Dollars and Sense: January was sunny, but ominous clouds loom on the horizon

January ends. The first month of the year is behind us, and from the stock market’s perspective it was a good month. The Dow was up 5.8 percent for the month, its best month since October 2011. The Standard & Poor’s 500 stock index climbed 5 percent, its strongest January since 1997. The reasons for the gains: We got the fiscal cliff deal behind us, and we saw a lot of positive earnings reports during the month. We learned that orders for durable goods rose in December by 4.6 percent. The report was a sign of strength for the manufacturing sector. For most of January, new claims for unemployment benefits dropped. And among public companies, earnings ended up being mostly better than expected.

Ominous signs. But all was not sweetness and light, especially at the end of the month. The Commerce Department said the economy actually contracted in the fourth quarter, the first time that’s happened since 2009. The National Association of Realtors said that its index of pending home sales fell in December, suggesting that sales of previously occupied homes may slow in the coming months. Today we learned that unemployment had ticked back up to 7.9 percent. Consumer confidence, as measured by the Conference Board, has now fallen for three months in a row. Lots of people, especially high-income earners, saw their paychecks shrink in January. These tax hikes on higher earners took a particularly heavy toll on the Conference Board survey, which showed a bigger decline in confidence among higher-income households.

What’s ahead? From Wall Street, we’ll see more earnings reports. We’re near the end of earnings season, and sometimes that’s when you get some surprises. A few negative surprises could change the tone of the entire season. Also, some retailers have Jan. 31 year-ends, so they can fully account for the Christmas sales. So the reports of these companies are not delayed, but they’ll be interesting, because retail sales account for about 70 percent of the overall economy.

Whither Europe. Absent crises, Europe has been mostly out of the economic news for the past few months, but the economic environment remains decidedly mixed. This week we heard that European Union unemployment remains high at 11.7 percent. Also, data released by Eurostat on Thursday showed housing prices continue to decline. European home prices fell 0.7 percent in the third quarter. Prices in the Netherlands fell 3.9 percent, the biggest drop in the eurozone. Spain was also hard-hit, with a 3.7 percent drop. The good news is that eight nations posted gains, including Ireland, where prices edged up 1.6 percent.