaps showing a lack of confidence in the euro. The continued decline in oil prices pushed consumer prices down 0.4%, while industrial production declined for the first time since August. Nonetheless, the preliminary January reading for the University of Michigan/Thomson Reuters consumer-sentiment index jumped to its highest level (98.2) since 2004.
REUTERS/Dado Ruvic
The mid-month announcement by the European Central Bank that it would launch in March its bond-purchase program worth 1.1 trillion euros helped offset concerns about the Greek election results, which brought the anti-austerity, leftist Syriza party to power. However, a downbeat gross domestic product report caused investors to duck for cover at month-end and turn their investment dollars to the safety of Treasuries and gold, sending equities to the cellar and bonds to the plus side. The main indices suffered their largest monthly losses in a year, with the Dow declining 3.69% and the S&P 500 tumbling 3.06% for January. As a result, equity CEFs posted a negative NAV-based return (-0.73% on average) and market-based return (-0.42%) for the second consecutive month, while fixed income CEFs were in the black, rising 1.61% on a NAV basis and 3.02% on a market basis.
Treasury yields declined at all maturities in January, with the ten-year yield (+1.68%) declining a whopping 49 bps at month-end from its prior month’s close to its lowest level since May 2, 2013. The rising dollar, slowing growth overseas, and Q4 U.S. GDP growth coming in below expectations at 2.6% made U.S. Treasuries more attractive to foreign investors and a safe-haven play for U.S. investors. The 30-year Treasury yield, dropping 50 bps to 2.25%, witnessed the largest decline in January of the group. At the short-end of the curve the one-month and three-month yields witnessed the smallest declines, dropping 2 bps to 0.01% and 0.02%, respectively.
For January the dollar once again gained against the euro (+7.31%) and the pound (+3.47%) but lost against the yen (-1.90%). Commodities prices were mixed, with near-month gold prices rising 8.03% to close the month at $1,279.20/ounce. Meanwhile, front-month crude oil prices plunged 9.44% to close the month at $48.24/barrel.
For the month 63% of all CEFs posted NAV-basis returns in the black, with 38% of equity CEFs and 81% of fixed income CEFs chalking up returns in the plus column. The slide in oil prices and concerns that the rising dollar might hurt U.S. exporters weighed on Lipper’s domestic equity CEFs macro-group (-1.17%), pushing it to the bottom of the equity CEF universe. For the fifth consecutive month) mixed-asset CEFs (+0.27%) outpaced the other macro-groups, followed by world equity CEFs (-0.42%).
Municipal bond CEFs (+2.74%) was the only fixed income macro-classification with all of its classifications experiencing returns in the black. The muni CEFs group was followed by domestic taxable bond CEFs (+0.41%) and world bond CEFs (-0.52%).
For January the median discount of all CEFs narrowed 72 bps to 8.56%—only slightly deeper than the 12-month moving average discount (8.54%). Equity CEFs’ median discount narrowed 46 bps to 9.00%, while fixed income CEFs’ median discount narrowed 78 bps to 8.35%.
To read the complete Month in Closed-End Funds: January 2015 FundMarket Insight Report, which includes the month’s closed-end fund corporate events, please click here.
