Market Commentary: Market Recap

    Market Update for the Quarter Ending March 31, 2015

    A weak end to a turbulent quarter
    March ended with U.S. indices down. The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq declined 1.85 percent, 1.58 percent, and 1.26 percent, respectively.

    Weak economic reports set the tone in early March, with declines in personal spending and vehicle sales. Weak retail sales reported later in the month preserved the downbeat atmosphere, despite strong employment growth.

    For the first quarter, the news was better, with U.S. markets posting gains despite weak March results. At quarter-end, the Dow gained 0.33 percent, while the S&P 500 was up 0.95 percent. The Nasdaq did best for the quarter, up 3.48 percent, on strong results in technology and biotechnology stocks.

    Fundamentals were weak during the quarter. Between the strong dollar and the collapse in oil prices, first- and second-quarter earnings projections and estimates went negative, although growth estimates for the second half of 2015 remain strong.

    International markets performed similarly for the month, though much better for the quarter. The MSCI EAFE Index was down 1.52 percent in March but up 4.88 percent for the quarter based on suggestions of a nascent recovery in the European economy. The MSCI Emerging Markets Index was down 1.59 percent for the month but up 1.91 percent for the quarter.

    The Barclays Aggregate Bond Index had another strong month, up 0.46 percent and capping a gain of 1.61 percent for the quarter. But weakness in the energy sector pulled the high-yield sector down, as the Barclays Capital U.S. Corporate High Yield Index lost 0.55 percent for the month despite gaining 2.52 percent for the quarter.

    U.S. economy takes a winter nap
    A principal cause of the March decline in U.S. markets was a series of poor economic reports during the quarter. Personal spending dropped, driven by declines in vehicle and retail sales. Business investment also dropped, with spending on durable goods down as well.

    Probably the biggest negative economic data was the March employment report, which showed job growth well below expectations, at 126,000, along with downward revisions to the previous two months. Still, despite this weak data, the underlying trends continued positive. Job growth over the past year has remained above the highest level of the mid-2000s and consistent with the late 1990s (see chart).

    Total Nonfarm Employment, All Employees, 1995–2015
    Total Nonfarm Employment

    Housing also showed improvement during the quarter. Sales volume for new and existing homes ticked up during March, as did prices, suggesting healthy demand.

    An interest rate rise may be on the horizon
    Speculation over when—and whether—the Fed would increase short-term interest rates also drove uncertainty during March. Even though improving employment led many to expect rates to rise sooner rather than later, persistently low inflation numbers led others to expect the Fed to keep rates low. The Fed’s March statement split the difference, removing the word “patient” from the language used but leaving open the possibility of rate increases at or after the Federal Open Market Committee’s June meeting.

    International risks take a break
    One reason for the strong performance of international equities for the quarter was the perception that geopolitical risks are decreasing. The Russian occupation of parts of Ukraine has moved off the headlines, while Iran and the U.S. are reportedly close to a deal to resolve concerns about Iran’s nuclear program.

    Economic issues have also started to recede, with the European Central Bank’s decision to start a stimulus program reassuring investors, as the European economies have shown increasingly positive results. Moreover, the Chinese government has been implementing stimulus programs in response to weaker-than-expected growth.

    Spring coming soon
    The U.S. economy will likely continue, and perhaps accelerate, its recovery, as global risks become less of a concern. But risks remain on the financial side. With interest rates still close to record lows—and stock prices at record highs—even continued good news could leave us vulnerable to price volatility, as March has shown.

    Given this uncertainty, investors should maintain a long-term focus to maximize their chances for success, and a properly diversified portfolio is still the best solution for achieving long-term financial aims.

    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.

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