Market Reviews 2012

2012RollingHillsTrees

2012 Market Reviews

The stock market in the fourth quarter of 2012 seemed to take a long, tortuous path, only to finish near where it started.  The economic data that emerged during the quarter were mildly positive.  More important, though, a series of major sources of uncertainty — negotiations over fiscal relief for weak economies in Europe, the storm in the northeast at the end of October, the election in November, and our own fiscal policy negotiations in December — preoccupied market participants.  In November, monetary authorities in Europe announced a framework under which Greece agreed to sufficiently stringent fiscal reform to justify an aid package that should keep that nation afloat for some time.  Here in the US, after President Obama’s re-election and weeks of wrangling over tax and spending policy, Congress passed a stop-gap tax bill that forestalls sharp tax increases and spending cuts that could have occurred at the turn of the year.  Even with all that news, the S&P 500 index slipped by just –0.38% for the quarter, bringing its return for the full year to +16.00%.  The Mid-cap 400 index returned +3.61% (+17.88% for the year), and the Small-cap 600 index returned +2.22% (+16.33% YTD).  Value out-performed growth in all capitalization ranges, both for the quarter and for the year.  [Index returns:  Standard and Poors]

Overseas markets deviated sharply from US results.  The Greek relief package and a Japanese announcement of an aggressive program of monetary easing were key factors.  The MSCI Barra EAFE international equity index returned +7.52% in local currencies for the quarter; +17.31% for the year.  The dollar eased to $1.3186 against the euro, from $1.2856 on September 30, and to $1.6262 against the pound Sterling, from $1.6132 three months earlier.  In contrast, the dollar jumped to 86.64 yen, having ending September at 77.92 yen.  The overall currency effect was slightly unfavorable for US investors, and EAFE returned +6.57% in US dollars (+17.32% for the year).  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

The Federal Reserve continued its policy of holding interest rates very low, but announced an important change in December.  Instead of estimating a target date for the duration of its policy of very low interest rates, the Fed will now keep rates low until unemployment moderates to around 6.5%.  Interest rates moved higher toward the end of the year, with longer-term rates rising the most.  The yield on the two-year US Treasury note ended the quarter at 0.25%, up slightly from 0.23% at the end of September, while the yield on the ten-year Treasury rose to 1.78%, from 1.65% three months earlier.  The Barclays Capital US Aggregate Bond index returned +0.22% for the quarter, and +4.22% for the year.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

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It was all about the cliff in December.  For most of the month, the market's attention centered on the fiscal policy negotiations in Washington DC, and on the threat that absent an agreement, the US would see significant increases in taxes and cuts to Federal spending at year-end.  In large measure, the market's tone shifted with the tone of comments from President Obama, House Speaker Boehner, and other politicians involved in the discussions.  Some observers noted that the market was strongest when Congress was in recess.  Stocks slid sharply toward the end of the month as the negotiations became particularly tense, but hints that at least a stop-gap bill would be forthcoming after all boosted the market on December 31.  For the month, the S&P 500 returned +0.91%, bringing its return for the year to +16.00%.  The Mid-Cap 400 index returned +2.19% for the month (+17.88% for the year), and the Small Cap 600 returned +3.30% (+16.33% YTD).  Value out-performed growth in all capitalization ranges, both for the month and for the year.  [Index returns:  Standard and Poors]

While the US market idled during the fiscal policy negotiations, overseas markets showed significant strength.  The MSCI Barra EAFE international equity index returned +3.24% in local currencies (+17.31% for the year).  Several European governments continued to pursue fiscal tightening, a deflationary measure that tended to support the value of the Euro.  The dollar weakened to $1.3186 to the Euro and $1.6262 to the pound Sterling, from $1.3010 and $1.6027 at the end of November.  A year ago, one Euro bought $1.2973, and one pound Sterling $1.5537.  Meanwhile, central banks in both the US and Japan announced plans for further monetary easing.  The Japanese announcement marked a shift to a more aggressive policy, and as a result, the US dollar rose sharply against the yen.  It ended the year at 86.64 yen, compared to 82.54 on November 30 and 76.98 a year earlier.  At the level of the EAFE index, the currency moves about offset one another, and EAFE returned +3.20% in US dollars for the month (+17.32% for the year).  [Index returns:  MSCI Barra.  Currency rates:  Federal Reserve H.10 releases]

The Federal Reserve continued its accommodative monetary policy, but announced an important change.  The Fed stated that instead of estimating a target date for the duration of its policy of very low interest rates, it would keep rates low until unemployment moderated to around 6.5%.  Investor reaction to the announcement was mixed, but overall the change should foster a smoother transition back to normal monetary policy when the time finally comes.  In the bond market, short-term rates remained steady, but longer-term rates rose.  The two-year Treasury yielded 0.25% at the end of December, unchanged from November 30 and from a year ago.  The yield on the ten-year rose to 1.78% from 1.62% a month earlier, although it remained lower than the year-ago level of 1.89%.  Overall, the rising long-term yields pushed bond prices down enough that the Barcap US Aggregate Bond Index returned –0.14% for the month (+4.23% for the year).  [Index returns:  Barclays Capital.  Bond yields:  US Treasury]

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November began with the news of the destructive storm in the northeast fresh, and the Presidential election on the immediate horizon.  The market rallied in the days between those two events, but they turned sharply lower for several days after the election.  Before long it became clear that the selloff had to do not with the actual election results, but with uncertainty about whether the newly re-elected President and the lame duck Congress will be able to arrive at a legislative deal to forestall the automatic tax increases and cuts in Federal spending scheduled for the first of the year.  So far we've seen mostly aggressive posturing, but many market participants seem to feel that the negotiations will result in some sort of deal.  Meanwhile, monetary authorities in Europe announced a framework under which Greece agreed to sufficiently stringent fiscal reform to justify an aid package that should keep that nation afloat for some time.  The Federal Reserve also released its Beige Book survey of economic conditions, which provided mildly encouraging economic data.  The markets finished the month on a positive note, and for the month the S&P 500 returned +0.58%.  The mid-cap 400 index returned +2.20%, and the small cap 600 index returned +1.00%.  Growth was stronger than value in the large- and mid-cap ranges, but small-cap value out-performed small-cap growth.  [Index returns:  Standard and Poors]

The apparent success of the Greek monetary deal lent strength to overseas markets, and the MSCI Barra EAFE international equity index returned +2.95% in local currencies.  The deal also strengthened the euro, which rose to $1.3010 against the dollar on November 30, from $1.2958 a month earlier.  The dollar advanced against the pound Sterling, ending November at $1.6027 to the pound, compared to $1.6111 at the end of October.  In Japan, election uncertainties and the announcement of significant monetary easing led to a weaker yen; the dollar advanced to 82.54 yen at the end of November, from 79.94 at the end of October.  Overall, the currency moves were a slight negative for US investors, and EAFE returned +2.42% in US dollars. [Index returns:  MSCI Barra; currency rates:  Fed H.10 release]

The bond market reflected the general economic and political uncertainty, as yields on US Treasury securities generally fell, while those on other types of bonds drifted higher.  The yield on the two-year Treasury ended November at 0.25%, compared to 0.30% a month earlier, while the yield on the ten-year fell to 1.62%, from 1.72% at the end of October.  In spite of the falling Treasury rates, the Barclays Capital US Aggregate bond index returned just +0.16% for the month.  [Index returns:  Barclays Capital; Treasury yields:  US Treasury]

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After having regained levels it had not seen since mid-2008, the US stock market took a breather in the early part of October.  Lukewarm corporate earnings results, along with mildly encouraging economic data, could not inspire further advances, and some market participants may have preferred to remain on the sidelines in the weeks immediately prior to our general election.  The data out during October indicated modest improvement in the housing market and in employment.  The market fluctuated aimlessly for the first three weeks of the month, and then fell a bit at the time of the Federal Open Market Committee's regular meeting.  In its announcement after the meeting, the Fed reinforced the overall impression of positive, but tepid, economic growth.  The market closed for October 29 and 30 because of the storm on the east coast, but when it reopened on October 31, trading was rather quiet.  For the month, the S&P 500 index returned –1.85%.  The Mid-cap 400 index returned –0.79%, and the Small-cap 600 index returned –2.03%.  Value out-performed growth in all capitalization ranges.  [Index returns:  Standard and Poors]

While the US market drifted lower, overseas markets advanced moderately.  Firming economic data from China, along with some stabilization in the European debt situation, led to rising markets in both Asia and Europe.  The MSCI Barra EAFE international equity index returned +1.16% in local currencies.  The US dollar rallied to 79.84 Japanese yen, from 77.92 a month earlier.  The dollar ended mixed in Europe, slipping to $1.2974 against the euro from $1.2856 on September 30, while it improved slightly to $1.6119 against the pound Sterling, from $1.6132 at the end of the previous month.  Overall, the dollar's movements worked against US investors, and EAFE returned +0.83% in US dollars.  [Index returns:  MSCI Barra; currency rates:  Yahoo! Finance and Federal Reserve H.10 release]

In spite of the Fed's continuing commitment to buy mortgage-backed securities and its statement that it would likely keep short-term rates exceptionally low until mid-2015, US Treasury yields shifted higher during October.  The yield on the two-year US Treasury rose to 0.30% on October 31 from 0.23% at the end of September, while the yield on the ten-year rose to 1.74% from 1.65% a month earlier.  Although Treasuries fell in price, other bonds did a bit better, and overall the BarCap US Aggregate Bond Index earned its coupon, returning +0.20% for the month.  [Index returns:  Barclays Capital; Treasury yields:  US Treasury]

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Going into the third quarter of 2012, the markets faced an atmosphere of anxiety and uncertainty.  Market observers suggested that corporate earnings growth was slowing.  The European sovereign debt drama dragged on, although the traditional August holiday seemed to break the daily cycle of dismal news from that region.  Economic data were tepid, and Facebook’s IPO in May had been a stunning bust for everyone except the selling shareholders.  The US election campaign season also heated up, with election uncertainty translating to inaction and uncertainty regarding US fiscal policy for the rest of this year and into next.  Yet as the summer wore on, equity markets drifted steadily higher.  In September, equity markets also jumped in response to accommodative policies from the European Central Bank and the Federal Reserve.  The overall result was a rise of +6.35% in the S&P 500 index for the quarter.  The Mid-cap 400 index returned +5.44%, and the Small-cap 600 index returned +2.33%.  Growth outperformed value among mid-caps; value did better among small-caps, and they were about equal in the large-capitalization range.  [Index returns:  Standard and Poors]

Overseas markets reflected the general shape of US results.  The MSCI Barra EAFE international equity index returned +4.67% in local currencies for the quarter.  The dollar also weakened as capital flows shifted toward other markets.  It eased to $1.2856 against the euro, from $1.2668 on June 30, and to $1.6132 against the pound Sterling, from $1.5686 three months earlier.  The dollar also fell against the Japanese yen, ending September at 77.92 yen, after ending June at 79.81 yen.  The overall currency effect was favorable for US investors, and EAFE returned +6.92% in US dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

The combined effect of aggressive central bank action and firm equity markets was to lower short-term interest rates, while long-term rates moved in a narrow range.  The yield on the two-year US Treasury note ended the quarter at 0.23%, down from 0.33% at the end of June, while the yield on the ten-year Treasury inched down to 1.65%, from 1.67% three months earlier.  The Barclays Capital US Aggregate Bond index returned +1.59%.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

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Equity markets around the world carried their momentum from a calm, but positive August into September.  Volatility remained subdued, and the market tone was generally favorable, but unlike August, September also saw sharp market moves in response to significant news events.  On September 6, the market rose when European Central Bank President Mario Draghi announced that the ECB stood ready to buy sovereign debt of countries that asked for help and met certain conditions.  The market rose again on September 13, when the Federal Open Market Committee announced further expansion of its quantitative easing program.  And it fell on September 22, when riots in Spain cast doubt on the Draghi plan.  Even so, and in spite of lukewarm economic data toward the end of the month, the S&P 500 ended the month with a return of +2.58%.  The Mid-cap 400 returned +1.94%, and the Small Cap 600 returned +2.33%.  In a bit of a reversal from recent months, value outperformed growth in all capitalization ranges. [Index returns: Standard and Poors]

As happens so often, international equity markets followed about the same path as the US market.  The MSCI Barra EAFE international equity index returned +1.54% in local currencies.  The dollar also weakened as capital flows shifted toward other markets.  It eased to $1.2856 against the euro, from $1.2578 at the end of August, and to $1.6132 against the pound Sterling, from $1.5864 a month earlier.  The dollar also slipped a bit against the yen, ending September at 77.92 yen, down from 78.30 on August 31.  As a result of the currency moves, EAFE returned +2.96% in US dollars.  [Index returns:  MSCI Barra; Currency rates:  Federal Reserve H.10 release].

In spite of the vigorous central bank actions, the general market strength pushed interest rates a bit higher.  The yield on the two-year US Treasury note ended September at 0.23%, just above its August 31 level of 0.22%.  The ten-year Treasury yield rose to 1.65%, from 1.57% at the end of August.  The Barclays Capital Aggregate Bond Index returned +0.14% for the month.  [Index return:  Barclays Capital; Treasury note yields:  US Treasury]

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As last month began, American observers expressed incredulity that European leaders would go ahead and take their traditional August holiday in spite of the sovereign debt crisis in the Eurozone.  For the markets, however, the European leaders' vacation provided a break from what had been constant worries about the fiscal position of their governments.  Even though the US Presidential campaign season continued in full force, including the Republican National Convention at the end of the month,  nothing in the political landscape seemed to move markets either.  Even Fed Chair Bernanke's talk at the Kansas City Fed's annual central bankers' conference in Jackson Hole failed to generate much of a market reaction.  Overall, the stock market spent August acting like it was on vacation too, with very low volatility and low trading volumes.  Even so, the S&P 500 managed a return of +2.25% for the month.  The mid-cap 400 index returned +3.48%, and the small-cap 600 +3.79%.  [Index returns:  Standard & Poors]

The late-summer lull was good for international stocks, too.  The MSCI Barra EAFE international equity index returned +1.58% in local currencies.  The US dollar slipped against European currencies, ending August at $1.2578 to the euro and $1.5864 to the pound Sterling, compared to $1.2315 and $1.5686 at the end of July.  The dollar improved a bit against the Japanese yen, ending the month at 78.30 yen, up from 78.10 a month earlier.  The overall currency effect helped US investors, and EAFE returned +2.69% in US dollars [Index returns:  MSCI Barra; currency rates: US Treasury H.10 release]

While equity markets quietly inched forward, the bond market idled.  The yield on the two-year US Treasury note ticked down to 0.22% at the end of August from 0.23% a month earlier, while the ten-year yield edged up to 1.57% from 1.51% at the end of July.  The Barclays Capital US Aggregate Bond index returned +0.07% for the month.  [Index returns:  Barclays Capital; bond yields:  US Treasury]

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The markets' tone felt negative during July, but for most of the month they really just bounced around aimlessly, as though waiting for a reason to move one direction or the other.  The June jobs report, which the Labor Department released early in July, was fairly weak, and other economic indicators showed tepid growth.  Quarterly earnings reports generally met modest expectations, but with some notable exceptions like Apple Computer and Facebook.  The saga of European sovereign debt continued to grind along, with no real movement until the July 29, when Mario Draghi, head of the European Central Bank, declared that the ECB would do "whatever is necessary" to prevent a financial calamity.  Mr. Draghi's remarks gave the markets a late lift, and the S&P 500 ended the month with a gain of +1.39%.  Even that advance was deceptive, though, since the strength lay almost exclusively with the largest stocks.  The S&P 100 index of the very largest stocks returned +2.06%, meaning the rest of the index added just +0.12%.  The Mid-cap 400 index actually slipped by -0.04%, and the Small-cap 600 fell by -0.77%.  Growth outperformed value among large- and mid-caps, with the reverse true for small stocks.  [Index returns:  Standard & Poors; non-S&P 100 return my calculation]

Global markets returned to their pattern of following the US market, and the MSCI Barra EAFE international equity index returned +1.48% in local currencies.  The euro fell sharply, to $1.2295 at the end of July, compared to $1.2668 a month earlier.  The dollar remained about unchanged against the pound Sterling — the July 31 exchange rate of $1.5672 wasn't far from the June 30 figure of $1.5686.  The dollar slipped to 78.13 yen from 79.81 a month earlier.  The currency movements generally worked against US investors, and EAFE returned +1.13% in US dollars.  [Index returns:  MSCI Barra; exchange rates:  Fed H.10 release and Yahoo! Finance]

Investor nervousness and expectations for central bank easing continued to push US Treasury yields lower.  The two-year Treasury yielded 0.23% on July 31, down from 0.33% on June 30.  The ten-year yield ended the month at 1.53%, compared to 1.67% a month earlier.  The ten-year yield had fallen as low as 1.43% during the month.  The Barclays Capital US Aggregate Bond Index returned +1.38% for the month.  [Index return:  Barclays Capital; Treasury yields:  US Treasury]

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The second quarter of 2012 was long on news, but short on items that resolved investor uncertainty.  The continuing European sovereign debt issue seemed to provide the main backdrop to the market’s movements.  The tone of the political discourse softened somewhat, and governments and the European Central Bank both provided some helpful support for the European banking sector.  The result was some relief from the urgency of the crisis, but little change in its seriousness.  The financial sector failed to distinguish itself during the quarter.   JP Morgan disclosed a trading loss in the billions of dollars, and Barclays found itself embroiled in scandal over alleged manipulation of LIBOR, a key interbank lending rank in wide use as a reference rate in financial contracts, including mortgages.  The Facebook IPO in May was successful in raising capital for the company, but the stock fared poorly in subsequent trading.  The offering brought unwanted attention to Morgan Stanley, its lead underwriter, and NASDAQ, which encountered significant operational problems in establishing a market for the shares.  Corporate results were mixed, and economic indicators were fairly weak.  Overall, the markets slid markedly in May before regaining some of their lost ground in June.  The S&P 500 returned –2.75% for the quarter, while the Mid-cap 400 index returned –4.93%, and the Small-cap 600 index returned –3.58%.  Growth outperformed value among large- and small-caps, though mid-cap value outperformed mid-cap growth.  [Index returns:  Standard and Poors]

Overseas markets reflected the general shape of US results.  The MSCI Barra EAFE international equity index returned –5.43% in local currencies for the quarter, with most of the loss occurring in May.  European currencies weakened against the dollar.  The euro ended June at $1.2668, compared to $1.3334 at the end of March.  The dollar closed the quarter at $1.5686 to the pound Sterling, better than the previous quarter’s $1.5985.  In contrast, the dollar slipped against the Japanese yen, ending June at 79.81 yen, after ending March at 82.41 yen.  The overall currency effect was detrimental to US investors, and EAFE returned –7.13% in US dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

Longer-dated US Treasury securities caught a strong flight-to-safety bid, especially during May.  The yield on the two-year US Treasury note ended the quarter unchanged at 0.33%, but the yield on the ten-year Treasury fell to 1.67%, from 2.23% three months earlier.  The Barclays Capital US Aggregate Bond index returned +2.06%.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

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After performing poorly in May, equity markets rebounded nicely in June.  Corporate earnings reports weren't especially strong, and neither were the month's economic data.  The US Federal Reserve did indicate its plans to continue its policy of monetary accommodation, but most market participants had expected the Fed to maintain that stance, so the Fed did not really move the market.  The Supreme Court's ruling largely upholding the Affordable Care Act excited a great deal of comment from market participants, but their remarks generally seemed more political than economic.  The only real market reaction to the ruling was in the stock prices of companies with a direct interest in the outcome.  Toward the end of the month, news emerged that Barclays Bank will face a record fine in a scandal involving manipulating LIBOR, a key reference interest rate.  The key news, however, was that European leaders, and particularly German Chancellor Merkel, seemed more inclined than in previous months to take steps to mitigate the sovereign debt problems in Europe.  The S&P 500 returned +4.12% for the month (–2.75% for the quarter and +9.49% year to date).  The Mid-cap 400 index returned +1.89%, and the Small Cap 600 +4.18%.  Value outperformed growth in all capitalization ranges for the month. [Index returns:  Standard and Poors]

As the worst European fears receded, both global equity markets and European currencies improved.  The MSCI Barra EAFE international equity index returned +5.18% (–5.43% for the quarter and +4.24% YTD) in local currencies.  The US dollar fell relative to the euro, ending June at $1.2668 to the euro, from $1.2364 a month earlier.  The dollar also weakened to $1.5686 against the pound Sterling, from $1.5405 at the end of May.  It rose, however, to 79.81 yen, from 78.29 on May 31.  EAFE returned +7.01% (–7.13% for the quarter and +2.96% YTD) in US dollars.  [Index returns:  MSCI Barra; currency rates:  Federal Reserve H.10 release]

While riskier assets gained in June, US Treasury securities slipped.  The yield on the two-year US Treasury rose to 0.33% on June 30, from 0.27% a month earlier.  The ten-year Treasury yield rose to 1.67%, from 1.59% at the end of May.  Overall, the Barclays Capital US Aggregate returned +0.04% for the month (+2.06% for the quarter, and +2.37% year to date).  [Index returns:  Barclays Capital; Treasury yields:  US Treasury]

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May played out as a repeat of January — in reverse.  While the year began with a steady series of modest gains, in May the market seemed to slip by about a half a percent every day.  The main reason for the weakness was the nagging worry about fiscal conditions in Europe, but that wasn't the only factor.  JP Morgan, in spite of its reputation for a "fortress balance sheet" and superior risk management, disclosed a trading loss in the billions of dollars, highlighting the lack of regulatory change since the financial crisis of 2008.  And then there was Facebook.   Its IPO was successful in raising capital for the company, but the stock fared poorly in subsequent trading.  The market action brought unwanted attention to Morgan Stanley, the lead underwriter, and NASDAQ, which encountered significant operational problems in establishing a market for the shares.  Overall, the S&P 500 index returned -6.01% for the month.  In spite of the weakness, the index has still returned +5.16% year to date.  The Mid-cap 400 index returned -6.48% (+5.90% year-to-date) and the Small cap 600 returned -6.27% (+3.64% YTD).  Growth again outperformed value in all capitalization ranges. [Index returns:  Standard & Poors]

European worries, along with evidence of a slowdown in China, weighed on global markets.  The MSCI Barra EAFE international equity index returned -7.52% in local currencies (-0.89% YTD).  Investors concerned about developments in Europe seemed to seek safety in the US dollar, which rallied sharply against European currencies.  The dollar strengthened to $1.236 to the euro from $1.323 a month earlier.  It also strengthened to $1.541 to the pound Sterling, from $1.623 at the end of April.  The dollar did ease to 78.29 yen, from 79.81 the previous month.  With the currency moves, EAFE returned -11.48% in dollars (-3.79% YTD).  [Index returns:  MSCI Barra; currency rates: Fed H-10 release]

The same impulse that drove investors into dollars seemed to move many of those dollars into intermediate- and long-term US Treasuries.  The yield on the 10-year Treasury dropped to 1.59%, from 1.98% a month earlier.  The two-year, however, remained unchanged at 0.27%.  With the flattening of the yield curve, the Barclays Capital US Aggregate bond index returned +0.90% (+2.33% year to date).  [Index returns:  Barclays Capital; Treasury yields:  US Treasury]

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As Spring began investors, who had seemed reasonably optimistic for the first three months of the year, turned somewhat more cautious.  European sovereign debt issues, this time in Spain, continue to create headaches for investors, and uncertainty over the course of everything from corporate earnings, to economic growth in China, to the outcome of the upcoming election in France seemed to weigh on investor confidence.  As a result, the equity market sold off early in the month.  But corporate earnings proved to be all right, and overseas worries seemed mostly to remain overseas.  The Federal Open Market Committee met late in the month, but while its statement generated comment on both sides of the question of whether the Fed will provide further fiscal stimulus, it did not really move the market.  The stock market's tone improved late in the month, and it climbed back close to even.  For April, the S&P 500 returned –0.63%.  The mid-cap 400 index returned –0.23%, and the small-cap 600 index returned –1.26%.  Growth out-performed value across all capitalization ranges.  [Index returns:  Standard and Poors]

While the overseas news had limited impact in the US, it did push markets lower outside the US, and particularly in Europe.  The MSCI Barra EAFE international equity index returned –2.77% in local currencies.  The US dollar generally softened.  It slipped to 79.92 yen, from 82.41 at the end of March.  It also fell against the pound Sterling, ending the month at $1.623 to the pound, weaker than March's close of $1.5985.  The euro was even weaker than the dollar, so the dollar gained a bit against it, ending April at $1.324 against the European currency, compared to $1.3334 a month earlier.  The currency move was favorable to US investors in foreign stocks, and EAFE returned –1.96% in US dollars.  [Index returns:  MSCI Barra; exchange rates:  Federal Reserve H.10 release and Yahoo! Finance]

Investor skittishness was most apparent in the US Treasury bond market, where yields fell.  The yield on the two-year US Treasury note ended April at 0.27%, down from 0.33% at the end of March.  The ten-year yield fell to 1.96% at April 30, compared to 2.23% a month earlier.  As a result, bond prices increased, and the Barclays Capital US Aggregate Bond Index returned +1.11% for the month.  [Index returns:  Barclays Capital.  Treasury note yields:  US Treasury]

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Sometimes the markets seem to turn a page at the start of a new year.  That was the case this year, as the uneasiness of 2011 seemed to give way to cautious optimism in 2012.  The sovereign debt crisis in Europe continues, but the negotiations over resolving, for example, Greek debt have become laborious, rather than urgent.  Market participants seem to feel that holders of Greek debt will suffer substantial losses, but the problem is unlikely to cause the European banking system to unravel.  Meanwhile, economic conditions have defied the protestations of campaigning politicians and improved somewhat.  US corporate earnings continue to grow, and while the figures this quarter weren’t stellar, the general sentiment is that they were good enough.  The market advanced for most of the quarter on low volatility and light volume, and the S&P 500 returned +12.59% for the quarter.  The Mid-cap 400 index returned +13.50% for the quarter, and the Small-cap 600 index returned +11.19%.  Value outperformed growth among large- and small-caps, though mid-cap growth outperformed mid-cap value.  [Index returns:  Standard and Poors]

Overseas markets reflected a portion of the US market’s strength during January and February, but a degree of nervousness affected European markets more strongly than American ones during March.  The MSCI Barra EAFE international equity index returned +10.22% in local currencies for the quarter, with most of the gains in the first two months.  In spite of jitters in those markets, European currencies strengthened against the dollar.  The euro ended March at $1.3334, compared to $1.2973 on December 31, 2011.  The dollar closed the quarter at $1.5985 to the pound Sterling, compared $1.5537 on 12/31/11.  In contrast, the dollar strengthened against the Japanese yen, ending March at 82.41 yen, compared to 76.98 three months earlier.  The overall currency effect was mildly beneficial to US investors, and EAFE returned +10.86% in US dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

The general trend toward stronger markets, along with uncertainty about further Fed stimulus, put pressure on the bond market during the quarter.  The yield on the two-year US Treasury note rose to 0.33%, from 0.25% on December 31, and the yield on the ten-year jumped to 2.23%, from 1.89% three months earlier.  The Barclays Capital US Aggregate Bond index returned +0.30%.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury].

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In the absence of dramatic events in Europe or in the US economy in March, equity markets maintained their strong momentum from the first two months of 2012.  Market participants found themselves trying to interpret tealeaves in the employment report (not too bad), the Federal Reserve's statements (which made it hard to tell whether the Fed would apply further monetary stimulus or not), and events like Apple's launch of its new iPad (successful enough that detractors have begun to appear) for indications of what to expect next.  The market for initial public offerings has warmed up, even though one offering, that of the BATS stock exchange, failed spectacularly when BATS proved unable to process trades in its own stock.  The US stock market advanced for most of the month on low volatility and light volume, and the S&P 500 index finished with a return of +3.29% for March, and a very strong +12.59% for the quarter.  The Midcap 400 returned +1.88% for March (+13.50% YTD), and the Small Cap 600 returned +2.90% (+11.99% YTD).  Value outperformed growth in all capitalization ranges for the month, but the value-growth comparisons were mixed for the quarter.  [Index returns:  Standard and Poors]

While the European sovereign debt mess receded into the background during March, few observers think that the Eurozone's troubles are over, and so equities were weaker overseas than in the US.  The MSCI Barra EAFE international equity index returned +0.45% in local currencies during March, bringing the index's return to +10.22% for the quarter.  The US dollar did not move much against European currencies, however; it ended March at $1.3334 to the euro (from $1.3359 on 2/29), and $1.5985 to the pound Sterling (from $1.5951 on 2/29).  The dollar did strengthen a bit against the Japanese yen, advancing to 82.41 yen on 3/31 from 81.10 on 2/29.   EAFE returned –0.46% in US dollars (+10.86% for the quarter).  [Index returns:  MSCI Barra.  Currency rates:  Federal Reserve H.10 release]

The general trend toward stronger markets, along with uncertainty about further Fed stimulus, pushed interest rates a bit higher during March.  The two-year US Treasury note's yield edged up to 0.33% at March 31, from 0.30% on February 29.  The ten-year yield rose to 2.23% at the end of March, up from 2.03% a month earlier.  Bond prices fell as a result, and the Barclays Capital US Aggregate Bond Index returned -0.55% for the month (+0.30% for the quarter).  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury]

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Equity markets followed a strong January with continued advances in the first week of February.  Negotiations over the continuing European sovereign debt problems moved ahead, while the European Central Bank took steps to prevent serious disruptions in the European banking system.  Corporate financial results in the US were fairly good, although not exceptionally strong, and other economic indicators, including consumer sentiment and employment, were encouraging.  After the jump in the first week, the market seemed to make a small advance every day.  That wasn’t quite the case, but the S&P 500 index rose on 14 trading days and fell on only six during February.    For the full month, the index returned +4.32%.  The Midcap 400 Index returned +4.50% for the month, but the Small Cap 600 returned just +2.12%.  Growth out-performed value in all capitalization ranges.  [Index returns:  Standard and Poors]

The improving outlook in Europe helped markets overseas as well.  The MSCI Barra EAFE international equity index returned +5.60% in local currencies.  The euro strengthened to $1.3325 against the dollar, from $1.3053 a month earlier.  The dollar also slipped against the pound Sterling.  The British currency ended Feburary at $1.5923, compared to $1.5754 a month earlier.  The dollar did strengthen against the yen, however.  It ended the month at 80.49 yen, up from 76.34 at the end of January.  Overall, the currency effect was about neutral for US investors, and EAFE returned +5.74% in US dollars. [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release and Yahoo! Finance]

The continued strength in equity markets finally put a bit of pressure on the bond market.  The yield on the two-year US Treasury note ended February at 0.30%, after finishing January at 0.22%.  The yield on the ten-year ended the month at 1.98%, up from 1.83% a month earlier.  The Barclays Capital US Aggregate Bond index returned -0.02% in February.  [Index returns:  Barclays Capital.  Treasury yields:  US Treasury]

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Sometimes the markets seem to turn a page at the start of a new year. That was the case this year, as the uneasiness of 2011 seemed to give way to cautious optimism so far in 2012. The sovereign debt crisis in Europe continues, but the negotiations over resolving, for example, Greek debt have become laborious, rather than urgent. Market participants seem to feel that holders of Greek debt will suffer substantial losses, but the problem is unlikely to cause the European banking system to unravel. Meanwhile, economic conditions have defied the protestations of campaigning politicians and improved somewhat. US corporate earnings continue to grow, and while the figures so far this quarter haven’t, for the most part, been stellar, the general sentiment is that they have been good enough. As a result, the US stock market advanced sharply during the first three weeks of the new year, and then calmly maintained those gains for the rest of the month. For all of January, the S&P 500 returned +4.48%. The Midcap 400 Index returned +6.61% for the month, and the Small Cap 600 returned +6.58%. Mid-cap growth outperformed mid-cap value, but value was stronger than growth in the large- and small-capitalization ranges. [Index returns: Standard and Poors]

Once again, global equities followed roughly the same pattern as the US market. The MSCI Barra EAFE international equity index returned +3.90% in local currencies. As the news from Europe became calmer, so did currency markets, and the US dollar lost a bit of ground as investors eased away from its perceived safety. The dollar weakened to $1.309 against the euro, from $1.2973 at the end of December. The dollar also slipped against the pound Sterling. The British currency ended January at $1.5766, compared to $1.5537 a month earlier. The dollar weakened to 76.35 yen, from 76.98 on 12/31/11. The currency effect was positive for US investors, and EAFE returned +5.33% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance]

In spite of the strong equity markets, investors still sought safety in US Treasuries, and an announcement by the Federal Reserve that it intends to keep rates very low into 2014 helped drive Treasury yields lower. The yield on the two-year US Treasury note ended January at 0.22%, after ending December at 0.25%. The yield on the ten-year ended the month at 1.83%, down from 1.89% a month earlier. The Barclays Capital US Aggregate Bond index returned +0.88% in January. [Index returns: Barclays Capital. Treasury yields: US Treasury].

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All Market Reviews written by Dr. Jonathan Tiemann. All rights reserved.