Market Reviews 2016

 2016PinkFlowers

2016 Market Reviews

The markets were quietly nervous in October, reflecting uneasiness over the November election, discussions in Europe concerning the UK’s exit from the European Union, and the future direction of Federal Reserve policy. For October, the small daily movements of the market added up to a distinct, downward trend. The election shifted the market’s tone. Although the overnight reaction on Election Night was strongly negative, by the time the market opened for regular trading the next morning, it had begun to advance, and it continued to do so for most of the next three weeks. Interest rates and the dollar jumped as well. The market advance was abnormally uneven, however. Financials, industrials, and energy were the best-performing sectors; traders apparently felt that possible changes to the regulatory environment and to fiscal policy would benefit the owners of these firms. The tone in December was calmer. Market commentators continued to express an expectation of business-friendly policies, but their comments increasingly reflected the concern many corporate CEOs now feel, lest they find themselves at the wrong end of loaded tweet. The advance stalled in the holiday period, with the Dow Jones Industrial Average tantalizing market-watchers by hanging just below 20,000. For the quarter, the S&P 500 index returned +3.82%. The Mid-cap 400 index returned +7.42%, and the Small-cap 600 returned +11.13%. [Index returns: Standard and Poors]

Global markets posted solid advances; the MSCI Barra EAFE international equity index returned +7.07% in local currencies for the quarter. But an astonishingly strong move in the US dollar against other currencies swamped the stock advances. The dollar ended the year at $1.0552 to the euro and $1.2337 to the pound Sterling, both unusually large gains from its September 30 levels of $1.1238 and $1.3015, respectively. The dollar also jumped to 116.78 yen, from 101.21 three months earlier. The overall currency effect outweighed the stock gains, and EAFE returned –0.71% in US dollars. [Index returns:  MSCI Barra; Exchange rates: Federal Reserve H.10 release]

Interest rates also rose sharply in November, and remained at higher levels after the FOMC announced a long-expected increase in its short-term interest rate target on December 14. The yield on the two-year US Treasury note rose to 1.20% at the end of December, from 0.77% at the end of September. Over the same interval, the ten-year yield rose to 2.45%, from 1.60% on September 30. The Bloomberg Barclays US Aggregate Bond index returned –2.98% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

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In December the stock market seemed content to rest at the plateau it reached after bouncing strongly in the immediate aftermath of the US election. Market commentators continued to express the belief that the incoming Administration’s policies are likely to be friendly to the markets, but their comments increasingly reflected the concern many corporate CEOs now feel, lest they find themselves on the wrong end of loaded tweet. The market advanced modestly, but the Dow Jones Industrial Average tantalized market-watchers by hanging just below 20,000 for most of the holiday period. The dispersion in performance among sectors and styles continued to be unusually high, with energy, financials, and small stocks performing particularly strongly, while health care lagged. For the month, the S&P 500 index returned +1.98%. The Mid-cap 400 index returned +2.19%, and the Small-cap 600 returned +3.37%. [Index returns: Standard and Poors]

Overseas markets rebounded nicely, as the MSCI Barra EAFE international equity index returned +4.53% in local currencies. The US dollar continued to show strength, keeping its very strong gains from November. The dollar ended the year at $1.0552 to the euro and $1.2337 to the pound Sterling, both small gains from its November 30 levels of $1.0578 and $1.2481, respectively. The dollar also strengthened to 116.78 yen, from 114.34 a month earlier. [Please remember that we quote dollars per euro and dollars per pound, so a lower number against those currencies means a stronger dollar. However, we quote yen per dollar, so that quote increases when the dollar strengthens.] The dollar’s strength reduced the EAFE return for US investors, and that index returned +3.42% in US dollars. [Index return: MSCI Barra; Currency rates: Federal Reserve H.10 release]

On December 14, the Federal Open Market Committee announced a long-expected increase in its short-term interest rate target. That target now stands at a range between 0.50% and 0.75%. In general, interest rates, which had also risen sharply in November, also continued to rise, but at a more modest pace. The yield on the two-year US Treasury note ended the year at 1.20%, up from 1.06% on November 30. The ten-year yield rose to 2.45%, from 2.32% a month earlier. The Bloomberg Barclays US Aggregate Bond Index returned +0.14% for the month.

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Markets reacted strongly and dramatically to the unexpected result of the US Presidential election. Although the immediate reaction in the overnight markets on Election Night was strongly negative, by the time the market opened for regular trading the next morning, it had begun to advance, and it continued to do so for most of the next three weeks. Interest rates and the dollar jumped as well. For the month, the S&P 500 index returned +3.70%, though the market advance was abnormally uneven. Financials, industrials, and energy were the best-performing sectors; traders apparently felt that possible changes to the regulatory environment and to fiscal policy would benefit the owners of these firms. Information technology, real estate, consumer staples, and utilities all posted negative returns, possibly due to anticipated increases in interest rates and shifting government priorities. Smaller stocks also performed very strongly – the Midcap 400 index returned +8.01%, and the Small Cap 600 returned +12.55% for the month. [Index returns: Standard and Poors]

Overseas equities advanced as well, as the MSCI Barra EAFE international equity index returned +1.23% in local currencies. The dollar’s advance swamped the strength in those stocks, however. At the end of November, it stood at $1.0578 to the euro, compared to $1.0962 a month earlier. It also advanced strongly against the yen, ending November at 114.34 yen, up from 105.07 yen on October 31. The dollar did slip a bit, to $1.2481 against the pound Sterling, from $1.2212 at the end of October. But overall the currency move worked strongly against US investors in foreign stocks, and EAFE returned -1.99% in US dollars for the month. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

Interest rates jumped sharply, as investors anticipated the substantial increase in government borrowing that would likely result from the combination of tax cuts and fiscal spending that have been under discussion since the election. The yield on the two-year US Treasury note rose to 1.11% on November 30, from 0.86% a month earlier. The ten-year yield jumped to 2.37%, from 1.86% at the end of October. That sharp increase in rates corresponds to a drop in bond prices, and the Bloomberg Barclays US Aggregate Bond index fell by -2.37% for the month of November. [Index returns: Bloomberg; bond yields: US Treasury]

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After a very quiet September, markets seemed to continue to be surprisingly calm in October, in spite of increasing uneasiness over the outcome of the November election, discussions in Europe concerning the UK’s exit from the European Union, and the future direction of Federal Reserve policy. But there was a difference. Whereas in September the modest day-to-day movements seemed random, and left the markets about where it had started, in October the small daily movements of the market added up to a distinct, downward trend. For the full month, the S&P 500 index returned -1.82%. Smaller stocks did even worse. The Mid-cap 400 index returned -2.68%, and the Small-cap 600 index returned -4.48%. Value performed a little better (or a little less badly) than growth in all three capitalization ranges. [Index returns: Standard and Poors]

International stock markets fared better, as the MSCI Barra EAFE international equity index returned +1.19% in local currencies. However, the Federal Reserve seemed to signal an increased bent toward monetary tightening in the near future, while other central banks maintained a more accommodative posture. The result was a strengthening of the dollar against other currencies. It ended October at 104.80 yen, up from 101.21 yen at September 30. It also strengthened to $1.097 per euro, compared to $1.1238 a month earlier. Uncertainty over the timing and form of the UK’s European Union exit put additional pressure on the pound Sterling, which fell to $1.223 at October 31, from $1.3015. This relative strengthening of the dollar worked against US investors, and EAFE returned -2.05% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release and Yahoo! Finance]

Increasing expectations of an upcoming Federal Reserve rate increase put upward pressure on interest rates. The yield on the two-year US Treasury note rose to 0.86% at the end of October, from 0.77% a month earlier. Over the same interval, the 10-year yield rose to 1.84%, from 1.60% at the end of September. The rate increase pushed bond prices lower, and the Bloomberg Barclays US Aggregate Bond Index returned -0.76% for the month. [Index returns: Bloomberg; Treasury note yields: US Treasury]

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As they sometimes do, markets spent the month of July seemingly ignoring both world events and the commentary of public officials, candidates, market participants, and journalists. The market’s downturn following the UK vote to leave the European Union proved short-lived, and equity markets advanced smartly early in the month. Market observers spent most of the month expressing concerns over economic growth, earnings, and political uncertainty, but the markets remained quiet during the political parties’ nominating conventions, and ended the month with gains. During August, it was as though after a run of several previous years in which world events had created enough uncertainty to keep market participants at their desks, this year those same traders and investors went on vacation and stayed away. Even when they returned in September, markets seemed to be waiting for the resolution of issues like the US election, Federal Reserve interest rate policy, and the progress of negotiations over the UK’s exit from the European Union, but they didn’t move much. Overall, the results for July were pretty much the results for the full quarter. The S&P 500 returned +3.97%. The Mid-cap 400 index returned +4.14%, and the Small-cap index returned +7.20%. [Index returns: Standard and Poors]

Global markets also advanced early in the quarter, and they, too recovered from the shock of the UK vote. They were also quiet in August and September. The MSCI Barra EAFE international equity index returned +6.04% in local currencies for the quarter. The US dollar slipped against the Japanese yen, to 101.21 yen at the end of the quarter from 102.77 yen at June 30. It also eased a bit, to $1.1238 against the euro, compare to $1.1032 at the end of June. It strengthened a bit against the pound Sterling, ending September at $1.3015 to the pound, from $1.3242 at the end of the previous quarter. The overall currency effect was slightly positive for US investors, and EAFE returned +6.43% in US dollars. [Index returns: MSCI Barra; Exchange rates: Federal Reserve H.10 release]

The action in the bond market was subdued, as the Federal Open Market Committee met twice without changing policy. They did, however, seem to hint that a rate increase may be on the horizon, perhaps penciled in for December. Overall, US interest rates rose a bit. The yield on the two-year US Treasury note climbed to 0.77% at the end of September, from 0.58% at the end of June. Over the same interval, the ten-year yield rose to 1.60%, from 1.49% on June 30. The Bloomberg Barclays US Aggregate Bond index returned +0.46% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

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September must have been a frustrating month for market commentators, with news reports full of uncertainty over a series of topics that all seem months from resolution. The US election, Federal Reserve interest rate policy, and the progress of negotiations over the UK’s exit from the European Union, all provided grist for discussion but little impetus for market movements. All in all, the news was more interesting than the market action, and the S&P 500 ended the month with a return of +0.02%. The Mid-cap 400 index returned -0.64%, and the Small-cap 600 index returned +0.64%. [Index returns: Standard and Poors]

Global equity markets were also relatively quiet, and the MSCI Barra EAFE international equity index returned +0.29% in local currencies. The US dollar eased against the euro (to $1.1238 per euro from $1.1146 on August 31) and the yen (to 101.21 yen from 103.38 a month earlier). As Prime Minister Teresa May began to articulate her plans for negotiating the UK’s exit from the EU, the pound Sterling slipped, and at the end of the month $1.3015 bought a pound Sterling, compared to $1.3129 at the end of August. Overall, the currency movement helped US investors, and EAFE returned +1.23% in dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The one moment of market suspense during the month was the announcement of the result of the meeting of the Federal Open Market Committee on September 20-21. The Committee announced that it would not change interest rate policy, but its statement and subsequent commentary seemed to hint that a rate increase may be on the horizon, perhaps penciled in for December. The news didn’t have much effect on interest rates, though the yield curve did steepen a bit. The yield on the two-year US Treasury note ended the month at 0.77%, down from 0.80% at the end of August. The yield on the 10-year edged up to 1.60%, from 1.58%. The Bloomberg Barclays US Aggregate Bond Index returned -0.06% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

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Anyone watching the markets during August might conclude that they simply took the month off. Volumes were small, price movements were modest, and volatility was low. Aside from the Olympics and some truly peculiar moments in the Presidential election campaign, most news stories that might have attracted notice from market participants – aggressive monetary policy steps in Europe and Japan, the initial weeks of Teresa May’s term as UK Prime Minister, and so forth – barely registered as significant events. It’s as though after a run of several previous years in which world events had created enough uncertainty to keep market participants at their desks during August, this year those same traders and investors went on vacation and stayed away. The market ended the month nearly flat, as the S&P 500 returned +0.14%. Smaller stocks showed a bit more life, as the Mid-cap 400 returned +0.50%, and the Small-cap 600 returned +1.36%. [Index returns: Standard and Poors]

Perhaps in response to signals of continued monetary stimulus in Europe and Japan, overseas equity markets moved a bit higher. The MSCI Barra EAFE International Equity index returned +0.94% in local currencies. However, the US dollar also strengthened against most foreign currencies. It rose to 103.38 yen at the end of August, from 102.32 a month earlier. It strengthened slightly against the euro, ending August at $1.1146 to that unit, compared to $1.1168 at the end of July. It also strengthened to $1.3129 against the pound Sterling, from $1.3270 on July 31. The dollar’s strength worked against US investors, and EAFE returned +0.07% in US dollars. [Index returns: MSCI Barra; currency parities: Federal Reserve H.10 release]

Interest rates shifted upward in the US, as the Federal Reserve hinted that tighter monetary policy may arrive on the horizon sometime soon. The yield on the two-year US Treasury note rose to 0.80% on August 31, from 0.67% a month earlier. The ten-year yield rose to 1.58%, from 1.46% at the end of July. The rising rates drove bond prices lower, and the Bloomberg Barclays US Aggregate Bond Index slipped by -0.11% for the month. [Index returns: Bloomberg; interest rates: US Treasury]

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As they sometimes do, markets spent the month of July seemingly ignoring both world events and the commentary of public officials, candidates, market participants, and journalists. The market’s downturn following the UK vote to leave the European Union proved short-lived, and equity markets advanced smartly early in the month. Market observers spent most of the month expressing concerns over economic growth, earnings, and political uncertainty, but the markets remained quiet during the political parties’ nominating conventions, and ended the month with gains. The S&P 500 index returned +3.69% for the month. The Mid-cap 400 index returned +4.29%, and the Small-cap 600 returned +5.09%. [Index returns: Standard and Poors]

Global equity markets generally tracked along with US markets. The MSCI Barra EAFE international equity index returned +4.75% in local currencies. The US dollar slipped just a little against other currencies, as most monetary authorities around the world signaled a continuation of accommodative monetary policy. The dollar slipped to 102.32 yen on July 31, from 102.77 on June 30. It closed the month at $1.1168 to the euro and $1.3270 to the pound Sterling, a bit weaker than the levels of $1.1032 and $1.3242, respectively, a month earlier. With the small currency effect, EAFE returned +5.07% in US dollars [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

With monetary policy discussions and economic news relatively quiet, the yield curve flattened a bit. The yield on the two-year US Treasury note traded at a yield of 0.67% at the end of July, up from 0.58% at the end of June. The 10-year yield eased a bit, to 1.46% on July 31, from 1.49% on June 30. The fall in longer-term rates helped the Barcap US Aggregate Bond index return +0.63% for the month. [Index returns: Barclays Capital; Interest rates: US Treasury]

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The second quarter of 2016 started out much more calmly than the first. For several weeks in April and May, the markets drifted without clear direction in spite of, or perhaps because of, uncertainty on several fronts. Early on, the likely course of US monetary policy was a key issue, but political uncertainty gradually garnered more and more of market participants’ attention. The US Presidential campaign has been one ongoing source of uncertainty, but as June wore on, investors increasingly focused on the UK referendum concerning that nation’s continued membership in the European Union. Market volatility increased as the referendum approached, and once the result — that UK voters endorsed the idea of withdrawing from the EU — came in, markets took a steep, two-day plunge. But they then recovered just as quickly, and the markets ended June near where they had started the month. For the full quarter, the S&P 500 returned +2.46%. The Mid-cap 400 index returned +3.99%, and the Small-cap index returned +3.48%. [Index returns: Standard and Poors]

Global markets advanced early in the quarter, but they reacted particularly strongly to the UK vote. The MSCI Barra EAFE international equity index fell by –0.74% in local currencies for the quarter, as a sharp drop late in June wiped out earlier gains. The referendum also reshuffled relationships in currency markets. The US dollar fell sharply against the Japanese yen, to 102.77 yen at June 30, from 112.42 three months earlier. But over the same interval, it firmed somewhat, to 1.1032 against the euro, compared to 1.1390 on March 31. It strengthened dramatically against the pound Sterling, which fell to $1.3242 by quarter-end, from $1.4381 at the end of the previous quarter. The overall currency effect was a modest negative for US investors, and EAFE returned –1.46% in US dollars. [Index returns:  MSCI Barra; Exchange rates:  Federal Reserve H.10 release]

The market with perhaps the most dramatic moves, especially during June, was the bond market. The combination of uncertainty over the course of post-referendum negotiations in Europe and a shift in tone from Fed policymakers pushed US interest rates sharply lower, and at all maturities. The yield on the two-year US Treasury note fell to 0.58% at the end of June, down from 0.73% at the end of March. Over the same interval, the ten-year yield fell to 1.49%, from 1.78% on March 31. The Barcap US Aggregate Bond index returned +2.21% for the quarter. [Index returns: Barclays Capital; Treasury yields: US Treasury]

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The beginning of June saw the markets continue to show the positive tone that had characterized their performance at the end of May. They became more volatile in the middle of the month, largely because of uncertainty over the outcome and implications of the UK referendum on that nation’s continued membership in the European Union. Once voters in the UK actually voted to endorse the idea of withdrawing from the EU, markets took a steep, two-day plunge. But they then recovered just as quickly, and for the full month, the S&P 500 eked out a return of +0.26%. The Mid-cap 400 index returned +0.42%, and the Small cap 600 index +0.61%. Value generally out-performed growth. [Index returns: Standard and Poors]

The market effect of the UK referendum was more pronounced overseas than in the US. The MSCI Barra EAFE international equity index returned -3.77% in local currencies, with Europe (especially Europe outside the UK, interestingly), falling particularly hard. The referendum also reshuffled relationships in currency markets. The US dollar fell sharply against the Japanese yen, to 102.77 yen at June 30, from 101.75 a month earlier. But over the same interval, it firmed a little, to 1.1032 against the euro, compared to 1.1135 on May 31. It strengthened dramatically against the pound Sterling, which fell to $1.3242 by month-end, from $1.4530 a month earlier. This might be the summer to visit the UK. The mixed currency moves helped US investors a bit, and EAFE returned -3.36% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The market with perhaps the most dramatic moves during June was the bond market. The combination of uncertainty over the course of post-referendum negotiations in Europe and a shift in tone from Fed policymakers pushed US interest rates sharply lower, and at all maturities. The yield on the two-year US Treasury note fell to 0.58% at the end of June, down from 0.87% at the end of May. Over the same interval, the ten-year yield fell to 1.49%, from 1.84%. As a result, the Barcap US Aggregate Bond Index returned an unusually strong +1.80% for June. [Index returns: Barclays Capital; bond yields: US Treasury]

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After making some sharp swings during the first part of the year, financial markets have now taken on a much calmer aspect. The stock market drifted downward for the first part of May, but it then advanced moderately as corporate earnings reports seemed reasonably good, the price of oil stabilized in the high $40s, and the market’s view of upcoming Federal Reserve action seemed to coalesce around expectations that the next interest rate increase will probably occur in June or July. (I’m in the July camp). The market action felt directionless, but in fact by the end of May the S&P 500 had added +1.80% for the month. The Mid-cap 400 returned +2.31%, and the Small Cap 600 returned +1.66%. Growth out-performed value, and information technology was the strongest-performing sector. [Index returns: Standard and Poors]

Global developed equity markets paralleled the US market, and the MSCI EAFE international equity index returned +1.88% in local currencies. However, the expectation of mildly tighter US monetary policy seemed to boost the US dollar against other currencies. The dollar increased to 110.7 yen at the end of May, up from 106.9 a month earlier. It also strengthened to $1.113 against the euro (from $1.144) and $1.449 against the pound Sterling (from $1.463). Recall that we conventionally quote the yen in terms of yen per dollar, but we quote the euro and pound in terms of dollars per unit of those currencies. That’s why a both a higher yen-dollar figure and lower dollar-euro and dollar-pound figures denote US dollar strength. In any case, the currency change worked against US investors (if you already own foreign assets, then you don’t get back quite so many dollars in exchange for them), and EAFE returned -0.91% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release and Yahoo! Finance]

The yield curve steepened a bit during the month, as short-term yields fell a bit, while longer-term yields remained steady. The yield on the two-year US Treasury note ended May at 0.77%, down from 0.87% at the end of April. The 10-year yield ended the month unchanged at 1.84%. The Barcap US Aggregate Bond index returned just +0.03% for May. [Index return: Barclays Capital; Bond yields: US Treasury]

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After recovering sharply toward the end of March, markets appeared to take a breather in April. The market’s upward momentum abated, but so did its volatility, in spite of uncertainty regarding US monetary policy, the possibility that a referendum in the UK might result in that nation’s withdrawing from the European Union, and the Presidential election. Instead, the market drifted a bit higher for about the first half of the month, and then a bit lower for the second half. For the full month, the S&P 500 returned +0.39%. Mid-cap stocks were stronger, with the Mid-cap 400 index returning +1.22%. The Small-cap 600 index added +1.17% [Index returns: Standard and Poors]

International stocks were also advanced moderately. The MSCI Barra EAFE international equity index returned +1.25% in local currencies for the month. The US dollar slipped against European currencies, ending April at $1.1441 to the euro and $1.4625 against the pound sterling, compared to $1.1390 and $1.4381, respectively, a month earlier. The dollar fell more sharply against the yen. It ended the month at 106.90 yen, down from 112.42 at the end of March. The currency effect worked in US investors’ favor, and EAFE returned +2.90% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 releases]

Interest rates drifted a bit higher during the month. The yield on the two-year US Treasury ended April at 0.77%, up from 0.73% at the end of March. The ten-year yield rose by a similar amount, to 1.83%, from 1.78% on March 31. In spite of the rate rise, the Barcap US Aggregate Bond index returned +0.38% for the month, reflecting some strength in the corporate bond market. [Index returns: Barclays Capital; US Treasury yields: US Treasury]

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2016 began badly, as the markets fell sharply, and sometimes viciously, for about the first three weeks of January. The drop initially seemed to be a response to a severe market downturn in China, which raised fears of a broader global slowdown. In the end, though, a persistent slide in the price of oil seemed to to unnerve market participants more. Meanwhile, economic indicators and corporate earnings reports sent mixed signals, so while they didn’t drive the market lower, they didn’t help much either. Only when the price of oil stabilized just above $30 per barrel did the stock market’s tone improve. An upward move at the end of January, another downdraft in early February, and a bounce late in that month, left investors feeling queasy. In March, though, the markets wrapped up the wild first quarter with a strong rally. Naysayers justify skepticism of the rally by pointing to an apparent shift toward a more dovish (that is, favoring continuation of easy-money policies) tone on the part of the Federal Reserve. But other factors have been at work too. The price of oil advanced – though it remains below $40 per barrel. Economic indicators firmed a bit, and corporate results, while not inspiring, also remained reasonable. In the end, investors shed some of their fear of risky assets, and for the quarter, the S&P 500 returned +1.35%. The Mid-cap 400 index returned +3.78%, and the Small-cap index returned +2.66%. Value generally out-performed growth [Index returns: Standard and Poors]

Global markets also fell early in the year, but their subsequent recovery was weaker. The MSCI Barra EAFE international equity index fell by –6.52% in local currencies for the quarter. Largely because of the Fed’s stance, the US dollar fell hard against the euro and the yen. It ended the quarter at $1.1390 to the euro and $1.4381 against the pound Sterling, against $1.0859 at the end of December. It also fell to 112.42 yen, from 120.27, during the quarter. It strengthened to $1.4381 against the pound sterling, from $1.4746. The currency effect was a positive for US investors, and EAFE returned –3.01% in US dollars. [Index returns:  MSCI Barra; Exchange rates:  Federal Reserve H.10 release]

Interest rates dropped, possibly due to the Fed’s apparent shift in stance. The yield on the two-year US Treasury note ended the quarter at 0.73%, down from 1.06% three months earlier. The ten-year yield fell to 1.78%, after ending December at 2.27%. The Barcap US Aggregate Bond index returned +3.03% for the quarter. [Index returns: Barclays Capital; Treasury yields: US Treasury]

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After stabilizing toward the end of February, the markets wrapped up a wild first quarter with a very strong rally. Naysayers justify skepticism of the rally by pointing to an apparent shift toward a more dovish (that is, favoring continuation of easy-money policies) tone on the part of the Federal Reserve, arguing that the Fed is being needlessly supportive of the markets. But other factors have been at work too. The price of oil, which had fallen sharply in January, stabilized – though still below $40 per barrel. Economic indicators firmed a bit, and corporate results, while not inspiring, also remained reasonable. In the end, investors shed some of their fear of risky assets, and the markets recovered to the levels at which they started the year. For March, the S&P 500 jumped by +6.78%. The Mid-cap 400 index returned +8.52%, and the Small cap 600 returned +8.20%. Value out-performed growth, especially among mid- and small-caps. [Index returns: Standard and Poors]

Overseas equity markets also recovered somewhat, with the MSCI Barra EAFE international equity index returning +2.93% for the month, in spite of worries about the consequences of a possible exit of the UK from the European Union, general nervousness after the bombings in Brussels, and signs of slowing growth in China. Largely because of the Fed’s stance, the US dollar weakened substantially against other currencies, especially in Europe. It ended March at $1.139 to the euro and $1.4381 to the pound Sterling, compared to $1.0868 and $1.3926, respectively on February 29. The dollar slipped a little against the yen, to 112.42 from 112.90 a month earlier. The currency movements favored US investors, and EAFE returned +6.51% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The bond market seemed to have anticipated continued monetary ease from the Fed, and interest rates moved only modestly. The yield on the two-year US Treasury ended March at 0.73%, compared to 0.78% on February 29. The ten-year yield inched up to 1.78%, from 1.74% a month earlier. The Barcap US Aggregate Bond index returned +0.92% for the month. [Index return: Barclays Capital; US Treasury yields: US Treasury]

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Initially, the markets in February continued the negative, dispiriting trend that had characterized most of January. Around the middle of the month, though, the price of oil stabilized and corporate earnings reports showed reasonable, if not exceptional, results. The US stock market reversed direction, and in the second half of the month recovered essentially all the ground it had lost in the first half. Some market participants initially found the recovery unconvincing, and their commentary reflected that, but while the market remains volatile, its tone has improved substantially. At the end of the volatile month, the market was back near where it started, and the S&P 500 returned -0.13% for the month. Mid- and small-cap stocks were stronger, with the Mid-cap 400 index returning +1.41%, and the Small Cap 600 returning +1.12%. [Index returns: Standard and Poors]

International stocks diverged unusually sharply from their US counterparts, most likely due to uncertainty over the effectiveness of monetary policy in Japan, and the effects of a possible withdrawal of the UK from the European Union. The MSCI Barra international equity index returned -3.56% in local currencies. The main currency action was in the Japanese yen. The US dollar fell to 112.41 yen at the end of the month, from 121.05 a month earlier, possibly because traders that had bet against the yen bought the currency to close out those positions. Elsewhere, the dollar slipped to $1.0885 against the euro, from $1.0832 a month earlier, and it strengthened to $1.3926 against the pound Sterling, from $1.4184 on January 31. Overall, the currency moves helped US investors, and EAFE returned -1.83% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release and Yahoo! Finance]

Although no big news came from Fed Chair Janet Yellen’s Congressional testimony (I read her remarks about negative interest rates to mean that the Fed had never seriously considered them as a policy tool), the yield curve flattened noticeably during February. The yield on the two-year US Treasury note inched up to 0.78%, from 0.76% at the end of January; but the ten-year yield fell to 1.74%, from 1.94% a month earlier. As a result, the Barcap US Aggregate Bond index returned +0.71% for the month. [Index return: Barclays Capital; Treasury yields: US Treasury]

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Sometimes the markets appear to turn a page at the turn of the year. That seemed the case in January, as the markets fell sharply, and sometimes viciously, for about the first three weeks. The drop initially seemed to be a response to a severe market downturn in China, which raised fears of a broader global slowdown. In the end, though, the persistent slide in the price of oil seemed to to unnerve market participants more. Meanwhile, economic indicators and corporate earnings reports sent mixed signals, so while indications of underlying economic fundamentals didn’t drive the market lower, they didn’t help much either. Only when the price of oil stabilized just above $30 per barrel did the stock market’s tone improve. A strong finish in the last couple of days of the month reduced the damage, but for the full month the S&P 500 nevertheless lost -4.96%. The Midcap 400 index fell by -5.69%, and the Small cap 600 by -6.17%. [Index returns: Standard and Poors]

Overseas equity markets were also quite weak. The MSCI Barra EAFE international equity index returned -5.83% in local currencies. The US dollar also strengthened somewhat against other currencies: it rose to 121.05 yen at the end of January, up from 120.27 yen on December 31. It improved slightly to $1.0832 per euro, from $1.0859 at the end of December. It moved more sharply against the pound Sterling, ending January at $1.4184 to the pound, quite a bit stronger than its year-end level of $1.4746. The currency movement worked against US investors, and EAFE returned -7.23% in US dollars. [Index returns: MSCI Barra; Currency rates: Fed H.10 release]

Interest rates, especially on US Treasury securities, fell sharply as some investors sought safer assets. The yield on the two-year US Treasury note fell to 0.74% at the end of January, from 1.06% a month earlier. The ten-year yield ended the month at 1.86%, down from 2.27% a month earlier. As a result the Barcap US Aggregate Bond index returned +1.38% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury].

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