Market Commentary: Market Recap
Market Update for the Month Ending February 28, 2014
Markets heat up . . .
After a difficult January, financial markets rebounded in February. The Dow Jones Industrial Average was up 4.34 percent, the S&P 500 Index climbed 4.57 percent, and the Nasdaq rose 3.15 percent. Both the Nasdaq and the S&P 500 are in positive territory for the year, although the Dow is down year-to-date.
Several factors drove February’s strong performance. Corporate earnings were stronger than expected, with growth rates up to 8.5 percent at month-end—above the estimate of 6.3 percent at the end of last year, per FactSet (see chart). Sales volume was also better than expected, with almost two-thirds of companies beating expectations.
Earnings Growth for the Fourth Quarter of 2013 Beat Expectations
Developed international markets performed well, with the MSCI EAFE Index up 5.56 percent, even more than the U.S. indices. The MSCI Emerging Markets Index was up less—3.19 percent.
Fixed income did reasonably well in February, with the Barclays Capital Aggregate Bond Index up 0.53 percent, continuing a positive streak for the year. Interest rates were relatively stable, and the 10-year U.S. Treasury ended the month yielding 2.65 percent. High-yield bonds returned a respectable 2.02 percent, according to the Barclays Capital U.S. Corporate High Yield Index, and emerging market bonds staged a comeback.
. . . Even as the economy suffers from severe winter weather
Concerns about employment continued in January, with only 113,000 jobs added; however, the unemployment rate dropped from 6.7 percent to 6.6 percent, and underemployment fell from 13.1 percent to 12.7 percent.
Areas of concern for the economy included weakening manufacturing data, slowing existing home sale volume, and a decline in retail sales. Can these be explained by bad weather? Or do they indicate a slowing economy? So far, economists believe the evidence points to the former, as consumer confidence remains relatively strong, consumer borrowing is up, foreclosures have declined, and new home sales have been strong.
On the other hand, the gain in the U.S. economy for the fourth quarter of 2013 was revised down, from 3.2 percent to 2.3 percent. This was largely due to lower-than-estimated sales of durable goods, such as cars, and reduced exports.
Global recovery continues but may be slowing
Economic reports for the rest of the world were mixed. Manufacturing and service PMI surveys indicated a mild slowing of the Chinese economy. Europe continued to stabilize, with Germany showing signs of accelerating growth.
As for Japan, easy monetary policy, fiscal stimulus, and a concerted effort to devalue the yen have boosted investor confidence, but we see a potential headwind coming in the form of consumption tax increases this spring.
Emerging markets appear to have stabilized from the impact of the Federal Reserve’s decision to taper asset purchases, but they are still adjusting. Currency fluctuations and rising interest rates have hurt trade and caused capital flight.
Politics threaten markets
Meanwhile, politics remains a risk factor. Euroskeptic parties could make gains in European Parliament elections this year. This could cause political uncertainty and derail the region’s fragile recovery. Similarly, major emerging markets, such as Turkey and Brazil, continue to suffer political turmoil. Most relevant of all, perhaps, is the crisis in Ukraine and the move by Russia into the Crimean peninsula.
Enjoy the gains but don’t be surprised by volatility
After a difficult January, February’s market recovery was a relief. Still, weak U.S. economic reports, along with events in Ukraine, highlight risks.
Although we expect the U.S. economy to continue to grow, recent weak data implies that this is by no means guaranteed. In Europe, the economy continues to mend, but politics could cause a rocky summer. China is trying to spin up its export machine, but this has the potential to spark trade disputes. In short, substantial uncertainty remains.
Therefore, although we have enjoyed this month’s results, we believe it is important to maintain a disciplined investment process. Through good times and bad, this is the key to achieving investors’ long-term goals.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.