Week Ended January 25, 2013

Week Ended February 1, 2013

Stocks close out best January since 1997 as earnings encourage investors

Stocks extended their winning streak to five weeks, thanks to some positive earnings surprises and generally favorable economic data. The S&P 500 closed out its best January since 1997, and the Dow Jones Industrial Average crossed the 14,000 mark for the first time since October 2007. At the end of the week, the S&P and Dow moved within a few percentage points of their all-time highs, while the smaller-cap indexes moved further into record territory. The technology-heavy Nasdaq remains well below the record it established in 2000, however.

More companies than usual beat earnings estimates

Relatively good fourth-quarter earnings reports continued to drive stocks higher. Energy shares received a boost early in the week after a prominent refiner announced better-than-expected profits. Thomson Reuters reported that nearly seven of 10 companies have exceeded earnings estimates for the quarter, a higher share than usual. Earnings expectations have come down considerably, however, as companies have largely exhausted cost-cutting efforts and revenue growth remains muted given the slowly recovering global economy.

Slowdown in Q4 expected to reverse

Economic data was perhaps more mixed than in recent weeks, but investors seemed to be encouraged that the recovery remained on track. The market generally brushed aside preliminary data that the economy had contracted (albeit slightly) in the final quarter of 2012 for the first time since the 2007-2009 recession ended, perhaps because much of the pullback was due to a sharp decline in defense spending. The Federal Reserve's assessment that the economy had "paused in recent months" because of weather and other unusual factors appeared to weigh on sentiment at midweek, however. Stocks saw good gains to end the week after the Labor Department revised payroll gains in November and December substantially higher. T. Rowe Price economists continue to expect the economy to grow at an annualized rate of 2.0% to 2.5% in the current quarter.

Reasonable valuations and flows from fixed income may support stock prices in 2013

Many T. Rowe Price equity managers believe that stocks remain reasonably priced, if not at the compelling valuations of a few years ago. In a recent roundtable hosted by Barron's, T. Rowe Price's chairman and chief investment officer Brian Rogers noted that, with the S&P 500 trading at roughly 13.5 times 2013 earnings estimates, valuations are not expensive relative to interest rates and fixed income alternatives. While he and other T. Rowe Price managers expect only modest earnings growth in 2013, demand for stocks could be strong as investors begin to reallocate funds to stocks from low-yielding fixed income securities.

U.S. Stocks1

Index2

Friday's Close

Week's Change

% Change
Year-to-Date

DJIA

14009.79

113.81

6.91%

S&P 500

1513.17

10.21

6.10%

NASDAQ Composite

3179.10

29.39

5.29%

S&P MidCap 400

1101.59

6.52

7.95%

Russell 2000

911.19

7.97

7.28%

This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

1Source of data Reuters, obtained through Yahoo! Finance Closing data as of 4 p.m. ET.

2The Dow Jones Industrial Average and the Standard & Poor's 500 Stock Index of blue chip stocks, the Standard & Poor's MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments by market capitalization of the U.S. equity markets. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock market and the National Market System.