A Relatively Quiet Quarter After the Barnburner That Was 2013


The U.S. stock market reported modest gains for the first three months of the year, and it was actually uncertain until the final trading days of the quarter whether those returns would be slightly positive or slightly negative. Several factors weighed on the market: a weak December 2013 employment report, emerging market concerns, and continuing talk about the end of the Fed’s Quantitative Easing program. Congress and the president extended the debt ceiling through Mach of 2015, pushing off any worries of a 2014 funding crisis like the one we saw last October.

In the end, the S&P 500 index of large U.S. company stocks gained 1.81% in the first three months of the year, dividends included, while small company stocks, as measured by the Russell 2000 small-cap index, rose 1.12. Despite the S&P’s positive return, the Dow Jones Industrial Average lost 0.15% during the quarter and the technology-laden Nasdaq Composite Index lost about one-half of a percent over the same period.

Looking abroad, the broad-based EAFE index of large international companies in developed economies – Europe, Australia, and the Far East – was exactly flat for the quarter. Eurozone markets reported a gain of almost 2% for the first three months of the year, despite Russia’s annexation of the Crimean region of Ukraine. The annexation seemed to do little to unsettle most markets, Russia itself being a notable exception: its stock exchange fell almost 18% for the quarter. Asian markets did not fare well either: Japan was down 9.8% in the first quarter and the Shanghai Composite lost 7.5% of its value. Meanwhile, the less-developed nations continued their slide, with the EAFE emerging markets index down just about 1%. (Egypt was the big winner for the quarter, by the way – up nearly 22%.)

Bonds are still yielding far less than their historical averages, and the trend has been interesting. Three month and 6-month Treasury bills are yielding less than they did at this time last year, with rates of 0.03% and 0.05%, respectively. Longer-term Treasuries have seen rates drop modestly as well: to 0.12% (for 1-year duration Treasuries), to 2.73% (for 10-year issues) and to 3.52% (for 30-year issues). You can now buy 20-year AAA rated corporate bonds and get a 3.97% yield but this, in my opinion, is not nearly worth the risk that goes with bonds that far out on the yield curve, as they tend to be especially sensitive to interest rate moves. Interest rate and bond markets have continued to confound the many experts who have been predicting for more than five years that rates are going to rise dramatically, decimating bond portfolios – although that may yet come.

Commodities, as measured by the S&P GSCI gauge of 24 commodities, gained 2.6% over the quarter. Real estate, as measured by the MSCI US REIT Index, was up more than 9% in the first quarter, despite having lost ground in March.

When you look at the returns of 2014’s first quarter in the context of the long market recovery we’ve experienced over the last five years – and especially following the 30+% year we had last year, it would be easy to be disappointed. That said, it was a reasonably positive quarter around much of the globe and somewhat of a moderation in returns would be fully expected after the barn-burner of year that 2013 was.

I hope the year is off to a good start for you. As always, please let us know if you have any questions or if there is anything we can do for you.