Market Commentary: Market Recap
Market Update for the Month Ending March 31, 2014
A weak end to a turbulent quarter
March ended with small gains for the Dow Jones Industrial Average, up 0.93 percent, and the S&P 500 Index, up 0.84 percent, though the Nasdaq was down 2.53 percent. But these modest changes masked significant volatility.
The same could be said for the quarter. Volatility returned, driven by unexpected developments on all fronts. Still, U.S. markets ultimately didn’t change much by quarter-end, with the Dow down 0.15 percent and the S&P 500 and Nasdaq gaining 1.81 percent and 0.54 percent, respectively.
Fundamentals were mixed for the quarter, with earnings growing but companies projecting slower future gains. This, combined with rising perceptions of risk outside the U.S. and the ongoing Federal Reserve (Fed) taper of its asset purchase program, made investors more cautious. Technical factors remained generally strong, however, and markets closed the quarter well above levels that could be considered red flags.
After Struggling Mid-Quarter, the S&P 500 Broke Above Technical Support Levels
The MSCI EAFE Index changed little, down 0.64 percent for the month and up a minimal 0.66 for the quarter. The MSCI Emerging Markets Index moved up 2.92 percent for the month and down 0.80 percent for the quarter. Technical factors were weaker during most of the quarter, but improved toward the end.
Within fixed income markets, March brought a significant change in sentiment, as emerging market bonds rose 1.08 percent, according to the JPMorgan EMBI Global Core Index. Previously, investors had been fleeing this asset class, due to concerns about Fed tapering and slowing economic growth. In the meantime, valuations had become compelling, and this may have been the catalyst behind the reversal of sentiment.
The Barclays Capital Aggregate Bond Index lost 0.17 percent in March, although the index has still returned 1.84 percent year-to-date. Longer-duration, high-quality bonds have posted the strongest performance this year.
U.S. economy goes into a “snowdown”
A principal cause of volatility and slow growth in U.S. markets was a series of poor economic reports during the quarter. Job gains for the first two months of 2014 were well below expectations, though data in March suggested a resumption of more normal employment growth.
Housing also slowed. The supply of homes for sale declined to historically low levels, affecting sales volume, and new home construction was stalled by unusually cold weather. Still, prices increased for both new and existing homes. Although data was mixed, the conclusion is that the housing market is healthy.
Fed taper continues
The Fed cited weather as a primary cause of the economic slowdown. It continued to reduce its purchases of Treasury and mortgage bonds at a steady rate during the quarter.
Geopolitical risk reappears
The Russian annexation of Ukraine’s Crimea region in early March was the major geopolitical news of the quarter. Markets dropped the next day but recovered as the situation stabilized. The U.S. continues to use diplomatic actions to penalize Russia, and this has resulted in greater uncertainty.
Other countries in Europe were affected by Russia’s actions. Many European Union nations rely on Russia for natural gas, which has made their decisions regarding how to counter Russian aggression particularly difficult. Harsh negotiation tactics could derail or delay the European recovery.
Speculation has also increased about China’s economy, which continues its slowdown. Moreover, ongoing developments in China’s financials sector could mean further uncertainty about where that nation’s economy is headed.
Time for caution
The U.S. economy appears likely to continue its recovery, but the “snowdown” reminds us that unanticipated events can make a large difference. The Russian annexation of the Crimea has only reinforced this lesson.
The risks to financial markets are real, but manageable. Investors should maintain a diversified portfolio and a long-term focus to maximize their chances for success. Although some concerns may be warranted, most won’t significantly affect markets, and long-term return expectations should overcome any short-term worries.
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 JPMorgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for traded external debt instruments in the emerging markets, and is an expanded version of the JPMorgan EMBI+. As with the EMBI+, the EMBI Global includes U.S. dollar-denominated Brady bonds, loans, and eurobonds with an outstanding face value of at least $500 million. It covers more of the eligible instruments than the EMBI+ by relaxing somewhat the strict EMBI+ limits on secondary market trading liquidity. 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.