Market Reviews 2014

Sunrise for 2014

 

2014 Market Reviews

Stories of dangers from Ebola, ISIS in the Middle East, and the revanchism of Vladimir Putin in Eastern Europe filled the news, and markets fell sharply for the first couple of weeks of October. But economic news and corporate earnings continued to show moderate strength, and the markets turned higher. A surprise drop in the price of oil seemed to help too, at least at first. Curiously, just at the time of the midterm elections, those stories about Ebola, ISIS, and Putin lost their edge of alarm, and those matters reverted to their proper position as items of concern, but not existential threats. The markets advanced until the end of November, when the drop in the price of oil turned into a rapid fall after the OPEC meeting on Thanksgiving Day, when Saudi Arabian officials announced that the kingdom would maintain its current level of production. December was a nervous month, but after a weak start, a late rally saved the month. For the full quarter, the S&P 500 returned +4.93%, while the Mid-cap 400 returned +6.35%, and the Small-cap 600 +9.85%. [Index returns: Standard and Poors]

Overseas markets were generally quieter than those in the US. For the quarter, the MSCI Barra EAFE international equity index returned +1.77% in local currencies. The more interesting action was in the currency markets, as the Federal Reserve followed through on its previously-announced intention of winding up program of adding to its holdings of Treasury and mortgage-backed securities, while both the Bank of Japan and the European Central Bank announced plans for further, dramatic monetary stimulus. As a result, the dollar rallied sharply. It ended the quarter at $1.2191 to the euro, against $1.2628 at the end of September. It also strengthened to $1.5578 against the pound sterling, from $1.6220; and to 119.85 yen, from 109.66, during the quarter. The currency effect was harshly negative for US investors, and EAFE returned –3.57% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release.]

Interest rate markets responded calmly to the Fed’s policy moves and announcements, and the end result was a substantial flattening of the yield curve. The yield on the two-year US Treasury note ended the quarter at 0.67%, up from 0.58% three months earlier, while the yield on the ten-year Treasury fell, ending the year at 2.17%, compared to 2.52% at the end of September. The Barclays Capital US Aggregate Bond index returned +1.79% for the quarter. [Index returns: Barclays Capital; bond yields: US Treasury]

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As in October, equity markets spent the first half of December falling, and the second half recovering. The main trigger for December's slide seems to have been a very sharp drop in the price of oil. That commodity, whose price had been drifting lower for some time, began to fall rapidly after the OPEC meeting on Thanksgiving Day, when Saudi Arabian officials announced that the kingdom would maintain its current level of production. Market participants took that to mean that oil supply would continue to outstrip demand, depressing prices. The US stock market, particularly the energy sector, also sold off. Favorable economic data led the markets to recover in the second half of December, and by the end of the month the S&P 500 had recovered most, but not quite all, of its lost ground. The S&P 500 returned –0.25% for the month. Smaller stocks performed better, with the Mid-cap 400 index returning +0.82%, and the Small-cap 600 returning +2.86%. [Index returns: Standard and Poors]

Economic uncertainty in both Europe and Asia dampened overseas markets, and the MSCI Barra EAFE international equity index returned -1.44% in local currencies for the month. At the same time, relative economic strength in the US and indications of possible extraordinary monetary easing in Europe and Japan bolstered the US dollar against foreign currencies. The dollar rose to 119.85 yen, up from 118.7 a month earlier. It also strengthened to $1.2101 against the Euro and $1.5578 against the pound Sterling, from $1.2438 and $1.5638, respectively, at the end of November. The dollar's strength further depressed US dollar returns on overseas assets; EAFE returned –3.46% in US dollars for the month. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

US interest rates fluctuated during the month; the end result was a meaningful flattening of the yield curve, with short-term rates rising and long-term rates not much changed. The yield on the two-year US Treasury note ended December at 0.67%, up from 0.47% a month earlier, but the 10-year yield closed the year at 2.17%, against 2.18% at the end of November. Bonds largely marked time, with the BarCap US Aggregate Bond index returning +0.09% for the month. [Index returns: Barclays Capital; Bond yields: US Treasury]

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The big news story of November was the midterm election, of course, but the financial markets didn't seem to react much to the results. However, at about the same time, a number of stories that had produced market anxiety in October – the arrival of ebola in the US, the destabilizing influence of ISIS in the Middle East, and the revanchism of Vladimir Putin – seemed to fade from the public imagination. While those fears were easing, economic reports and corporate earnings announcements continued to be moderately favorable, and so the markets continued to advance steadily in November. Adding to the general economic optimism was the continuation of the recent sharp drop in the price of oil, with West Texas Intermediate falling into the mid-60s. The drop seemed favorable to just about every sector except Energy, which fell sharply during the month. Overall, the S&P 500 index returned +2.69% for November. The advance was concentrated among the largest stocks, however – the Mid-cap 400 index gained just +1.85%, and the Small-cap 600 index had a loss of –0.27%. Growth outperformed value, except among the small stocks. [Index returns: Standard and Poors]

Overseas markets also advanced, partly due to the drop in oil and partly because of continued monetary easing in Japan and the promise of more easing in Europe. The MSCI Barra EAFE international equity index returned +3.55% in local currencies. Strength in the US and easing in other markets supported the continuing rise of the US dollar. It advanced to 118.70 yen at the end of November, from 112.09 a month earlier. Over the same interval the dollar also strengthened to $1.2438 to the euro, from $1.2530; and to $1.5638 against the pound Sterling, from $1.5999. Dollar strength worked against US investors already holding overseas assets, tempering EAFE's return in US dollars to +1.36%. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Interest rates in the US continued to slip lower during November, partially, perhaps, because falling oil prices may work against any inflationary pressure central banks, including the Fed, might be creating. The yield curve also flattened a bit. The yield on the two-year US Treasury slipped to 0.47%, from 0.50% on October 31, but the yield on the ten-year Treasury fell further, to 2.18%, from 2.35%. The bond market again produced a gain, with the Barclays Capital US Aggregate Bond index returning +0.70% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

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If you had spent October completely out of touch with the news or the financial markets, you might easily imagine that October was a nice, calm, positive month. It was anything but. For the first half of the month, markets fell sharply, as press reports of dangers from such threats as ISIL and the ebola outbreak in West Africa grew increasingly strident, and indications of economic performance in both Europe and Asia grew weaker. Almost exactly halfway through the month, though, corporate quarterly results and US economic data began coming in unexpectedly strong. In addition, a surprising decline in the price of crude oil spurred hopes of improvements to consumer spending. The markets also responded calmly as the Federal Reserve followed through on its previously-announced intention of winding up program of adding to its holdings of Treasury and mortgage-backed securities. Finally, at the end of the month the Bank of Japan announced plans to increase its monetary easing even further, and the Japanese Government Pension Investment Fund announced plans for a major allocation to equities. US stocks staged a major reversal, erasing a significant loss and then some. For the full month, the S&P 500 index returned +2.44%. The Mid-cap 400 index returned +3.56%, and the Small-cap 600 jumped by +7.09%. [Index returns: Standard and Poors]

Overseas markets were weaker than those in the US, and the MSCI Barra EAFE international equity index returned -0.29% in local currencies. The contrast between the monetary actions of the Fed, on the one hand, and the European Central Bank and the Bank of Japan on the other, gave a boost to the US dollar, particularly against the Japanese yen. The dollar ended October at 112.09 yen, up from 109.66 a month earlier. The dollar also strengthened to $1.2530 to the euro and $1.5999 to the pound Sterling, from $1.2628 and $1.6220, respectively, at the end of September. The result was adverse for US investors, and EAFE returned -1.45% in US dollars. [Index returns: MSCI Barra; currency exchange rates: Federal Reserve H.10 release]

In spite of the overall strength of the US stock market at the end of the month, and the end of the Fed's quantitative easing program, US interest rates fell a bit during October. The yield on the two-year US Treasury note slipped to 0.50% on October 31, from 0.58% on September 30. The ten-year yield also fell, to 2.35% at the end of October from 2.52% a month earlier. The result was strength in the bond market; the BarCap US Aggregate Bond Index returned +0.98% for October. [Index return: Barclays Capital; Treasury yields: US Treasury]

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The stock market spent the summer months alternating between quiet periods of low trading volume and volatility, and sharp moves in response to news. In July, markets dipped in response to renewed jitters over Russia's actions in Ukraine, conflict in Gaza, and the possible failure of a Portuguese bank, Banco Espirito Santo. They jumped in August on the strength of solid employment figures, firm economic growth, and good corporate earnings. And they fell in September as data concerning the housing market and industrial production, along with preliminary readings on employment, came in soft. Adding to the downward pressure in September was a constellation of news, including continuing uncertainty over events in the middle east. News reports suggested that worries over the spread of ebola and the pro-democracy protests in Hong Kong also unsettled markets. After all the ups and downs, for the full quarter, the S&P 500 ended with a gain of +1.13%. The gains among the largest stocks masked weakness in the broader markets, however. The Mid-cap 400 returned –3.98%, and the Small-cap 600 returned –6.73%, an unusually large divergence. [Index returns: Standard and Poors]

Overseas markets were generally quieter than those in the US. For the quarter, the MSCI Barra EAFE international equity index returned +0.93% in local currencies. The main event affecting those markets occurred on August 22, as European Central Bank President Mario Draghi reiterated the ECB's commitment to accommodative monetary policy in a speech at the Kansas City Fed's annual summer conference in Jackson Hole, Wyoming. Mr. Draghi seemed particularly concerned about gathering signs of both recession and deflation in Europe. His comments reflected (and perhaps amplified) conditions that produced a dramatic strengthening of the US dollar against other currencies. The dollar ended the quarter at $1.2628 to the euro, against $1.3690 at the end of June. It also strengthened to $1.6220 against the pound sterling, from $1.7105; and to 109.66 yen, from 101.28, during the quarter. The currency effect was harshly negative for US investors, and EAFE returned –5.88% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release.]

Interest rates went up, and then down, and then back up during the course of the quarter, as the Fed continued winding down its program of quantitative easing. The yield on the two-year US Treasury note ended the quarter at 0.58%, up from 0.47% three months earlier, while the yield on the ten-year Treasury ended little changed, at 2.52%, compared to 2.53% at the end of June. The Barclays Capital US Aggregate Bond index returned +0.16% for the quarter. [Index returns: Barclays Capital; bond yields: US Treasury]

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Volatility returned to the markets in September, as though traders coming back from summer vacation decided that the markets had been too quiet while they were gone. The market's action early in the month was bumpy but directionless. Then mid-September saw the end of what had been a run of fairly strong economic indicators. Data concerning the housing market and industrial production, along with preliminary readings on employment, came in soft, and the market slid somewhat. Adding to the downward pressure was a constellation of external news, including continuing uncertainty over events in the middle east. News reports suggested that worries over the spread of ebola and the pro-democracy protests in Hong Kong also unsettled markets. For the full month, the S&P 500 returned –1.40%. The modest loss to the largest stocks masked greater weakness in the broader markets. The Mid-cap 400 returned –4.55%, and the Small-cap 600 returned –5.37%. In addition, value stocks generally lost more than growth. [Index returns: Standard and Poors]

Global equity markets were a little firmer than the US market, and the MSCI Barra EAFE international equity index returned +0.16% in local currencies. However, the indications from Europe that the European Central Bank may increase policy accommodation, combined with general economic softness in Europe and much of Asia, contributed to a dramatic rise in the value of the US dollar against other currencies. The dollar increased to 109.66 yen at the end of September, from 104.00 at the end of August. It strengthened to $1.2628 against the euro and $1.6220 against the pound Sterling, compared to $1.3150 per euro and $1.6585 per pound a month earlier. As a result, EAFE slid by –3.84% in US dollars for September. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

In spite of the softer economic indicators, the Federal Reserve's continuing progress in winding down its program of quantitative easing contributed to a notable rise in US interest rates. The yield on the 2-year US Treasury note ended September at 0.58%, compared to 0.48% at the end of August. The yield on the 10-year Treasury rose to 2.52%, from 2.35% a month earlier. The rise in rates pushed bond prices lower, and the BarCap US Aggregate Bond index returned –0.68% for the month. [Index returns: Barclays Capital; US Treasury yields: US Treasury]

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The stock market's stumble at the end of July proved shallow and short-lived. By mid-August, markets seemed to shake off worries that the ongoing geopolitical problems in Ukraine and the Middle East would translate into economic difficulties at home. The markets' attention seemed to turn instead to strong employment figures, firmer economic growth, and solid corporate earnings. The US stock market climbed steadily for the second half of the month, seeing the S&P 500 index close above 2000 for the first time on August 26. For the full month, the S&P 500 returned +4.00%. The Mid-cap 400 index did even better, returning +5.08%, and the Small-cap 600 returned +4.29%. Value and growth stocks both seemed to participate about equally in the gains. [Index returns: Standard and Poors]

Neither the economic news nor the geopolitical situation seemed quite so benign overseas as here in the US, and the MSCI Barra EAFE international equity index returned +0.96% in local currencies. On August 22, European Central Bank President Mario Draghi reiterated the ECB's commitment to accommodative monetary policy in a speech at the Kansas City Fed's annual summer conference in Jackson Hole, Wyoming. Mr. Draghi seemed particularly concerned about gathering signs of both recession and deflation in Europe. In any case, the US dollar strengthened against the principal foreign currencies. It closed August at $1.3150 to the euro, $1.6585 to the pound Sterling, and 104.00 yen. A month earlier those parities had been $1.3390 (dollars per euro), $1.6889 (dollars per pound), and 102.75 (yen per dollar). The dollar's strength worked against US investors in overseas assets, and EAFE returned –0.15% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 releases]

The dollar's strength also seemed to quiet those critics of the Federal Reserve that had been suggesting that the Fed may end up keeping money too easy for too long. But a little incongruously, given the strength of both the equity markets and the dollar, interest rates fell markedly. The move may have reflected both private savings and the continuing reduction in the US fiscal deficit. Whatever the cause, the yield on the two-year US Treasury note slipped to 0.48% at the end of August, from 0.53% a month earlier. The ten-year yield fell more sharply, to 2.35% from 2.58% at the end of July. As a result, bonds had a good month, and the BarCap US Aggregate Bond Index returned +1.10%. [Index returns: Barclays Capital; Treasury yields: US Treasury]

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The almost eerie quiet that characterized the markets for much of the first half of the year persisted for most of July. Low volumes and modest daily moves in the major averages remained the typical pattern until the last couple of days of the month. At that point, a combination of external events – renewed jitters over Russia's actions in Ukraine, conflict in Gaza, and the possible failure of a Portuguese bank, Banco Espirito Santo – conspired to push markets sharply lower. For the full month, the S&P 500 returned -1.38%. While the large cap stocks only slipped modestly, mid- and small-cap stocks fell harder. The Mid-cap 400 index returned -4.27% for July, and the Small-cap 600 returned -5.49%. [Index returns: Standard and Poors]

The other major bit of news toward the end of the month was the report that the US economy (in terms of Gross Domestic Product) grew by 4% during the second quarter. That seemed to answer the question of whether the first quarter's weakness really was due, as many had suggested, to the awful weather that struck much of the country this past winter. Although welcome, the news also moved some Fed critics, who had previously suggested that the Fed's monetary actions were unlikely to have much effect, to wonder aloud whether the Fed isn't now likely to move too slowly to tighten monetary policy. Whatever the merits of that critique, the GDP report did push interest rates up a bit. The yield on the two-year US Treasury note ended July at 0.53%, up from 0.47% at the end of June, and the ten-year yield rose to 2.58%, from 2.53% a month earlier. The rise in rates put pressure on the bond market, and the Barclays Capital US Aggregate bond index returned -0.25% for the month. [Index returns: Barclays Capital; bond yields: US Treasury]

In spite of all the geopolitical uncertainty, overseas markets were fairly steady, and the MSCI Barra EAFE international equity index returned -0.19% for the month in local currencies. However, the combination of geopolitical and US economic news boosted the US dollar against other currencies. The dollar ended July at 102.75 yen, up from 101.28 a month earlier. It also strengthened to $1.3390 against the euro (from $1.3690 on 6/30) and $1.6889 against the pound Sterling (it took $1.7105 to buy one pound at the end of June). As a result, EAFE returned -1.97% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

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The quiet market tone of the first three months of the year continued through April and well into May. Continuing concerns over the implications of Russia's adventurism in Ukraine, along with tepid first-quarter economic performance figures, seemed just about to balance generally good corporate earnings and a clear sense of continuity in Federal Reserve policy. Toward the end of May, tensions over Ukraine seemed to quiet, while market participants seemed to shrug off the violence in Iraq as a matter of only peripheral concern. At the same time, encouraging housing and employment data gave a boost to the market, and US stocks advanced steadily for the remainder of the quarter. For the full quarter, the S&P 500 ended with a gain of +5.23%. The Mid-cap 400 index returned +4.33%, and the the Small Cap 600 gained +2.07%. Growth out-performed value among the large-cap stocks, but value did better among mid- and small-caps. [Index returns: Standard and Poors]

Overseas markets broadly mirrored US markets, although they weren't quite so strong. The main overseas events concerned elections — in India, voters sent Narendra Modi to the Prime Minister's office, while in Europe, results hinted at a weakening of public support for the euro and the European Union. The MSCI Barra EAFE international equity index returned +3.41% in local currencies. European observers have been expressing increasing concern about deflation in the Eurozone, but the US dollar edged higher against the euro, ending the quarter at $1.3690 to the euro, against $1.3777 at the end of March. The dollar slipped, though, to $1.7105 against the pound sterling, from $1.6675; and to 101.28 yen, from 102.98, during the quarter. The currency effect was favorable for US investors, and EAFE returned +4.09% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release.]

Fixed income markets were calm during the quarter, but the yield curve did flatten somewhat. The yield on the two-year US Treasury note ended the quarter at 0.47%, up from 0.44% three months earlier, while the yield on the ten-year Treasury fell, ending the quarter at 2.53%, down from 2.73% at the end of March. The Barclays Capital US Aggregate Bond index returned +2.04% for the quarter. [Index returns: Barclays Capital; bond yields: US Treasury]

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After snapping out of a months-long doldrums at the end of May, markets continued their steady, gradual advance through most of June. Geopolitical worries, particularly in Ukraine and Iraq, settled down to a dull roar. Meanwhile, indications of gathering economic improvement at home lent a generally positive tone to the market. A number of observers noted an unusual lack of market volatility, and (perhaps a related factor) trading volumes were light. Nevertheless, the stock market rose gradually, and for the full month the S&P 500 returned +2.07%. Smaller stocks performed even better, with the Mid-cap 400 index returning +4.14% and the Small-cap 600 +4.71%. [Index returns: Standard and Poors]

International equity returns were more tempered. In particular, talk of the possibility of deflation persisted in Europe. The MSCI Barra EAFE international equity index returned just +0.18%. The US dollar eased a bit against the pound Sterling, and it remained about steady against the euro. At the end of June, a dollar bought 101.39 yen, compared to 101.77 a month earlier. The pound Sterling stood at $1.7016 toward the end of the month, where it had been worth $1.6764 at the end of May. The euro ended June at $1.3631, little changed from the May 31 figure of $1.3640. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

Interest rates generally rose a bit during June, most likely in response to signs of economic firmness. The yield on the two-year US Treasury note rose to 0.47% at June 30, compared to 0.37% a month earlier. The ten-year yield rose by a bit less, so the yield curve flattened a little. The ten-year yielded 2.53% at the end of June, up from 2.48% at the end of May. Because of the rise in rates, the Barcap US Aggregate Bond index returned just +0.05% for the month. [Index return: Barclays Capital; Bond yields: US Treasury]

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For the first three weeks of May, markets continued the directionless pattern that had characterized their behavior for the first four months of the year. At the end of the month, though, the stock market advanced markedly. The gains reflected, perhaps, a quieting in tensions over Russia's adventurism in Ukraine, a sense of stability in Federal Reserve policy, and encouraging data in housing and employment. A number of market commenters noted the unusually low volatility (magnitude of price swings) and trading volumes, especially in the stock market. At times their comments sounded like one of those detective stories that start, "It was quiet in the City — too quiet." The gains were welcome just the same, as the S&P 500 index returned +2.35% for the month. The Mid-cap 400 index returned +1.78%, while the Small-cap 600 returned just +0.27%. Growth was stronger than value among the large caps, but value bettered growth in the small-cap range. [Index returns: Standard and Poors]

Perhaps the most notable international news was the result of the general election in India, which seemed to end decades of dominance of that country's politics by the Congress Party, and appears to have brought to the Prime Minister's office Narendra Modi, widely regarded as a pro-business leader. Whether or not that affected markets, the MSCI Barra international equity index returned +2.42% in local currencies, not far from the US market's figure. The US dollar slipped a bit against the Japanese yen, ending May at 101.77 yen, down from 102.14 a month earlier. The dollar strengthened against European currencies, however, possibly due to indications of further monetary easing by the European Central Bank in response to the threat of deflation in the region. Elections for the European Parliament, whose results hinted at a weakening of public support for the euro and the European Union, may also have affected the currency. The dollar ended May at $1.364 to the euro and $1.6764 to the pound Sterling, a bit stronger than the April 30 levels of $1.3870 and $1.6883. As a result, EAFE's return in US dollars was a bit lower, at +1.62%, than in local currencies. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 release]

Interest rates continued to confound the expectations of many by remaining low, and in many cases, falling. US Treasury note yields fell, with the yield on the two-year Treasury note ending May at 0.37%, down from 0.42% a month earlier, and the yield on the ten-year note falling to 2.45%, from 2.60% on April 30. Accordingly, US bonds posted a good month, with the Barclays Capital US Aggregate Bond index returning +1.14%. [Index returns: Barclays Capital. US Treasury yields: US Treasury]

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Equity markets continued in April their recent pattern of oscillating around the levels at which they ended 2013. None of the news we might have expected to have a major effect on the market – the simmering crisis in Ukraine, a poor report on first-quarter economic growth, middling corporate earnings, or Fed Chair Janet Yellen's remarks pointing toward a continuation of the Fed's accommodative monetary policy – caused much in the way of market moves. After some ups and downs, the S&P 500 index closed the month with a gain of +0.74%. The variation of returns across types of securities was unusually great, however. The Mid-cap 400 index lost -1.56% for the month, and the Small-cap 600 index lost -2.79%. Anecdotally, a number of stocks that had been strong for the past several months showed sudden weakness. Reflecting that shift, value out-performed growth in all capitalization ranges. [Index returns: Standard and Poors]

International equity markets reverted to form, once again broadly reflecting the movements of the US market. The MSCI Barra EAFE international equity index returned +0.79% in local currencies. The US dollar weakened against other major currencies. It slipped to 102.3 yen at 4/30, from 102.98 a month earlier. It also fell to $1.3870 against the euro, from $1.3777 on 3/31; and to $1.69 against the pound Sterling, from $1.6675 at the end of the previous month. The currency changes pushed EAFE's return up to +1.45% in US dollars. [Index returns: MSCI Barra; exchange rates: Federal Reserve H.10 release]

Interest rates did not move sharply during April, but the yield curve did flatten noticeably. The yield on the two-year US Treasury slipped to 0.42%, from 0.44% a month earlier. The yield on the ten-year Treasury fell by a bit more, ending April at 2.67%, compared to 2.73% on March 31. Bonds generally performed fairly well for the month, and the Barclays Capital US Aggregate Bond Index returned +0.84% for the month. [Index returns: Barclays Capital; bond yields: US Treasury]

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As sometimes happens at the turn of the year, the market's tone changed markedly at the beginning of 2014. Where the stock market had advanced steadily in spite of mixed economic data and corporate results late in 2013, in January it took a distinct turn downward. Rumors of possible trouble in the shadow banking system (the unofficial financial system, outside the reach of normal banking controls) in China seemed to knock the market off balance early in the month. Those concerns proved overblown, but more substantive data later in the month — mixed corporate earnings and weaker-than-expected economic indicators — drove markets lower in January. They recovered in February, as decent corporate results, the calm demeanor of new Fed Chair Janet Yellen during her first Congressional testimony, and relative quiet in international affairs during the Winter Olympics all contributed to a sense that market risks perhaps remain muted after all. Markets remained fairly steady in March, in spite of soft economic indicators and geopolitical worries surrounding Russia's annexation of Crimea. For the full quarter, the S&P 500 ended with a gain of +1.81%. The Mid-cap 400 index returned +3.04%, and the the Small Cap 600 gained +1.89%. Value out-performed growth in all capitalization ranges. [Index returns: Standard and Poors]

Overseas markets broadly mirrored US markets, although they were somewhat softer. The MSCI Barra EAFE international equity index returned -0.28% in local currencies. The US dollar was steady against European currencies, ending the quarter at $1.3775 to the euro and $1.666 against the pound Sterling, little changed from its levels of $1.3779 and $1.6574 at the end of the year. The dollar slipped against the yen, though, ending March at 103.15 yen, compared to 105.25 on December 31. The currency effect was favorable for US investors, and EAFE returned +0.66% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance.]

Fixed income markets showed a bit of volatility during the quarter, as they adjusted to the message and style of new Federal Reserve chair Janet Yellen. Although she indicated that the Fed will generally continue with its current monetary policy, the US Treasury yield curve flattened noticeably. The yield on the two-year US Treasury note ended the quarter at 0.44%, up from 0.38% three months earlier, while the yield on the ten-year Treasury fell, ending the quarter at 2.73%, down from 3.04% at the end of December. The Barclays Capital US Aggregate Bond index returned +1.84% for the quarter. [Index returns: Barclays Capital; bond yields: US Treasury]

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March was an odd month. Markets were peculiarly quiet, considering the noisy background. Market participants expressed concern over everything from the Russian annexation of Crimea to the comments of new Federal Reserve Chair Janet Yellen, but none of the news seemed to have much of an effect on the markets. Economic indicators, starting with the February employment figures, were rather soft, but market participants seemed uncertain how much of that softness was due to the severe winter weather in much of the US. Overall, the markets seemed to be running at idle speed, and the S&P 500 index returned +0.84% for the month. The Mid-cap 400 index returned +0.37%, and the Small-cap 600 index returned +0.70%. Value substantially out-performed growth in all capitalization ranges. [Index returns: Standard and Poors]

Global equity markets were also fairly quiet, although they were softer than their US counterpart. The MSCI Barra EAFE international equity index lost -0.50% in local currencies. Currency movements were muted, with the US dollar nearly unchanged against both the pound Sterling (at around $1.67) and the euro (at about $1.38). The dollar strengthened a bit against the yen, from just over 102 to just under 103. The currency effect was slightly negative for US investors, and EAFE returned -0.64% in US dollars. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 release. Figures for 3/31 will be in the release of Monday, April 7].

On March 19, new Federal Reserve Chair Janet Yellen gave her first press conference since taking office. Analysts disagreed over how to interpret her remarks, and interest rates generally rose. (My take is that she intended to signal that the Fed is likely – although not certain – to continue reducing its program of quantitative easing, but once that program has reached its end, the Fed is likely to maintain its generally easy monetary stance, at least well into next year.) The yield on the two-year US Treasury note ended March at 0.43%, up from 0.33% at the end of February. Longer rates also rose; the ten-year Treasury's yield rose to 2.74% at the end of March, from 2.66% a month earlier.

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After a sharp downturn in January, equity markets recovered smartly in the first part of February. Decent corporate results, the calm demeanor of new Fed Chair Janet Yellen during her first Congressional testimony, and relative quiet in international affairs during the Winter Olympics all contributed to a sense that market risks perhaps remain muted after all. (Events in Ukraine did not take on their ominous geopolitical cast until after the first of March). Economic indicators were generally tepid, but many market commentators suggested that the unusually awful winter weather in the Midwest and on the east coast, rather than real economic weakness, may have accounted for that sluggishness. The S&P 500 recovered all its January losses, and closed February at an all-time high. For the month, that index returned +4.57%. The Mid-cap 400 index returned +4.88%, and the Small-cap 600 returned +4.46%. Growth out-performed value among large- and mid-cap issues. [Index returns: Standard and Poors]

International equities also recovered, with the MSCI Barra EAFE international equity index returning +3.71% in local currencies. At the same time, a growing chorus of voices has begun suggesting that Europe (both the UK and the Eurozone) may be threatening to fall into deflation, and their currencies strengthened sharply against the US dollar. At the end of February, it cost $1.3806 to buy a Euro and $1.6705 to buy a pound Sterling, where those rates had been at $1.3500 (Euro) and $1.6450 (Sterling) at the end of January. The dollar also slipped to 102.08 yen, from 102.28 yen a month earlier. The currency movements added to US investors' overseas returns, and EAFE returned +5.56% in US dollars. [Index returns: MSCI Barra; currency exchange rates: Federal Reserve H.10 release]

US interest rates made a round-trip during February, rising for the first half of the month and falling back in the second half. The yield on the two-year US Treasury note ended February at 0.33%, compared to 0.34% on January 31. The ten-year yield also eased by just -0.01%, to 2.66% from 2.67% at the end of January. The Barclays Capital US Aggregate Bond index returned +0.53% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

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As sometimes happens at the turn of the year, the market's tone changed markedly at the beginning of 2014. Where the stock market had advanced steadily in spite of mixed economic data and corporate results late in 2013, in January it took a distinct turn downward.  Rumors of possible trouble in the shadow banking system (the unofficial financial system, outside the reach of normal banking controls) in China seemed to knock the market off balance early in the month. Those concerns proved overblown, but more substantive data later in the month – mixed corporate earnings and weaker-than-expected economic indicators – reinforced the market's weakness. At the same time, growing indications that the Federal Reserve's modest decrease in monetary stimulus could create knock-on problems in several emerging markets further unsettled markets. The cumulative effect of all this news was to drive the equity market lower. For the month, the S&P 500 index returned -3.46%. The Mid-cap 400 index returned -2.12%, and the Small-cap 600 returned -3.86%. [Index returns: Standard & Poors]

International equity markets, and especially the emerging markets, also felt the pressure. The MSCI Barra EAFE international equity index returned -3.37% in local currencies. The US dollar was mixed against other currencies. It eased to 102.28 yen, compared to 102.45 yen at the end of last year. It also slipped to $1.6450 against the pound Sterling, from a level of $1.6373 a month earlier. It firmed a bit against the euro, however, ending January at $1.3500, a bit stronger than December's 1.3606. (Remember that since we quote yen per dollar, but dollars per euro and dollars per pound, a higher figure against the yen means the dollar has strengthened, but a higher figure against the euro or pound means the dollar has weakened. A weaker dollar means higher returns for US investors that have existing investments in overseas assets.) Overall, the currency movements worked a bit against US investors, and EAFE returned -4.03% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The weakness in equity markets outweighed the Fed's continued reduction in its securities purchase program, resulting in a sharp decline in interest rates, especially at the longer end of the yield curve. The yield on the two-year US Treasury note slipped to 0.34% at the end of January, from 0.38% at the end of December. The ten-year yield fell more sharply, to 2.67% from 3.04%. Reflecting the general rise in bond prices that goes with a reduction in interest rates, the Barclays Capital US Aggregate bond index returned +1.48% for the month. [Index return: Barclays Capital; bond yields: US Treasury]

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