Market Reviews 2011

Native Grass & Flowers

MARKET REVIEWS 2011

Market Review, Fourth Quarter 2011

After a terrible summer of sharp downdrafts and wild swings largely due to worries about public finances in the US and Europe, equity markets reversed course and advanced strongly in October. Concerns about sovereign debt problems in Europe continue, however, and the market bounced wildly in November and December in response to the changing headlines. Crisis fatigue finally set in during the last couple of weeks of the year, and the S&P 500 ended December with a rally that brought its return for the quarter to +11.82%. The late strength was only enough to bring the index back to breakeven on the year. It closed 2011 at a level of 1257.60, almost identical to its level of 1257.64 a year earlier. With dividends, the S&P 500 returned +2.11% for the year. The Mid-cap 400 index returned +12.98% for the quarter (–1.73% for the year), and the Small-cap 600 index returned +17.17% (+1.02% year to date). Value outperformed growth in all capitalization ranges for the quarter, but growth was stronger than value for the year. [Index returns: Standard and Poors]

Overseas markets reflected a portion of the US market’s strength in October, and all of the volatility during November and December. The MSCI Barra EAFE international equity index returned +4.07% in local currencies for the quarter (–12.15% year to date). The euro held steady against the US dollar for a while, but slid in December, ending the year at $1.2973, compared to $1.3449 on September 30 and $1.3269 on December 31, 2010. The dollar was more or less steady against the pound Sterling, closing the year at $1.5537 to the pound, compared to $1.5624 on 9/30 and $1.5392 on 12/31/10. It also stabilized against the Japanese yen, ending December at 76.98 yen, compared to 77.04 yen at the end of September and 81.67 a year earlier. The currency effect was mildly adverse to US investors, and EAFE returned +3.33% in US dollars (–12.14% year to date). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The news continued to drive many investors seeking safety toward US Treasuries, and they remained strong in response to the quarter’s news. The yield on the two-year US Treasury note remained unchanged at 0.25% (from 0.61% at 12/31/10), and the yield on the ten-year fell to 1.89%, from 1.92% three months earlier and 3.30% on 12/31/10. The Barclays Capital US Aggregate Bond index returned +1.12% (+7.86% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

December 2011

Crisis fatigue seemed to define the tone of equity markets in December, as the daily headlines about the continuing sovereign debt mess in Europe overshadowed generally good economic news in the US and the usual seasonal obsession with holiday retail sales. The trend was generally downward during the first half of the month, and UK prime minister David Cameron’s veto of a new proposed Eurozone treaty didn’t help. Markets finally seemed to recover when European governments shut down for the holiday break, and investors appeared to look forward to a couple of weeks without the danger of major blunders. The recovery resulted in a slightly positive month, with the S&P 500 returning +1.02% (+11.82% for the quarter). The year-end recovery brought the index level to 1257.60, almost exactly where it stood a year earlier (it ended 2010 at 1257.64). With dividends, the S&P 500 returned +2.11% for the year. The Midcap 400 Index returned –0.37% for December (+12.98% for the quarter and –1.73% YTD), and the Small Cap 600 returned +1.25% (+17.17% quarter; +1.02% YTD). In all three capitalization ranges, value was stronger than growth for the month and the quarter, although growth was better for the year. [Index returns: Standard and Poors]

Global equities followed roughly the same pattern as the US market, and the MSCI Barra EAFE international equity index returned +0.53% in local currencies (+4.07% for the quarter, but –12.15% YTD). After holding up well for months, the euro slid sharply against the US dollar, ending the year at $1.2973, against $1.3453 a month earlier. The euro was at $1.3449 on September 30 and $1.3269 on December 31, 2010. The dollar also gained against the pound Sterling. The British currency ended the year at $1.5537, compared to $1.5705 a month earlier ($1.5624 on 9/30 and $1.5392 on 12/31/10). The dollar weakened to 76.98 yen, from 77.88 on 11/30 (77.04 on 9/30 and 81.67 on 12/31/10). The currency effect was negative for US investors, and EAFE returned –0.95% in US dollars (+3.33% for the quarter, and –12.14% YTD). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

In spite of the relatively calm equity markets, investors still sought safety in US Treasuries, and rates fell at the long end of the yield curve. The yield on the two-year US Treasury note ended December at 0.25% unchanged from a month earlier, while the yield on the ten-year ended the year at 1.89%, down from 2.08% a month earlier (1.92% on 9/30; 3.30% on 12/31/10. The Barclays Capital US Aggregate Bond index returned +1.10% in December (+1.12% quarter and +6.76% YTD). [Index returns: Barclays Capital. Treasury yields: US Treasury].

November 2011

Global equity markets returned in November to the summer pattern of horrifying drops and dizzying rallies, driven primarily by each day's news concerning the sovereign debt worries that continue to unfold in Europe. Equity investors found themselves paying as much attention to the yields on Italian and Spanish government bonds as to the US economic data (mostly favorable) that comprise their more typical fare. Toward mid-month, Italian yields moved above 7%, a level that many observers have been associating with financial distress in European government bonds. With southern European bond markets so weak, news of a poor German government bond auction hit equity markets hard, and the US stock market fell sharply during the week of Thanksgiving. Better news during the last few days of the month, especially coordinated central bank intervention in the market for US dollar interbank funding, sent the market up again. Even though it advanced more than +4% on November 30 alone, the S&P 500 index ended the month with a return of –0.22%. The index is up +1.08% year to date. The S&P Midcap 400 index returned –0.30% (–1.36% year-to-date), and the SmallCap 600 returned +0.63% (–0.23% year-to-date). Value and growth were close in the large- and small-cap ranges, while among mid-caps, value was stronger. [Index returns: Standard & Poors]

Not surprisingly, the European debt worries were also the main factor affecting global equity and currency markets. The MSCI Barra EAFE International Equity index returned –2.51% in local currencies (–12.61% year-to-date). The dollar strengthened against European currencies, as it provided a haven from the trouble in Europe. It improved to $1.3440 against the euro and $1.5694 against the pound Sterling, compared to $1.3947 and $1.6141 a month earlier. The dollar didn't move much against the yen, however, ending the month at 77.58 yen, a bit below the previous month's level of 77.97. Overall, the stronger dollar hurt US investors in foreign assets, and EAFE returned –4.85% in dollars (–11.29% year-to-date). [Index returns: MSCI Barra; Currency rates: US Treasury H.10 release and cnbc.com]

US Treasury debt strengthened a bit during the month as it, too, provided investors a haven. The yield on the 2-year US Treasury note ended unchanged at 0.25%, but the yield on the 10-year note fell to 2.01%, from 2.17% a month earlier. In spite of the strength in Treasuries, corporate credit slipped in value by enough that the Barclays Capital US Aggregate Bond Index returned –0.09% for the month, bringing its return to +6.67% year-to-date. [Index returns: Barclays Capital; Interest rates: US Treasury]

October 2011

Equity markets bounced back strongly in October after an awful third quarter. Depressed market prices and encouraging corporate earnings drew investors back into the market early in the month, as the results suggested they could hope that most firms’ dividends and earnings would remain attractive. Meanwhile, the dithering in Europe regarding the sovereign debt problems in Greece continued until October 26, when German Chancellor Merkel announce a deal under which bondholders would voluntarily accept a 50% “haircut” and Greece would receive substantial advances from other European governments. The market responded with a powerful rally, but it fell back on the last day of the month on the failure of futures brokerage MF Global, along with Greek Prime Minister Papandreou’s announcement that he wanted to put the bailout deal before the Greek people in a referendum. In spite of the late fallback, though, the S&P 500 returned +10.93% for the month, recovering its losses and bringing its return for the year to date to +1.30%. The Midcap 400 Index returned +13.75% for October (–1.06% YTD), and the Small Cap 600 returned +15.00% (–0.86% YTD). Value was stronger than growth in all three capitalization ranges. [Index returns: Standard and Poors]

The apparent stabilization of the Greek helped overseas markets, and the MSCI Barra EAFE international equity index returned +6.19% in local currencies (–10.37% YTD). The US dollar fell against other currencies, although the Japanese yen strengthened so much that the Bank of Japan intervened to drive the yen lower at the end of the month. The dollar ended October at 78.18 yen, up from 77.04 at the end of September. It weakened to $1.6087 against the pound Sterling, compared to $1.5624 a month earlier. It also weakened against the euro, ending October at $1.3859 to the European currency, compared to $1.3449 at the end of September. The currency effect was favorable for US investors, and EAFE returned +9.61% in US dollars (–6.78% YTD). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance]

The favorable domestic market news seemed to shift investor money out of bonds, and longer-term US Treasury yields rose, steepening the yield curve. The yield on the two-year US Treasury note ended October at 0.25% unchanged from a month earlier, while the yield on the ten-year ended October at 2.17%, up from 1.92% a month earlier. The bond market’s return was a bit less than its yield, and the Barclays Capital US Aggregate Bond index returned +0.11% (+6.76% YTD). [Index returns: Barclays Capital. Treasury yields: US Treasury].

Market Review, Third Quarter 2011

Uncertainty was the overriding theme of the third quarter of 2011. The long-running drama of potential sovereign defaults in Europe continued, and the news from the Continent only reinforced investor uncertainty regarding Eurozone policy responses to the issue and possible consequences for the US market. In our own market, economic indicators were about neutral and corporate earnings were reasonably good, but in early August the spectacle of the Congressional threat to trigger a default on US Treasury debt, followed by Standard and Poors’s downgrade of the Treasury’s credit rating, undermined confidence. To make matters worse, the tone of comments both from Congress and among Eurozone governments seemed to point to fiscal austerity, which could drive our economy into recession. As a result, the market fell sharply in early August and then bounced wildly for the rest of the quarter. The Fed announced further monetary stimulus, but also expressed some pessimism regarding both economic growth and its ability to do more, especially if Congress reins in spending too severely. The S&P 500 index ended the quarter with a loss of –13.87%, wiping out earlier gains on the way to a year-to-date return of –8.68%. The Mid-cap 400 index returned –19.88% for the quarter (–13.02% year to date), and the Small-cap 600 index returned –19.83% (–13.79% year to date). Growth outperformed value in all capitalization ranges. [Index returns: Standard and Poors]

The continuing European debt issues were also hard on global equity markets and European currencies. The MSCI Barra EAFE international equity index returned –15.74% in local currencies for the quarter (–15.59% year to date). The US dollar strengthened to $1.3449 against the euro, from $1.4523 at the end of June, and it improved to $1.5624 against the pound Sterling, from $1.6067 three months earlier. It fell against the Japanese yen, however, ending September at 77.04 yen, compared to 80.64 yen at the end of June. The currency effect was adverse to US investors, and EAFE returned –19.01% in US dollars (–14.98% year to date). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Interest rates fell sharply in response to the quarter’s news and the Federal Reserve’s actions. The yield on the two-year US Treasury note fell to 0.25% (from 0.45% at 6/30/11), and the yield on the ten-year fell to 1.81%, from 3.18% three months earlier. The Barclays Capital US Aggregate Bond index returned +3.83% (+6.67% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

September 2011

Probably the best thing to say about September, as well as the third quarter, is that it is over. Worries about Greece — the potential for a sovereign default and uncertainty regarding the Eurozone policy response and the consequences for our market — along with ongoing worries that a concerted drive in Congress toward fiscal austerity might drive our own economy toward recession, outweighed some modestly encouraging economic news. The prospect of further monetary easing by the Federal Reserve, which announced plans to buy longer-term Treasury securities to drive long-term interest rates lower, seemingly had no effect on the equity market, which focused instead on the increasingly pessimistic tone of the Fed’s announcements. Traders drove the markets lower and beat back any attempts at recovery. The net result was a September return of –7.03% for the S&P 500 (–13.87% for the quarter, and –8.68% year to date). The Midcap 400 Index returned –10.59% for September (–19.88% quarter and –13.02% YTD), and the Small Cap 600 returned –10.29% (–19.83% quarter; –13.79% YTD). Value was weaker than growth in all three capitalization ranges. [Index returns: Standard and Poors]

The continued European debt issues were also hard on global equity markets and currencies. The MSCI Barra EAFE international equity index returned –4.36% in local currencies (–15.74% for the quarter, and –15.59% YTD). As many assets fell around the world, the US dollar gained against other currencies. The dollar ended September at 77.04 yen, up from 76.50 at the end of August. It strengthened to $1.5624 against the pound Sterling, compared to $1.6236 a month earlier. It was especially strong against the euro, ending September at $1.3449 to the European currency, compared to $1.4406 at the end of August. The currency effect was adverse for US investors, and EAFE returned –9.53% in US dollars (–19.01% quarter and –14.98% YTD). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The combined effect of the global flight from risk and the Fed’s action drove long-term US interest rates sharply lower, while shorter rates edged higher. The yield on the two-year US Treasury note rose to 0.25% at the end of September, from 0.20% at the end of August, and the yield on the ten-year ended August at 1.81%, down from 2.23% a month earlier. The bond market’s return reflected the drop in long rates, as the Barclays Capital US Aggregate Bond index returned +0.73% (+3.83% for the quarter, and +6.67% YTD). [Index returns: Barclays Capital. Treasury yields: US Treasury].

August 2011

August was a wild month. It began with the spectacle of the Congressional threat to trigger a default on US Treasury debt. Congress reached a deal that avoided default, but the result did not inspire market confidence. Almost immediately, Standard and Poors announced that it would downgrade the Treasury’s credit rating. The combination of the Congressional fireworks, the S&P downgrade, and fears that reduced Government spending would translate to recession drove equity markets sharply lower. The apparent intractability of the ongoing crisis over sovereign debt in southern Europe added to the pressure, and the US equity market dropped –13% between July 31 and August 8. The market bounced violently for the next two weeks, and finally recovered somewhat toward the end of the month on hopes of further monetary accommodation by the Federal Reserve, along with some tepidly hopeful news from Europe. In the end, the S&P 500 returned –5.43% for August, wiping out its gains from earlier in 2011. The index returned –1.77% for the year through August 31. The Midcap 400 Index returned –7.11% for August, and the Small Cap 600 returned –7.67%. Value was weaker than growth in all three capitalization ranges. [Index returns: Standard and Poors]

The political news from the US and continued worries about European debt were also hard on global equity markets. The MSCI Barra EAFE international equity index returned –8.71% in local currencies. Although the news was bad in the US, it was bad everywhere else too, and the US dollar ended mixed against other currencies. It slipped a bit against the yen, ending August at 76.88 yen, down from 77.18 at the end of July. It gained a bit against the pound sterling, strengthening to $1.6236 against the British currency, compared to $1.6455 a month earlier. The dollar was nearly unchanged against the euro, ending August at $1.436 to the European currency, compared to $1.4388 at the end of July. The currency effect was slightly adverse for US investors, and EAFE returned –9.03% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance]

In spite of the downgrade by S&P, yields on US Treasury debt fell dramatically during the month, both because of economic worries and the announcement by the Federal Reserve that it plans to keep short-term rates very low for at least two years. The yield on the two-year US Treasury note fell to 0.20% at the end of August, from 0.36% at the end of July, and the yield on the ten-year ended August at 2.23%, down from 2.82% a month earlier. The bond market’s return reflected the drop in rates, as the Barclays Capital US Aggregate Bond index returned +1.46%. [Index returns: Barclays Capital. Treasury yields: US Treasury]

July 2011

As the second half of the year began, the US stock market was recovering from weakness it had suffered in June in connection with worries about the fiscal perils of the Greek government. The market advanced for the first few days of July on the strength of promising corporate earnings reports. By mid-month, however, the market turned sour because of weak economic data. Making matters worse, for the rest of the month it appeared entirely possible that Congressional hard-liners might refuse to increase the Treasury’s statutory borrowing authority. That could have forced the Treasury to default on its obligations, with unpredictable repurcussions throughout the banking system and the economy. As investor nervousness increased, the market weakened, with the S&P 500 falling nearly –4% for the final week of July. For the full month, the S&P 500 returned –2.03%. The Midcap 400 Index returned –3.53% for the July, and the Small Cap 600 returned –3.21%. Value was again weaker than growth among large- and mid-caps, but again did a little better in the small cap range. [Index returns: Standard and Poors]

The economic news and worries about both Europe and the US continued to weigh on global equity markets. The MSCI Barra EAFE international equity index returned –3.50% in local currencies. With US budget negotiations going nowhere and default a real possibility, the dollar fell against the yen, ending July at 77.18 yen, down from 80.64 at the end of June. It also fell against the pound sterling, falling to $1.6455 against the British currency, compared to $1.6067 a month earlier. Worries about the euro were even worse than those about the dollar, however, and the dollar rose to $1.4388 against the European currency, from $1.4523 at the end of June. The currency effect was favorable overall for US investors, and EAFE returned –1.59% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

In spite of talk about a possible Treasury default, yields on US Treasury securities fell sharply during the month, as worries about economic weakness appeared to trump worries about default. The yield on the two-year US Treasury note fell to 0.36% at the end of July, from 0.45% at the end of June, and the yield on the ten-year ended July at 2.82%, down from 3.18% a month earlier. The bond market’s return reflected the drop in rates, as the Barclays Capital US Aggregate Bond index returned +1.59%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

Market Review, Second Quarter 2011

After a solid advance in the first quarter, the first major move in US stocks in the second was a decline, as the quarter’s first major bit of news — Standard and Poors’ announcement that they may eventually have to downgrade the credit rating of US Treasury debt — hit the wires.  When companies began reporting their quarterly earnings, however, the results were strong enough to send the market higher again.  The Fed also gave clear signals of its intention to keep rates low but not to extend its purchases of Treasury securities, which also helped the market remain firm.  Persistent concerns about the stalling budget negotiations in Washington and worries that Greece would not be able to avoid some form of default undermined the markets, however, and trading was volatile in May and June.  For much of June, street protests in Athens appeared likely to impede the Greek government’s efforts to adopt a budget plan that would meet conditions the European Union demanded in exchange for providing the credit necessary to forestall a default, and markets fell sharply.  Late in the month, though, the Greek government did in fact pass the required austerity plan, and a strong relief rally in the last week of June retraced much of the lost ground.  The S&P 500 index ended the quarter with a gain of +0.10%, a return of +6.02% for the first half.  The Mid-cap 400 index returned –0.73% for the quarter (+8.56% year to date), and the Small-cap 600 index returned –0.16% (+7.54% year to date).  Growth outperformed value in all capitalization ranges.  [Index returns:  Standard and Poors]

Global developed equity markets generally tracked the US, with particular emphasis on fears of fiscal problems in Europe, especially in Greece and Portugal.  The MSCI Barra EAFE international equity index returned –0.80% in local currencies for the quarter (+0.18% year to date.  The US dollar fell against the euro weakening to $1.452 against the European currency, from $1.4183 at the end of March.  It ended nearly unchanged at $1.6067 to the pound Sterling (from $1.6048 three month earlier), and it fell against the Japanese yen, ending June at 80.81 yen, compared to 82.76 at the end of March.  The currency effect was favorable to US investors, and EAFE returned +1.56% in US dollars (+4.99% year to date).  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

Interest rates fell sharply in response to the quarter’s news.  The yield on the two-year US Treasury note fell to 0.45% (from 0.80% at 3/31/11), while the yield on the ten-year fell to 3.18%, from 3.47% three months earlier.  The Barclays Capital US Aggregate Bond index returned +2.30% (+2.74% year to date).  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

June 2011

The market weakness that characterized much of May intensified during the first part of June. Domestically, economic indicators reported during the month were generally soft, and Congressional budget negotiations stalled. Overseas, Greece and its fiscal position continued to dominate the news. Street protests in Athens appeared likely to impede the Greek government’s efforts to adopt a budget plan that would meet conditions the European Union demanded in exchange for providing the credit necessary to forestall a default on Greece’s debt. Late in the month, though, the Greek government did in fact pass the required austerity plan, and a strong relief rally in the last week of June retraced much of the lost ground. For the full month, the S&P 500 returned –1.67%; it has returned +6.02% so far this year. The Midcap 400 Index returned –2.04% for the month (+8.56% year to date), and the Small Cap 600 returned –1.81% (+7.54% year to date). Value was weaker than growth among large- and mid-caps, but did a little better in the small cap range. [Index returns: Standard and Poors]

The economic news and worries about Greece were again hard on global equity markets. The MSCI Barra EAFE international equity index ended the month with a return of –1.22% in local currencies (–0.80% year to date). The dollar strengthened against the pound sterling, ending June at $1.6067 to the British currency, compared to $1.6439 a month earlier. The dollar fell to $1.4523 against the euro, from $1.4376 at the end of May. It also fell to 80.81 yen, from 81.29 yen at the end of May. The currency effect was about neutral for US investors, and EAFE returned –1.25% in US dollars (+1.56% for the first half). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The US Treasury yield curve steepened a bit during the month. The yield on the two-year US Treasury note was unchanged at 0.45%, while the yield on the ten-year ended June at 3.18%, up from 3.05% a month earlier. The bond market’s return reflected the increase in intermediate- and long-term rates, as the Barclays Capital US Aggregate Bond index slipped, returning –0.29% (+2.74% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

May 2011

After ending April at levels it had not reached since mid-2008, the US stock market gave back some of its gains in May.  The market’s tone was sour for most of the month, as a string of weak economic reports, especially in housing, raised concerns over the likelihood of the long-feared “double-dip” recession.  The already persistent fears over public debt in portions of the Eurozone also intensified as news emerged suggesting that Greece may be unable to avoid some form of default.  The news regarding Greece seemed to drive stocks lower, but it also pushed the US dollar higher.  In recent weeks strength in the dollar has also been a negative for US stocks, especially those of companies in commodity-related businesses.  News at month’s end about a possible bailout agreement for Greece provided a measure of relief, but the S&P 500 still ended May with a return of –1.13%.  The Midcap 400 Index returned –1.35% for the month, and the Small Cap 600 returned –0.90%.  Value declined more severely than growth in all market capitalization ranges.  [Index returns:  Standard and Poors]

The economic news and worries about Greece were also hard on global equity markets. The MSCI Barra EAFE international equity index ended the month with a return of –1.45% in local currencies.  As noted, the dollar also strengthened, particularly against European currencies.  It ended the month at $1.439 against the euro, compared to $1.482 a month earlier.  The dollar also rose to $1.645 against the pound Sterling (from $1.669 a month earlier), and to 81.495 yen, from 81.31 yen at the end of April.  The currency effect was unfavorable to US investors, and EAFE returned –2.95% in US dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release and Yahoo! Finance]

As the dollar strengthened and the stock market weakened, US Treasury interest rates fell during the month.  The yield on the two-year US Treasury note decreased to 0.45% (from 0.61% at 4/30), while the yield on the ten-year ended May at 3.05%, down from 3.32% a month earlier.  The bond market’s return reflected the drop in rates, as the Barclays Capital US Aggregate Bond index returned +1.31%.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

April 2011

Equity markets began April seemingly uncertain whether to continue their recent advance or fall back.  The month’s first major bit of news — Standard and Poors’ announcement that they may eventually have to downgrade the credit rating of US Treasury debt — seemed to decide the issue, and the market sold off.  When companies began reporting their quarterly earnings, however, the results were strong enough to send the market higher again.  Reasonably good economic data, more clarity on the Fed’s intention to keep rates low but not to extend its purchases of Treasury securities, and a strong performance by Fed Chair Ben Bernanke in the news conference immediately following the Federal Open Market Committee meeting all contributed to the market’s positive tone.  For the month, the S&P 500 returned +2.96%.  The Mid-cap 400 index returned +2.72%, and the Small-cap 600 index returned +2.60% for the month.  Growth did substantially better than value in all capitalization ranges.  [Index returns:  Standard and Poors]

Global equity markets were also moderately strong during April.  The MSCI Barra EAFE international equity index ended the month with a return of +1.90% in local currencies.  But while the Fed’s decisions and comments helped the equity markets, they contributed to continuing weakness in the US dollar.  The dollar ended the month at 81.31 yen, compared to 82.76 a month earlier.  The dollar also fell to $1.669 against the pound Sterling (from $1.605 a month earlier), and to $1.482 against the euro, from $1.418 at the end of March.  The currency effect was strongly favorable to US investors, and EAFE returned +5.98% in US dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

In spite of S&P’s credit warning, US Treasury interest rates fell during the month.  The yield on the two-year US Treasury note decreased to 0.61% (from 0.80% at 3/31), while the yield on the ten-year ended April at 3.32%, down from 3.47% a month earlier.  The bond market’s return reflected the drop in rates, as the Barclays Capital US Aggregate Bond index returned +1.27%.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

 

Market Review, First Quarter 2011

US stocks started 2011 with a solid advance, as investor optimism carried over from 2010. Investors grew cautious as the quarterly rush of corporate earnings reports approached, but the results were good enough to preserve the market’s early gains. Economic data during the quarter were generally fairly good as well. Rising tensions in a number of Middle Eastern countries, especially Egypt, led to short-term losses at the end of January, but the market recovered, continuing to gain until the middle of March. At that point, the disastrous earthquake and tsunami in Japan, fears that damage to the Fukushima-Daiichi nuclear power plant might escalate into a major environmental catastrophe, news of the continuing conflict in Libya, and rising oil prices combined to send the market into full retreat. By March 16, the S&P 500 Index had given up its entire advance for the year. Yet in spite of continuing nervousness about Japan and Libya, the market turned around again, with support from promising economic indicators, especially those suggesting a nascent recovery in employment. The S&P 500 index ended the quarter with a gain of +5.92%. The Mid-cap 400 index returned +9.36%, and the Small-cap 600 index returned +7.71%. Value did better than growth among large-caps, while small- and mid-cap growth were better than their value counterparts. [Index returns: Standard and Poors]

Global developed equity markets generally tracked the US through mid-March, but they did not bounce back so strongly in the second half of March. Fears of fiscal problems in Europe, which had abated, grew again as it began to appear Portugal may need assistance. The MSCI Barra EAFE international equity index returned +0.99% in local currencies. The US dollar fell against European currencies, weakening to $1.418 against the euro (from $1.327 on 12/31/10) and $1.605 against the pound Sterling (from $1.539 three months earlier). The dollar was stronger against the Japanese yen, ending March at 82.76 yen, compared to 81.67 at the end of December. The currency effect was favorable to US investors, and EAFE returned +3.36% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Interest rates varied considerably with the quarter’s news. The economic data showed early indications of a possible re-emergence of inflation, although many market participants continue to expect the Fed to complete its current round of quantitative easing. The overall result was a modest increase in rates. The yield on the two-year US Treasury note rose to 0.80% (from 0.61% at 12/31/10), while the yield on the ten-year rose to 3.47%, from 3.30% a month earlier. The Barclays Capital US Aggregate Bond index returned +0.68%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

March 2011

After advancing strongly in January and well into February, US stocks wobbled early in March against a backdrop of economic and geopolitical pressures. Near mid-month, the disastrous earthquake and tsunami in Japan, fears that damage to the Fukushima-Daiichi nuclear power plant might escalate into a major environmental catastrophe, news of the continuing conflict in Libya, and rising oil prices combined to send the market into full retreat. By March 16, the S&P 500 Index had given up its entire advance for the year. Yet in spite of continuing nervousness about Japan and Libya, the market turned around again, with support from promising economic indicators, especially concerning a nascent recovery in employment. Over the full course of a volatile March, the S&P 500 returned +0.04%, bringing its return for the first quarter to +5.92%. The Mid-cap 400 index returned +2.45% (+9.36% year to date), and the Small-cap 600 index returned +3.01% for the month (+7.71% so far this year). Growth did better than value in all capitalization ranges. [Index returns: Standard and Poors]

While global developed equity markets generally fell along with the US market in the first half of the month, they did not quite track the US market’s recovery in the second half.  The MSCI Barra EAFE international equity index ended the month with a return of –2.86% in local currencies.  So far in 2011, the index has returned +0.99%.  At the height of the fears over the damage to the Japanese nuclear power plant, the yen (counter-intuitively) rallied strongly, but coordinated central bank intervention and a somewhat improved outlook reversed the rally.  For the month, the US dollar gained against the yen, ending at 82.76 yen, compared to 81.94 a month earlier.  The dollar also improved to $1.605 against the pound Sterling (from $1.625 a month earlier), but it fell to $1.418 against the euro, from $1.379 at the end of Feburary.  The overall currency effect was modestly favorable to US investors, and EAFE returned –2.24% in US dollars (+3.36% year to date).  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

Equity markets first fell and then rose during March, and so did interest rates. In the end, US Treasury yields rose a bit, with shorter rates rising a little more strongly, flattening the yield curve. The yield on the two-year US Treasury note increased to 0.80% (from 0.69% at 2/28), while the yield on the ten-year ended February at 3.47%, up from 3.42% a month earlier. The bond market’s return reflected the slight increase in rates, as the Barclays Capital US Aggregate Bond index returned +0.12% (+0.68% for the quarter). [Index returns: Barclays Capital. Treasury yields: US Treasury].

February 2011

US stocks followed up a strong January with further gains well into February. The reasons for the advance continued to be the same — strong corporate earnings, along with encouraging economic figures, although data concerning housing and employment continue to be soft. The advance stalled toward the end of the month, though, as violence in Libya escalated to the point of interfering with the production of oil in that country. At that point the markets, which had more or less ignored equally dramatic events in Tunisia, Egypt, and Bahrain, took notice and fell back somewhat. Even so, the S&P 500 index gained +3.43% for the month. The Mid-cap 400 index returned +4.65%, and the Small-cap 600 index returned +4.41% for the month. Value did better than growth among large-caps, while mid- and small-cap growth did a little better than their value counterparts. [Index returns: Standard and Poors]

Global developed equity markets generally tracked the US again in February. The MSCI Barra EAFE international equity index ended the month with a return of +2.34% in local currencies. The US dollar generally slipped a bit, weakening to $1.381 against the euro (from $1.372 on 1/31), $1.627 against the pound Sterling (from $1.605 a month earlier), and 81.73 yen (compared to 81.97 at the end of January). The overall currency effect was favorable to US investors, and EAFE returned +3.30% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance]

The continued signs of economic recovery pushed interest rates higher for most of the month, until the news from Libya created a bit of a flight to US Treasuries, offsetting a portion of those increases. Overall, the yield curve flattened a bit. The yield on the two-year US Treasury note increased to 0.67% (from 0.58% at 1/31), while the yield on the ten-year ended February at 3.42%, the same level as a month earlier. The bond market’s return reflected the fairly steady rates, as the Barclays Capital US Aggregate Bond index returned +0.25%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

January 2011

The US stock market in January was unable to continue the stunning run it made from mid-March through December. It began the year with a modest advance, but lost its strength around the middle of the month. Earnings reports were generally good, but not good enough to drive further gains. At the same time, posturing in the US Senate over the reappointment of Federal Reserve Chair Ben Bernanke created jitters in the market. The Senate finally confirmed his reappointment at month’s end, with vocal critics like Jim Bunning of Kentucky capitalizing on the opportunity to cast “no” votes without real-world consequences. Troubles overseas affected the US markets too, as continued worries about the ability of governments in Greece, Ireland, and Portugal to pay their debts raised fears for the stability of the Euro. Even an unexpectedly strong GDP report — the Commerce Department estimated that real US economic output increased by 5.7% in the fourth quarter — failed to help the markets. A number of observers downplayed the report, pointing out that inventory buildup was a big component of the increase. These observers apparently think that inventories somehow don’t count, even though businesses do not build inventories that they do not believe they will be able to sell in the future. Nevertheless, the S&P 500 fell toward the end of the month, ending with a return of –3.60%. Mid- and small-capitalization stocks did slightly better; the S&P Midcap 400 returned –3.22% and the Small Cap 600 –3.38%. Value performed quite a bit better than growth in all capitalization ranges. [Index returns: Standard & Poors]

Equities’ weakness was again global. The MSCI Barra EAFE international equity index ended January with a return of –3.45% in local currencies. The US dollar was mixed against other currencies. At the end of January, it stood at 90.38 yen, weaker than December’s 93.08. It ended at $1.3870 to the euro, sharply stronger than the $1.4332 level of a month earlier. The dollar edged ahead to $1.6009 against the pound Sterling, from $1.6167 on December 31. The overall currency effect was a negative for US investors, and EAFE returned –4.41% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

US Treasury interest rates fell across the yield curve during January. The yield on the two-year US Treasury note ended the month at 0.82% (from 1.14% on 12/31), and the yield on the ten-year fell to 3.63% (from 3.85% on 12/31). The overall performance of the US bond market reflected this drop in rates — the Barclays Capital US Aggregate Bond index returned +1.53% for January. [Index returns: Barclays Capital. Treasury yields: US Treasury].