The first quarter of 2014 introduced us again to volatility, something we did not hear much about during the run in 2013. Stocks and bonds were mostly positive across the board albeit with a modest pull back during the period. The S&P 500 finished the quarter up 1.97% while the Barclays US Aggregate Bond index produced results of 1.84%. Global markets were mixed as shown above.

US Markets

US markets saw a brief 6% decline in value which was confined to the latter half of January. A weak December 2013 employment report, concerns over emerging markets, and the Federal Reserve’s continued tapering of its Quantitative Easing program, were all factors in the decline. Fears quickly eased and reassuring comments from new Federal Reserve Chair, Janet Yellen, helped bolster the market and push it to all-time highs in February and March. Utilities, following a lackluster 2013, had the best sector return, up 10%, as appeal for dividend paying stocks was reinforced by declining interest rates. Last year’s market leader, consumer discretionary, declined 3% during the first quarter. If the bull market is to continue, we would expect defensive sectors uch as utilities and health care to take a back seat to more cyclical sectors including consumer discretionary, technology, and industrials.

Large cap stocks were the leader during the first quarter with Value outperforming growth.


Foreign Markets

European markets showed slow but stable economic growth and strong corporate earnings. Improvements in some of Europe’s weakest economies drove returns into the double digits for markets in Portugal, Italy, Ireland, and Greece. Spain was up 5.37% to round out the “PIIGS.” Overall the MSCI European Index advanced 2%.
Asian Pacific stocks were unable to continue their 50% rally from 2013 and saw their markets sharply lower. Japanese equities shed 8% while the MSCI Pacific Index lost 5%.
International markets collectively gained 0.75% with small cap outperforming large, and value out performing growth.
Emerging markets stocks overall were roughly flat with a -0.43% return. Markets in India and Indonesia returned 8.49% and 22.44% respectively, boosted by improving current account deficits and hopes for reform. Tension between Russia and Ukraine helped drive Russian markets down 14.69% while political uncertainty in Venezuela and Thailand generated further market worries. China fell 5.17% amid slowing economic growth, and concerns about the health of the country’s banking system.
Fixed Income
The 10-year Treasury note started the year with a yield of 2.93%. Yields declined 31 basis points during the first quarter to 2.72% which generated strong gains in long-dated Treasuries and high-grade corporate bonds. Coming off of a record-high volume of new bond issues in 2013, the decline of rates to start the year has led some corporations back into the new issuance market. Companies so far have sold at least $11 billion of debt to fund share repurchases this year, with Cisco among the largest offerings at $8 billion. Strong inflows into tax exempt municipal bonds helped the muni market gain 3.3%. The high yield bond market advanced 3% with the overall US Aggregate index posting a gain of 1.8%.
In a turnaround from 2013, REITS posted strong performance during the quarter. US REITs posted gains 10.35% while global REITs (ex US) posted gains of 3.27%. REITs largely sold off last year in anticipation of rising interest rates, but with rates staying low and declining further to start the year, the search for yield found many investors bidding up prices.
Commodities regained some ground in the first quarter after a lackluster year in 2013. The DJ-UBS Commodity index advanced nearly 7%. Gold rebounded with a 6.71% gain while the energy sector produced mixed results. Natural gas rose over 12% while Brent Crude and Heating Oil declined 1.65% and 2.41% respectively. Coffee led the charge higher for the commodity group with an impressive 58.17% gain.
Looking Forward

The first quarter of 2014 can be characterized by a lot of movement to go nowhere. Severe weather has skewed economic data and with valuations appearing reasonable, it is understandable for investor confidence to be lacking. Near term market movements may continue to be volatile but with interest rates low, and non-existent cash yields, alternatives to stocks are lacking appeal. Pullbacks can be healthy and it is encouraging to see market participants taking advantage of falling prices. Without the “major pullback” many investors are looking for, the market may experience a “melt-up” as investors pour money into the market as to not miss out on any further gains. The labor market is improving, corporate and consumer spending is increasing, and company earnings are continuing to grow. These factors should lead to the market grinding higher by year end, and it is important for investors to keep a long term focus and avoid the knee-jerk reactions to short term market movements when the overall landscape has not changed.

Very truly yours,

CRA Financial LLC