Market Reviews 2010

After pulling back at the end of November, equity markets staged a solid advance in the first week of December. Retail holiday sales looked good, and corporate performance looked likely to continue improving. The result was a strong market at the beginning of the month. The first week of December was a replay of the start of November, the S&P 500 rising about 3.5% over each span. Unlike November, when the market fell back after its initial gains, in December the market sustained the advance as the general tone of the economic data continued to be favorable. The S&P 500 index ended the month with a strong +6.68% return. December’s gains brought the index’s performance for the quarter to 10.74%, and turned an average year into a good one, with the S&P returning +15.05% for the full year. The Mid-cap 400 index returned +6.55% (+13.50% quarter, and +26.64% year), and the Small-cap 600 index was stronger still, returning +7.66% (+16.24% quarter, +26.31% year). Value did better than growth in each capitalization range in December, although growth was the stronger performer for the quarter. For the full year, large-cap value and growth were close, while growth was a bit stronger in the mid- and small-cap ranges. [Index returns: Standard and Poors]

Fiscal problems in Europe remained a topic of conversation in December, but they didn’t affect markets much. The MSCI Barra EAFE international equity index ended the month with a return of +4.77% in local currencies. The US dollar, which had rebounded in November, slipped a bit. The dollar weakened to 81.67 yen, compared to 83.56 yen at the end of November (83.53 on 9/30 and 93.08 on 12/31/09). The dollar also eased against the Euro, ending December at $1.327 to the Euro, from $1.304 a month earlier ($1.360 on 9/30 and $1.433 on 12/31/09). The dollar ended December at $1.539 against the pound Sterling, from $1.558 at the end of November ($1.573 on 9/30 and $1.617 on 12/31/09). The overall currency effect was favorable to US investors, and EAFE returned +8.10% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Interest rates continued to rise in December, as the likelihood of economic recovery continued to increase. The yield on the two-year US Treasury note ended the month at 0.61% (from 0.45% at 11/30 and 0.42% at 9/30 but still well below the 1.14% level of a year earlier). The yield on the ten-year rose to 3.30%, from 2.81% a month earlier (2.53% on 9/30 and 3.85% on 12/31/09). The bond market’s return reflected the rise in rates, as the Barclays Capital US Aggregate Bond index returned –1.08% (–1.30% for the quarter, and +6.54% for the year). [Index returns: Barclays Capital. Treasury yields: US Treasury].

November was a peculiar month in the markets. Equity markets began the month strongly, but after about the first week, each day seemed to bring lukewarm economic data or corporate reports, and the US stock market fell back. Especially toward the end of the month, renewed fears of fiscal problems in Europe in general, and Ireland in particular, raised fears of further instability in credit markets and the global financial system. One side-effect was a sharp weakening of the euro against the US dollar. Financial journalists, noting a recent association between dollar weakness and stock market strength, suggested that the stronger dollar would be bad for equity markets. Yet while the market fell at the open on several trading days, it recovered strongly at the end of a number of those days. The S&P 500 index ended the month with not much to show for all the action — it returned +0.01% for November. The Mid-cap 400 index, however, returned +2.97%, and the Small-cap 600 index was stronger still, returning +3.56%. Growth again did better than value in each capitalization range. [Index returns: Standard and Poors]

With the troubles in Europe, overseas markets were a bit weaker than those in the US. The MSCI Barra EAFE international equity index ended the month with a return of –0.99% in local currencies. Meanwhile, the US dollar, which had fallen sharply in recent months, rebounded strongly. The dollar strengthened to 83.64 yen, compared to 80.47 yen at the end of October. The dollar also rose against the pound Sterling, ending November at $1.5563 to the pound, from $1.6022 a month earlier. The most dramatic move, though, was against the euro. The dollar ended November at $1.298 against the European currency, from $1.391 at the end of October. The overall currency effect was detrimental to US investors, and EAFE returned –4.81% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release and Yahoo! Finance]

Interest rates jumped in November, as stirrings of economic recovery, and possible inflation, continued. The yield on the two-year US Treasury note ended the month at 0.45% (from 0.34% at the end of October). The yield on the ten-year rose to 2.81%, from 2.63% a month earlier. The bond market’s return reflected the rise in rates, as the Barclays Capital US Aggregate Bond index returned –0.57%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

With the S&P 500 index at levels near those at which it traded in the volatile days after the collapse of Lehman Brothers in September 2008, market participants came into October 2010 wondering whether the US stock market would continue its recent advance, pause, or fall back as it had earlier in the year. Third-quarter earnings reports began to come out early in October, and they were good enough to sustain the advance into the middle of the month. At about that time public statements by Federal Reserve officials began to create the impression that the Fed’s next round of monetary stimulus (the second round of quantitative easing, or “QE2”) will be more measured than previously thought. The market’s advance stalled at that point, but markets continued to trade on a belief that the Fed’s policy would lead to weakness in the US dollar, which investors seemed to judge as favorable for US stocks. Toward the end of the month, the market held on to its earlier gains, and the S&P 500 index returned +3.80% for the month. The Mid-cap 400 index returned +3.45%, while the Small-cap 600 index was stronger, returning +4.26%. Growth again did better than value in each capitalization range. [Index returns: Standard and Poors]

Overseas markets again mirrored the US. The MSCI Barra EAFE international equity index ended the month with a return of +1.82% in local currencies. Meanwhile, the US dollar continued to weaken. The dollar eased to 80.47 yen at the end of October, compared to 83.53 at the end of September. The dollar also fell against the euro and the pound Sterling. It ended October at $1.391 per euro, from $1.360 at the end of September. At the end of the month, the pound stood at $1.602, compared to $1.573 a month earlier. The overall currency effect was beneficial to US investors, and EAFE returned +3.61% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

As in September the strong market and easy Fed policy stance resulted in a kind of standoff in the bond market, with the yield curve steepening a bit. The yield on the two-year US Treasury note ended the month at 0.34% (from 0.42% at the end of September). The yield on the ten-year rose to 2.63%, from 2.53% on 9/30. The bond market ran in neutral, as the Barclays Capital US Aggregate Bond index returned +0.36%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

Equity markets in the third quarter of 2010 exhibited a sharp, sawtooth pattern of movement, with the changes in direction nearly coinciding with the change of months. After a weak June, the US stock market rallied strongly in July, largely on the strength of good earnings reports and improving prospects for stability in European government bond markets. It fell back again in August, as weak employment and measured comments from Fed Chair Ben Bernanke highlighted worries that the US economy might soon fall back into recession. Those fears abated somewhat in September. That, along with clear indications that the Federal Reserve will remain unusually accommodative, sent shares higher again in September. In the end, equities turned in a very strong quarter. The S&P 500 index nearly recovered its losses from the second quarter, returning +11.30% (+3.89% for the year to June 30). Mid-cap stocks did better still; the S&P Midcap 400 returned +13.12% (+11.57% year to date). The Small Cap 600 returned +9.62% for the quarter (+8.66% year to date). Growth outperformed value in all capitalization ranges. [Index returns: Standard & Poors]

Global markets continued their pattern of mirroring the US market — or is it the other way around? In any case, the MSCI Barra EAFE international equity index ended the quarter with a return of +7.10% in local currencies (–0.76% year to date). As salutary as the Fed’s comments and actions were for the stock market, they put downward pressure on the US dollar. The US dollar rose dramatically against the euro. At the end of September, the dollar stood at $1.360 to the euro, compared to $1.229 at the end of June. It fell to $1.573 against the pound Sterling, from $1.4947 at the end of June. It dropped against the yen, ending June at 83.53 yen, compared to 88.49 in June. The overall currency effect was a positive for US investors, and EAFE returned +16.48% in US dollars for the quarter (+1.07% year to date). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Largely because of worries about economic weakness, yields on US Treasuries fell sharply in August, and Fed action helped hold them steady in spite of a strong equity market in September. The yield on the two-year US Treasury note ended the quarter at 0.42% (down from 0.61% on June 30), and the yield on the ten-year ended September at 2.53%, down from its level of 2.97% at the end of June. The Barclays Capital US Aggregate Bond index returned +2.48% for the quarter (+7.94% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

The markets’ jagged, see-saw movement persisted in September. Global equity markets, which rose sharply in July and fell nearly as far in August, shot higher in September. News reports suggested that trading volume during the advance was light, and that no single catalyst chased the market higher. A series of economic reports came in less negative than feared, however, and signs of a possible early recurrence of recession (the so-called “double dip”) waned, giving hope that the economic recovery that began a year or so ago will continue, even if not at a particularly exciting rate. During the month the Federal Reserve also made clear that it intends to continue its easy money policies, adding to worries about renewed inflation, but also easing fears that premature Fed action would choke off any continued recovery. For the month, the S&P 500 index returned +8.92%, its strongest September showing since the 1930s. For the quarter, the S&P 500 is up +11.30%, and year-to-date it has returned +3.89%. The Mid-cap 400 index was even stronger, at +11.31% (+13.12% for the quarter and +11.57% YTD), as was the Small-cap 600 index, which returned +11.40% (+9.62% quarter, +8.66% YTD). Growth again did better than value in each capitalization range. [Index returns: Standard and Poors]

Global equity markets continued to trade in parallel. The MSCI Barra EAFE international equity index ended the month with a return of +5.16% (+7.10% for the quarter, and –0.76% YTD) in local currencies. The US dollar weakened substantially in response to the Fed’s reiterating its accommodative policy stance. The dollar eased to 83.53 Japanese yen at the end of September, compared to 84.10 a month earlier. The dollar fell more sharply against the euro and the pound Sterling. The US dollar fell to $1.360 per euro, from $1.270 at the end of August. At the end of September, the pound stood at $1.573, compared to $1.536 a month earlier. The overall currency effect was beneficial to US investors, and EAFE returned +9.80% (+16.48 quarter, +1.07% YTD) in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The strong market and easy Fed policy stance resulted in a kind of standoff in the bond market, though the yield curve steepened a bit. The yield on the two-year US Treasury note ended the month at 0.42% (from 0.47% at the end of July). The yield on the ten-year rose to 2.53%, from 2.47% on 8/31. The bond market ran in neutral, as the Barclays Capital US Aggregate Bond index returned +0.11% (+2.48% quarter, +7.94% YTD). [Index returns: Barclays Capital. Treasury yields: US Treasury].

Global equity markets once again reversed course, sliding in August after showing strength in July. Economic news and market commentary were generally negative during the month, with reports on employment, housing, and retail sales all contributing to an atmosphere of market weakness. Market commentary generally highlighted weak employment and the possibility of the US economy’s slipping back into recession in coming quarters, and measured remarks by Fed Chair Ben Bernanke added to the uneasiness. The result was a steady drop for the last three weeks of the month. For the month, the S&P 500 index returned –4.51%. The Mid-cap 400 index performed similarly, at –4.94%, but the Small-cap 600 index lagged substantially, returning –7.96%. Growth did a bit better than value in each capitalization range. [Index returns: Standard and Poors]

As has been the pattern for the past several years, international equity markets performed similarly to the US market during August. The MSCI Barra EAFE international equity index ended the month with a return of –2.67% in local currencies. In recent months the Japanese yen has emerged as one of the world’s strongest currencies, as investors around the world have gravitated toward it as a safe haven. Despite Japanese Prime Minister Naoto Kan’s assurance that his nation would intervene in currency markets if necessary, the yen ended August at 84.18 to the dollar, compared to 86.43 a month earlier. While the dollar weakened against the yen, the US currency improved against European ones. The US dollar strengthened to $1.268 per euro, from $1.3069 at the end of July. The dollar also strengthened against Sterling; at the end of August, the pound stood at $1.535, compared to $1.5714 a month earlier. The overall currency effect was detrimental to US investors, and EAFE returned –3.10% in US dollars. [Index returns: MSCI Barra. Exchange rates: Yahoo! Finance and Federal Reserve H.10 release]

The soft economic reports and weak equity markets continued to drive demand for US Treasuries, whose yields fell sharply during August. The yield on the two-year US Treasury note ended the month at 0.47% (from 0.55% at the end of July). The yield on the ten-year fell to 2.47%, from 2.94% on 7/31. The bond market accordingly advanced during the month, as the Barclays Capital US Aggregate Bond index returned +1.29%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

Global equity markets continued their recent pattern of strong moves within a narrow range. Having fallen sharply in May and June, the stock market reversed course and advanced strongly in July. In part, the market responded to a series of unexpectedly strong earnings reports and improving hopes that sovereign debt fears in Europe would not result in a financial crisis. The market advanced in spite of generally soft economic reports, which raised concerns that the economic recovery of the past several quarters may be abating. The S&P 500 index returned +7.01% for the month. The Mid-cap 400 index performed similarly, at +6.91%, and the Small-cap 600 index lagged a bit, returning +6.34%. Value and growth were not far apart, though value did a bit better in the small-cap range. [Index returns: Standard and Poors]

Global equity markets also advanced during July. The MSCI Barra EAFE international equity index ended the month with a return of +4.64% in local currencies. As fears regarding the sovereign debt situation in the Mediterranean economies continued to ease, the euro strengthened as well — the US dollar fell to $1.3069 per euro, from $1.2291 per euro, from at the end of June. The dollar also dropped against Sterling; at the end of July, the pound stood at $1.5714, compared to $1.4947 a month earlier. The dollar also fell against the yen, ending July at 86.43 yen, down from 88.49 yen at the end of June. The overall currency effect was a benefit for US investors, and EAFE returned +9.48% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The soft economic reports improved demand for US Treasuries, whose yields fell during July. The yield on the two-year US Treasury note ended the month at 0.55% (from 0.61% at the end of June). The yield on the ten-year fell to 2.94%, from 2.97% on 6/30. The bond market accordingly advanced during the month, as the Barclays Capital US Aggregate Bond index returned +1.07%. [Index returns: based on iShares pricing from Yahoo! Finance. Treasury yields: US Treasury].

Market participants entered April apprehensive about the length, breadth, and strength of the stock market’s recovery during the previous year, which had raised the US equity market by 75% its lows of March 2009. Would growth continue? Could corporate earnings reports due in the second half of April justify the levels the market had reached, or would they disappoint investors? What about the debt problems of Greece and other European countries, which seemed no nearer any resolution than when they first surfaced a few months earlier? Markets were firm in April, but as the quarter progressed, fears of a sovereign default in Europe increased, and the market sold off sharply in May. The selling continued in June, as a series of tepid economic reports contributed to a gathering atmosphere of nervousness regarding the durability of the economic recovery. Fears of an imminent European government default abated, but doubts about those nations’ financial stability persisted, contributing to the overall weakness of equity markets. The net result was a bad quarter for equities. The S&P 500 index lost –11.43%; (–6.65% for the year to June 30). Mid- and small-cap stocks did better; the S&P Midcap 400 returned 9.59% (–1.36% year to date), and the Small Cap 600 –8.73% for the quarter (–0.88% year to date). Value and growth were about even in the large- and mid-cap ranges, but small growth performed better than small value. [Index returns: Standard & Poors]

Global markets largely mirrored the US market, in part because of those continuing concerns about the Greece. The MSCI Barra EAFE international equity index ended the quarter with a return of –11.15% in local currencies (–7.34% year to date). The US dollar rose dramatically against the euro. At the end of June, the dollar stood at $1.229 to the euro, compared to $1.353 at the end of March. It also moved ahead to $1.4947 against the pound Sterling, from $1.5186 at the end of March. It dropped against the yen, ending June at 88.49 yen, compared to 93.40 in March. The overall currency effect was a negative for US investors, and EAFE returned –13.97% in US dollars for the quarter (–13.23% year to date). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The combination of economic concerns in the US and sovereign debt worries in Europe led to a sharp fall in US Treasury interest rates. The yield on the two-year US Treasury note ended the quarter at 0.61% (down from 1.02% on 3/31/10), and the yield on the ten-year ended June at 2.97%, well below its level of 3.84% on March 31. The Barclays Capital US Aggregate Bond index returned +3.49% for the quarter (+5.33% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

Having settled into selling mode in May, equity investors continued to apply downward pressure on markets during most of June. The culprit this time seemed to have been a series of tepid economic reports, which contributed to a gathering atmosphere of nervousness regarding the durability of the economic recovery. At the same time, fears of an imminent default on the government debt of Greece or another European country seem to have abated, but doubts about those nations’ financial stability persist, contributing to the overall weakness of equity markets. Market volatility has also remained elevated, perhaps discouraging investors that might otherwise think about buying. Continuing to grind lower, the S&P 500 index ended June with a loss of –5.23%, bringing the result for the quarter to –11.43%. Year to date, the S&P 500 has returned –6.65%. Mid- and small-capitalization stocks did even worse in June; the S&P Midcap 400 returned –6.55% (–9.59% for the quarter and –1.36% year to date) and the Small Cap 600 –7.07% (–8.73% for the quarter, and –0.88% year to date). Growth performed somewhat better than value in all capitalization ranges for the month. [Index returns: Standard & Poors]

Global equity markets slipped during June, but stabilized relative to their very poor showing in May. The MSCI Barra EAFE international equity index ended June with a return of –2.83% (–11.15% for the quarter and –7.34% year to date) in local currencies. As fears regarding the Greek situation eased, the euro stabilized as well — the US dollar gained just a bit, to $1.2291 per euro, from $1.2369 at the end of May. The dollar dropped against Sterling; at the end of June, it stood at $1.4947, compared to $1.4497 a month earlier. The dollar also fell against the yen, ending June at 88.49 yen, down from 90.81 yen at the end of May. The overall currency effect was a benefit for US investors, and EAFE returned –1.00% (–13.97% for the quarter and –13.23% year to date) in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Investor nervousness also seems to have driven a bit of a flight to US Treasuries, whose yields fell during June. The yield on the two-year US Treasury note ended the month at 0.61% (from 0.76% at the end of May and 1.02% on March 31). The yield on the ten-year breached 3%, falling to 2.97% (from 3.31% on 5/31 and 3.84% on 3/31). The bond market accordingly advanced during the month, as the Barclays Capital US Aggregate Bond index returned +1.57% (+3.49% for the quarter and +5.33% year too date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

The slide in global equity markets that started toward the end of April gathered pace in May. The principal issue troubling investors was the state of sovereign debt in Greece, Portugal, and other “Club Med” — Mediterranean — members of the Eurozone. Greece’s problems are the most acute of that group’s. Since Greece uses the Euro currency, a default or other major disruption in that country would inevitably spill over to other European nations, with unpredictable effects. If the contagion were severe enough, it could potentially slow or halt our own economic recovery, and as a result, global equity markets sold off sharply during May. In addition, volatility, which had been rather quiescent for the past year or so, also increased. An aggressive European policy response, led by Germany and France, calmed fears of an economic disaster, but did little to reverse the market’s decline. After grinding lower all month, the S&P 500 index ended May with a loss –7.99%, more than wiping out the gains from earlier in the year. Year to date, the S&P 500 has returned –1.50%. Mid- and small-capitalization stocks did a little better; the S&P Midcap 400 returned –7.20% (+5.55% year to date) and the Small Cap 600 –7.22% (+6.66% year to date). Value and growth were nearly equal among large-caps, but growth did better in the mid- and small-capitalization ranges. [Index returns: Standard & Poors]

Global markets also fell in response to the worries about Greece. The MSCI Barra EAFE international equity index ended May with a return of –7.39% (–4.64% year to date) in local currencies, though Europe actually did a bit better than Asia. The Greek situation continued to drive the euro lower; the US dollar strengthened to $1.2369 against that currency, from $1.3302 at the end of April. The dollar also strengthened against Sterling; at the end of May, it stood at $1.4497, substantially stronger than its $1.5303 level of a month earlier. The dollar fell against the yen, though, ending May at 90.81 yen, compared to 94.24 at the end of April. The overall currency effect was a negative for US investors, and EAFE returned –11.51% (–12.36% year to date) in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Despite continued indications of economic improvement in the US, currency and credit fears overseas drove US interest rates lower again during May. The yield on the two-year US Treasury note ended the month at 0.76% (from 0.97% at the end of April), and the yield on the ten-year fell to 3.31% (from 3.69% on 4/30). The bond market accordingly advanced during the month, as the Barclays Capital US Aggregate Bond index returned +0.84% (+3.71% year too date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

In spite of gathering signs of strength in the recovery of the US economy, market participants entered April apprehensive about the length, breadth, and strength of the stock market’s recovery during the past year. Would economic growth continue? Could first quarter corporate earnings, reported in the second half of April, justify the levels the market had reached, or would they disappoint investors and drive the market back down? What about the debt problems of Greece and other European countries, which seemed no nearer any resolution than when they first surfaced a few months ago? Could they cause a market break? In the event, the data on the economy remained encouraging, earnings came in relatively well, and the US Federal Reserve announced the continuation of the easy monetary policy it has pursued for almost the last three years. These items all favored the markets, but toward the end of the month the simmering uncertainty over Greece’s ability to service its sovereign debt boiled over again, and the market sold off in the final week. Even after that selloff, though, the S&P 500 index gained +1.58% for the month. Mid- and small-capitalization stocks continued to do even better; the S&P Midcap 400 returned +4.26% and the Small Cap 600 +5.85%. Value out-performed growth in all capitalization ranges. [Index returns: Standard & Poors]

Global markets fell, largely in response to the worries about Greece. The MSCI Barra EAFE international equity index ended April with a return of –1.27% in local currencies. The Greek situation also affected the euro; the US dollar strengthened to $1.3302 against that currency, from $1.3526 at the end of March. The dollar was mixed against other currencies; at the end of April, it stood at $1.5308 against the pound Sterling, a bit weaker than its $1.5186 level of a month earlier. It rose a bit against the yen, ending April at 94.24 yen, compared to March’s 93.40. The overall currency effect was a negative for US investors, and EAFE returned –1.81% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Despite continued indications of economic improvement in the US, currency and credit fears overseas drove US interest rates lower during April. The yield on the two-year US Treasury note ended the month at 0.97% (from 1.02% at the end of March), and the yield on the ten-year fell to 3.69% (from 3.84% on 3/31. The bond market accordingly advanced during the month, as the Barclays Capital US Aggregate Bond index returned +1.04%. [Index returns: Barclays Capital. Treasury yields: US Treasury].

Despite generally good economic news, the US stock market failed to extend 2009’s strong advance in the opening weeks of the year. The very strength of the previous year’s rally seemed to be a factor, as were fears over the stability of the Eurozone in light of potentially serious financial problems in Greece, Portugal, and other countries. Markets were weak overall in January. They recovered most of their lost ground in February and advanced steadily in March against a backdrop of improving news on corporate earnings, merger activity, initial public offerings, consumer spending, and even employment. For the quarter, the S&P 500 index posted a gain of +5.39%. That brought the index to a level about +75% higher than the low it had reached just over a year earlier. Mid- and small-capitalization stocks did better still; the S&P Midcap 400 returned +9.09%, and the Small Cap 600 +8.61% for the first quarter. Large-cap value did a bit better than large-cap growth for the quarter, but value and growth were about even in other capitalization ranges. [Index returns: Standard & Poors]

Global markets gained in spite of those concerns about the Greece and Portugal. The MSCI Barra EAFE international equity index ended the quarter with a return of +4.29% in local currencies. The US dollar strengthened a bit against other currencies, largely because of worries about the euro and improvements in the economic picture in the US. At the end of March, the dollar stood at $1.353 to the euro, compared to $1.433 at the end of 2009. It also moved ahead to $1.5186 against the pound Sterling, from $1.6167 at the end of December. It dropped, and then rose sharply again, against the yen, ending March at 93.40 yen, compared to December’s 93.08. The overall currency effect was a negative for US investors, and EAFE returned +0.87% in US dollars for the quarter. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

US interest rates fell in the first weeks of the year, but then the combined effect of economic improvement and fiscal deficits in the US drove rates back up during March. They stayed in a fairly narrow range, though, partially because of assurances from Federal Reserve Chair Ben Bernanke that the Fed intends to keep short-term rates low for some time to come. The yield on the two-year US Treasury note ended the quarter at 1.02% (down from 1.14% on 12/31/09), and the yield on the ten-year ended March at 3.84%, nearly the same as its level of 3.85% on 12/31/09. The Barclays Capital US Aggregate Bond index returned +1.78% for the quarter. [Index returns: Barclays Capital. Treasury yields: US Treasury].

The US stock market recovery that began in March 2009 paused for the first two months of 2010, but it resumed in March 2010. Against a backdrop of improving news on corporate earnings, merger activity, initial public offerings, consumer spending, and even employment, the market seemed to edge forward on nearly a daily basis during March. While the advance was less steady than it seemed, by the end of the month the S&P 500 index had posted a gain of +6.03% for March, bringing its return for the first quarter to +5.39%. The gain brought the index to a level about +75% higher than the low it had reached just over a year earlier. Mid- and small-capitalization stocks did better still; the S&P Midcap 400 returned +7.14% (+9.09% year to date) and the Small Cap 600 +7.78% (+8.61% year to date). Large-cap value did a bit better than large-cap growth for the quarter, but value and growth were about even in other capitalization ranges. [Index returns: Standard & Poors]

Global markets gained in spite of continued concerns about the economic health of Greece and Portugal. The MSCI Barra EAFE international equity index ended March with a return of +7.45% (+4.29% year to date) in local currencies. The US dollar strengthened a bit against other currencies, largely because of worries about the euro and improvements in the economic picture in the US. At the end of March, the dollar stood at $1.353 to the euro, from $1.366 a month earlier, and $1.433 at the end of 2009. It also moved ahead to $1.5186 against the pound Sterling, from $1.5239 at the end of February and $1.6167 at the end of December. It rose sharply against the yen, ending March at 93.40 yen, compared to February’s 88.84, and December’s 93.08. The overall currency effect was a negative for US investors, and EAFE returned +6.24% (+0.87% year to date) in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

The combined effect of economic improvement and fiscal deficits in the US drove interest rates somewhat higher during March, in spite of assurances from Federal Reserve Chair Ben Bernanke that the Fed intends to keep short-term interest rates low for some time to come. The yield on the two-year US Treasury note ended the month at 1.02% (from 0.81% at the end of February and 1.14% on 12/31/09), and the yield on the ten-year rose to 3.84% (from 3.61% on 2/28 and 3.85% on 12/31/09). The bond market accordingly gave up ground during the month, as the Barclays Capital US Aggregate Bond index returned –0.12% (+1.78% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury]

The US stock market fell sharply toward the end of January, and the first week of February looked as though the month would deliver more of the same. Markets steadied, however, as fears of a major debt crisis in Greece abated, and Federal Reserve Chair Ben Bernanke made clear that policy-makers still expect to keep short-term US interest rates very low for an extended period. Corporate merger activity also gave the market a lift, as Warren Buffett’s Berkshire Hathaway (BRK.A and BRK.B) completed its acquisition of Burlington Northern (formerly BNI), and several other deals appeared on the horizon. For the month, the S&P 500 returned +3.10%, retracing all but –0.61% of the ground it had lost in January. Mid- and small-capitalization stocks did better still; the S&P Midcap 400 returned +5.21% (+1.83% year to date) and the Small Cap 600 +4.30% (+0.77% year to date). Growth performed a bit better than value among large- and mid-caps, while value was a little stronger in the small-cap range. [Index returns: Standard & Poors]

For a change, global equities did not quite mirror the US market, as the jitters regarding Greece — along with Portugal, Italy, and Spain — held European markets down. The MSCI Barra EAFE international equity index ended January with a return of +0.54% (–2.94% year to date) in local currencies, with the Eurozone losing –1.96% (–7.21% year to date). The US dollar also strengthened against the euro, but was mixed against other currencies. At the end of February, it stood at $1.366 to the euro, from $1.387 a month earlier. It also moved ahead to $1.5239 against the pound Sterling, from $1.6009 at the end of January. It fell against the yen, though, ending February at 88.84 yen, weaker than January’s 90.38. The overall currency effect was a negative for US investors, and EAFE returned –0.69% (–5.06% year to date) in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

US Treasury interest rates were nearly unchanged across the yield curve during February. The yield on the two-year US Treasury note ended the month at 0.81% (from 0.82% on 1/31), and the yield on the ten-year slipped to 3.61% (from 3.63% on 1/31). The bond market basically earned its coupon during the month, as the Barclays Capital US Aggregate Bond index returned +0.37% (+1.91% year to date). [Index returns: Barclays Capital. Treasury yields: US Treasury].

The US stock market in January was unable to continue the stunning run it made from mid-March through December. It began the year with a modest advance, but lost its strength around the middle of the month. Earnings reports were generally good, but not good enough to drive further gains. At the same time, posturing in the US Senate over the reappointment of Federal Reserve Chair Ben Bernanke created jitters in the market. The Senate finally confirmed his reappointment at month’s end, with vocal critics like Jim Bunning of Kentucky capitalizing on the opportunity to cast “no” votes without real-world consequences. Troubles overseas affected the US markets too, as continued worries about the ability of governments in Greece, Ireland, and Portugal to pay their debts raised fears for the stability of the Euro. Even an unexpectedly strong GDP report — the Commerce Department estimated that real US economic output increased by 5.7% in the fourth quarter — failed to help the markets. A number of observers downplayed the report, pointing out that inventory buildup was a big component of the increase. These observers apparently think that inventories somehow don’t count, even though businesses do not build inventories that they do not believe they will be able to sell in the future. Nevertheless, the S&P 500 fell toward the end of the month, ending with a return of –3.60%. Mid- and small-capitalization stocks did slightly better; the S&P Midcap 400 returned –3.22% and the Small Cap 600 –3.38%. Value performed quite a bit better than growth in all capitalization ranges. [Index returns: Standard & Poors]

Equities’ weakness was again global. The MSCI Barra EAFE international equity index ended January with a return of –3.45% in local currencies. The US dollar was mixed against other currencies. At the end of January, it stood at 90.38 yen, weaker than December’s 93.08. It ended at $1.3870 to the euro, sharply stronger than the $1.4332 level of a month earlier. The dollar edged ahead to $1.6009 against the pound Sterling, from $1.6167 on December 31. The overall currency effect was a negative for US investors, and EAFE returned –4.41% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

US Treasury interest rates fell across the yield curve during January. The yield on the two-year US Treasury note ended the month at 0.82% (from 1.14% on 12/31), and the yield on the ten-year fell to 3.63% (from 3.85% on 12/31). The overall performance of the US bond market reflected this drop in rates — the Barclays Capital US Aggregate Bond index returned +1.53% for January. [Index returns: Barclays Capital. Treasury yields: US Treasury].