Market Reviews 2017

The most important piece of business-related news in December was, of course, the passage of the new US tax law. From a market point of view, the new law’s most significant feature was a cut in the headline rate of corporate tax from 35% to 21%. Market commentators also point to relief the law provides on repatriation of cash balances that companies hold offshore, but the effect of that provision is uncertain. It seems unlikely to affect investment, since large companies have always been able to invest those offshore balances in the US by using offshore entities to do so. It could, however, potentially enable companies to distribute cash to shareholders. Like many governmental actions in the past year, the new tax law seems likely to give its greatest benefits to large companies, and the market reaction seems to validate that conclusion. The S&P 500 returned +1.11% for the month, but the Mid-cap 400 index returned just +0.22%, and the Small-cap 600 index lost –0.52%. For the year, the S&P 500 returned +21.84%, its best showing since 2013’s +32.41%, and respectably close to 2009’s +26.45%. The S&P Mid-cap 400 index returned +16.24% for the year, and the S&P Small-cap 600 index returned +13.23% for 2017. [Index returns: Standard and Poors]

International stocks advanced, reflecting continued encouraging economic signs around the world. The MSCI EAFE international index returned +1.20% in local currencies. Currencies moved modestly during December. The US dollar rose to 112.69 yen, from 112.30 at the end of November, but it eased against European currencies. The dollar ended the year at $1.3529 against the pound Sterling and $1.2022 against the euro, from month-earlier levels of $1.3506 and $1.1898, respectively. The currency movement helped US investors a bit, and EAFE returned +1.61% in US dollars. EAFE returned +25.03% in US dollars for the year. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

The Federal Reserve signaled its intention to continue its slow-motion tightening of monetary policy. Short-term interest rates rose, flattening the yield curve. The yield on the two-year US Treasury note rose to 1.89% at the end of December, from 1.78% a month earlier. The ten-year yield inched lower, to 2.40%, from 2.42% at the end of November. The ten-year yield ended 2017 near where it had started; it stood at 2.45% at the end of 2016. Because changes in short-term yields produce smaller changes in bond prices than do changes in long-term yields, the Bloomberg Barclays US Aggregate bond index returned +0.46% for the month of December. The index returned +3.45% for 2017. [Index returns: Bloomberg; US Treasury yields: US Treasury]

US equity markets continued their upward drift for much of November, as corporate results continued to be relatively strong and economic indicators also showed some moderate strength. Then in the final couple of days of the month, the Republican leadership succeeded in obtaining Senate passage of a tax bill whose contents were largely unclear, aside from a move to lower significantly the rate of tax on corporate income. The fate of the tax bill, and the longer-term economic effects of whatever bill might emerge from Congress, are still uncertain, but the market jumped on this news, perhaps reckoning primarily on the first-order effect the bill would have of increasing after-tax earnings of many US companies. The S&P 500 index returned +3.07% for the month. The Mid-cap 400 index returned +3.68%, and the Small-cap 600 returned +3.52% [Index returns: Standard and Poors]

International stocks did not share the strength of the US market; and the MSCI EAFE international equity index returned –0.52% in local currencies. The US dollar weakened sharply, however, possibly owing to the prospect that the tax bill could significantly increase our fiscal deficit. The dollar fell to 112.3 yen at the end of November, from 113.63 a month earlier. It also weakened to $1.1898 against the euro and $1.3506 against the pound Sterling, from October 31 levels of $1.1648 and $1.3281, respectively. Owing to the currency move, EAFE returned +1.05% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 Release]

Interest rates rose, particularly at the short end of the yield curve. The Federal Reserve continues to signal its intentions to proceed with its plans for a gradual rise in rates and reduction in the size of its balance sheet. Jerome Powell, the new nominee to be the next Fed Chair, also seemed to express in his Senate confirmation hearing an intention to maintain continuity with the Fed’s current policies. As a result, the rise in rates, though meaningful, was orderly. The yield on the two-year US Treasury note ended November at 1.78%, up from 1.60% at the end of October. The ten-year yield rose to 2.42%, from 2.38% a month earlier. This flattening of the yield curve may be an early-warning sign for slowing economic activity, but if so, it’s quite early. The Bloomberg Barclays US Aggregate Bond index returned –0.13% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

US equity markets continued their steady rise in October. As in previous months, many days seemed to end with modest gains in the market averages, without many dramatic moves in either direction. While some market commentators profess themselves optimistic about the possible passage of a large tax cut package in Washington, those on-air voices may be representative of the preferences of the large companies sponsoring their broadcasts — rather than the market’s expectations. The market may instead be responding favorably to the ongoing Congressional stalemate. For the month of October, the S&P 500 returned +2.33%, a solid one-month gain. As has been common recently, large stocks have done better than small ones, and growth has out-performed value, with a small number of stocks producing the best gains. This pattern is similar to the market’s behavior for much of the late 1990s. The Mid-cap 400 index returned +2.26% in October, and the Small-cap 600 returned +0.95% [Index returns: Standard and Poors]

International equity markets also advanced, apparently on hopes that an emerging trend of synchronized economic growth around the world may persist. The MSCI EAFE international equity index returned +2.97% in local currencies. The US dollar strengthened during the month, as the Federal Reserve continued to signal that it would stay ahead of other central banks in its efforts to move toward a more normal monetary posture after years of extremely accommodative policy. The dollar firmed to 113.63 yen by the end of October, up from 112.64 at the end of September. It also strengthened to $1.1648 to the euro, from $1.1813; and to $1.3281 against the pound Sterling, from $1.3402. The currency movements reduced US investors’ gains on overseas assets, and EAFE returned +1.52% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The Fed’s monetary posture put upward pressure on interest rates, especially at shorter maturities. The yield on the two-year US Treasury note rose to 1.60% at the end of October, up from 1.47% on September 30. Over the month, the yield on the ten-year Treasury rose to 2.38%, from 2.33%. On average over the broad bond market, the rise in interest rates just about offset the interest the bonds earned, and the Bloomberg Barclays US Aggregate Bond Index returned +0.06% for the month. [Index return: Bloomberg; Treasury yields: US Treasury]

After the past couple of summers, during which the press of political and economic uncertainties tethered many Wall Street traders to their phones, market participants seemed happy to enjoy their summer break this year. The markets were quiet in July and August. Neither the erratic dance between the leaders of the United States and North Korea nor the landfall of Hurricane Harvey on the Texas Gulf Coast caused more than a mild ripple in the markets. Once September did arrive, the need to provide hurricane relief enabled Congress to pass a bill waiving the debt ceiling for several months, removing one source of economic risk for the time being. The Senate proved unsuccessful in its final attempt to pass a new health care law under budget reconciliation rules for fiscal 2017, and while the outlines of a new tax bill have become somewhat more discernible in recent weeks, the proposal is not complete. When it is, it will excite significant debate. Meanwhile, two more major hurricanes—Irma, which struck Florida heavily, and Maria, which devastated Puerto Rico—diverted attention from politics. The markets seemed to approve of all the Congressional inaction. For the quarter, the S&P 500 index returned +4.48. Smaller stocks lagged in July and August, but rebounded sharply in September. For the quarter, the Mid-cap 400 index returned +3.22%, and the Small-cap 600 returned +5.96%. [Index returns: Standard and Poors.]

Global markets also posted solid advances, possibly reflecting continued optimism and approval of Angela Merkel’s re-election as German Chancellor. The MSCI EAFE international equity index returned +3.36% in local currencies for the quarter. European currencies strengthened sharply. The US dollar ended September trading at $1.1813 to the euro and $1.3402 to the pound Sterling, compared to levels of $1.1411 and $1.2995, respectively, at the end of June. The dollar rose to 112.64 yen, from 112.40. Overall, the currency movement was favorable to US investors, and EAFE returned +5.40% in US dollars. [Index returns:  MSCI; Exchange rates: Federal Reserve H.10 release]

In September the Federal Reserve confirmed and clarified its plans to begin reducing the size of its balance sheet by allowing some of its holdings of US Treasury securities to run off. Overall, the yield curve flattened further during the quarter. The yield on the two-year US Treasury note rose to 1.47% at the end of September, from 1.38% at the end of June. The ten-year yield ended September at 2.33%, little changed from its 2.31% at the end of June. The Bloomberg Barclays US Aggregate Bond index returned +0.85% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

Market participants returning from a very quiet summer break likely expected September to be a lively month, with uncertain events unfolding on a number of fronts. Congress returned, needing to address the raising of the debt ceiling. The Congressional majority leadership also pledged to redouble its efforts to pass a new health care bill, and to enact the tax reductions they have been discussing for months. Tensions with North Korea also remain high. Ironically, the need to provide relief after Hurricane Harvey struck Texas also enabled Congress to pass a bill waiving the debt ceiling for several months, removing one source of economic risk for the time being. The Senate proved unsuccessful in its final attempt to pass a new health care law under budget reconciliation rules for fiscal 2017, and while the outlines of a new tax bill have become somewhat more discernible in recent weeks, the proposal is not complete. When it is, it will excite significant debate. Meanwhile, two more major hurricanes — Irma, which struck Florida heavily, and Maria, which devastated Puerto Rico — diverted attention from politics. The markets seemed to approve of all the Congressional inaction, and the S&P 500 index returned +2.06% for the month. The big change was among smaller stocks. While mid- and small-cap stocks had lagged the S&P 500 prior to this month, in September both were very strong. The Mid-cap 400 index returned +3.92%, and the Small-cap 600 index returned +7.71%. [Index returns: Standard and Poors]

Overseas stocks also continued to perform well. They generally seemed to welcome the elections in Germany, which returned Angela Merkel for her fourth term as Chancellor. The MSCI EAFE international equity index returned +2.71% in local currencies. The US dollar was mixed. It rose to 112.64 yen from 110.06 a month earlier, but it weakened to $1.3402 against the pound Sterling, from $1.2888 at the end of August. It firmed slightly against the euro, ending September at $1.1813 against that unit, a small change from its August 31 value of $1.1894. The currency movements did not affect US investors much, and EAFE returned +2.49% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release]

Interest rates rose somewhat during the month, as the Federal Reserve confirmed and clarified its plans to begin reducing the size of its balance sheet by allowing some of its holdings of US Treasury securities to run off. The Bloomberg Barclays US Aggregate Bond index returned –0.48% for the month. The yield on the two-year US Treasury note rose to 1.47%, from 1.33% at the end of August. The ten-year yield rose by a similar amount, ending September at 2.33%, compared to 2.12% on August 31. [Index return: Bloomberg; Treasury yields: US Treasury]

After the past couple of summers, during which the press of political and economic uncertainties tethered many Wall Street traders to their desks, or at least to their phones, market participants this August seemed only too happy to enjoy their summer break. The markets were quiet. Neither the erratic dance between the leaders of the United States and North Korea, the approach of a September presenting Congress with a potentially heavy legislative calendar, nor the landfall of Hurricane Harvey on the Texas Gulf Coast caused more than a mild ripple in the markets. To the extent that the market exhibited a trend, it seemed negative. For the full month the S&P 500 index returned +0.31%, but that positive result among the largest stocks masked an underlying weakness in the broader market. The Mid-cap 400 index returned –1.52% for the month, and the Small-cap 600 returned –2.57%. [Index returns: Standard and Poors]

Overseas markets were also quiet, in spite of the approach of elections in Germany, debate in the UK over the shape of its exit from the European Union, and uncertainty over the future monetary policy of the European Central Bank. The MSCI EAFE international equity index returned –0.04% in local currencies. The US dollar did not make any dramatic change against other currencies. It eased to 110.06 yen at the end of August, from 110.38 at the end of July. It also slipped slightly against the Euro, ending August at $1.1894 for the euro, compared to $1.1826 a month earlier. Against the pound Sterling, however, it strengthened to $1.2888, from $1.3196 at the end of July. The various currency movements just offset one another, and EAFE also returned –0.04% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

The one market to show a distinct trend during August was the bond market. The yield curve flattened quite a bit. The yield on the two-year US Treasury note slipped to 1.33%, a minimal change from its July 31 level of 1.34%. The ten-year yield, however, fell to 2.12% on August 31, from 2.30% at the end of July. The fall in long-term rates led to a return of +0.90% for the month in the Bloomberg Barclays US Aggregate Bond index. [Index returns: Bloomberg; Treasury yields: US Treasury]

The US equity market continued their quiet levitation, moving upward for the first half of July, and then remaining about stationary for the second half. Even though market commentators have been breathlessly dissecting legislative developments in Washington for months, the markets themselves barely responded when the Senate narrowly defeated the health care bill that the majority leadership had hoped to pass as part of their legislative strategy for enacting large tax cuts. For the month, the S&P 500 returned +2.06%. As has often been the case in recent months, though, the advance was quite narrow. Established companies with market power turned in the strongest gains, while smaller firms lagged. The Mid-cap 400 index returned +0.88%, and the Small-cap 600 returned +0.97% for the month of July. [Index returns: Standard and Poors]

International stocks markets were also generally positive, and the MSCI Barra EAFE international equity index returned +0.67% in local currencies. The dollar weakened significantly against other currencies. It fell to 110.28 yen at the end of July, from 112.4 at the end of June. It also weakened to $1.183 per euro and $1.320 per pound Sterling on July 31, compared to levels of $1.1411 and $1.2955, respectively, a month earlier. The currency move strongly favored US investors, and EAFE returned +2.88% in US dollars. [Index returns: MSCI; Currency rates: Yahoo! Finance and Federal Reserve H.10 release]

Accompanying the decline in the US dollar was a mild decline in US interest rates. The yield on the two-year US Treasury note slipped to 1.34% at July 31, from 1.38% at June 30. The ten-year yield fell a similar amount, ending July at 2.26%, compared to 2.31% at the end of June. The Bloomberg Barclays US Aggregate Bond index returned +0.43% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

The principal influences on the markets for the second quarter seemed to run on two political tracks. The first concerned uncertainty over whether the Administration would succeed in implementing the pro-business agenda the President’s Wall Street supporters seem to favor. Many of these market participants anticipated significant tax cuts and regulatory rollbacks. Toward the end of the quarter, though, this agenda seemed to stall, particularly when Senate Majority Leader McConnell announced that he would not call for a vote on his health care bill — the first stage of his legislative tax-cutting strategy — until after the Independence Day recess. The second political track concerned the elections in the UK, which thwarted Prime Minister Teresa May’s attempt to increase her Tory party majority, and in France, where voters decisively rejected the Presidential bid of far-right candidate Marine Le Pen. Despite these currents, market volatility was low for most of the quarter. For the full period, the S&P 500 index returned a solid +3.09%, with large stocks out-performing smaller stocks. The Mid-cap 400 index returned +1.97%, and the Small-cap 600 returned +1.77%. However, what the quartely numbers don’t show is that toward the end of June the S&P 500 turned downward, while smaller stocks performed much better. [Index returns: Standard and Poors.]

Global markets posted solid advances, reflecting cautious economic optimism and the resolution of some of the uncertainty regarding the UK’s exit from the European Union and the leadership of France. The MSCI Barra EAFE international equity index returned +2.71% in local currencies for the quarter. European currencies strengthened sharply. The US dollar ended June trading at $1.1411 to the euro and $1.2995 to the pound Sterling, compared to levels of $1.0698 and $1.2537, respectively, at the end of March. The dollar rose to 112.4 yen, from 111.41. Overall, the currency movement was favorable to US investors, and EAFE returned +6.12% in US dollars. [Index returns: MSCI Barra; Exchange rates: Federal Reserve H.10 release]

In mid-June, the Federal Reserve, as expected, raised its target for its main short-term policy interest rate by another +0.25%. The Fed again telegraphed the move well ahead of time, and the market’s reaction was muted. Overall, the yield curve flattened further during the quarter. The yield on the two-year US Treasury note rose to 1.38% at the end of March, from 1.27% at the end of March. Over the same interval, the ten-year yield fell to 2.31%, from 2.40% on March 31. The Bloomberg Barclays US Aggregate Bond index returned +1.44% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

US equity markets continued their quiet, steady drift upward for the first part of June, but they reversed course a bit during the second half of the month. Two overt factors may have come into play. First, on June 14 the Federal Reserve announced a further increase in short-term interest rates, and released information giving more definite shape to their plans to reduce the size Fed’s balance sheet over the coming months. Second, those market participants anticipating significant tax cuts may have found that legislative progress, particularly in the Senate, was slower than they had expected. The tax-cut agenda hit a further snag toward the end of the month, when Senate Majority Leader McConnell announced that he would not call for a vote on his health care bill – the first stage of his legislative tax-cutting strategy – until after the Independence Day recess. Despite the late reversal, the S&P 500 still returned +0.62% for the month. The Mid-cap 400 index returned +1.62%, and the Small cap 600 index returned +2.99%. Value outperformed growth across all capitalization ranges. This marked a particularly interesting shift, because for several months large-capitalization growth stocks had been by far the best performers in the market. [Index returns: Standard and Poors]

After several months of strong performance, global stocks eased a bit during June, with the MSCI Barra EAFE international equity index returning –0.78% in local currencies. European currencies showed strength, however, as election results in the UK and France helped clarify political matters in Europe. The dollar ended June trading at $1.1411 to the euro and $1.2995 to the pound Sterling, compared to levels of $1.1236 and $1.2905, respectively, at the end of May. The dollar rose to 112.4 yen, from 110.71. Overall, the currency movement was favorable to US investors, cutting EAFE’s loss to –0.18% in JS dollars [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The Fed’s interest rate move resulted in a general increase in rates across the yield curve. The yield on the two-year US Treasury note ended June at 1.38%, up from 1.28% on May 31. The 10-year yield increased by a similar amount, to 2.31% at June 30, from 2.21% at the end of May. With rates rising, the Bloomberg Barclays US Aggregate Bond index returned —0.10% for the month. [Index returns: Bloomberg; US Treasury yields: US Treasury]

Markets continued to be eerily quite during May. The new Administration’s agenda of cutting taxes and reducing regulation appears to have stalled, and investors appear to have shifted their focus to corporate earnings, which have shown strength in recent months. Uncertainty in the political realm has also played out in US dollar weakness and somewhat lower interest rates, which are also supportive of corporate results and valuations. For the month of May, the S&P 500 index returned +1.41%. As has been the pattern for much of the year, though, most of the market’s strength remains concentrated in a relatively small number of very large stocks. The Mid-cap 400 index returned -0.49%, and the Small-cap 600 returned -2.13%. Growth also substantially out-performed value among large- and mid-cap stocks. [Index returns: Standard and Poors]

International equities performed well, with the MSCI Barra EAFE international equity index returning +2.09% in local currencies for the month. The US dollar fell sharply against the euro, ending May at $1.1236 per euro, from $1.0895 at the end of April. It also slipped to 110.71 yen, from 111.44 on April 30. The dollar was steady against the pound Sterling. That unit traded at $1.2905 on May 31, compared to $1.2938 a month earlier. The currency movements favored US investors, and EAFE returned +3.67% in US dollars. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 release]

To most notable expression of market uncertainty was in a modest flattening of the yield curve. While the two-year US Treasury note’s month-end yield of 1.28% was unchanged from the previous month’s level, the ten-year yield fell to 2.21% on May 31, down from 2.29% on April 30. The Bloomberg Barclays US Aggregate Bond index returned +0.77%, reflecting the drop in longer-term rates. [Index return: Bloomberg. US Treasury yields: US Treasury]

In April the stock market continued its recent pattern of low volatility. Stocks drifted slightly lower early in the month, perhaps reflecting a surprisingly weak March employment report and uncertainty over whether the Administration will succeed in implementing the pro-business agenda the President’s Wall Street supporters seem to favor. When the market did turn upward, it seemed to be largely in response to the initial round of balloting in the Presidential election in France. Ironically, the markets reacted favorably to results decreasing the likelihood that Marine Le Pen, a right-wing populist for whom Donald Trump has expressed support, will be France’s next President. For the month the S&P 500 index returned +1.03%. The Midcap 400 index returned +0.84%, and the Small cap 600 returned +0.90%. Growth out-performed value in all capitalization ranges. [Index returns: Standard and Poors]

International stocks did fairly well. They, too, reflected the French election results. Market participants seemed to take comfort from indications that Emmanuel Macron, a supporter of France’s participation in the European Union, has emerged as the favorite in the May runoff. The MSCI Barra EAFE international equity index returned +1.40% in local currencies. The dollar weakened against European currencies, or rather, the European currencies strengthened. The dollar fell to $1.0895 against the euro and $1.2938 to the pound Sterling, from levels of $1.0698 and $1.2527 at the end of March. It ended April at 111.44 yen, little changed from its March 31 level of 111.41. The currency move was favorable for US investors, and EAFE returned +2.54% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Interest rates, at least at the longer end of the yield curve, fell in spite of the release of Federal Open Market Committee meeting minutes, which showed that the FOMC is actively discussing plans to reduce the size of the Fed’s balance sheet, a step that would seem likely to cause rates to rise. The yield on the two-year US Treasury note ticked up to 1.28%, from 1.27% a month earlier, but the ten-year yield ended April at 2.29%, down from 2.40% at the end of March. The Bloomberg Barclays US Aggregate Bond index returned +0.77% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]

The US equity market started the year with a smart two-day advance before settling back into the dull pattern it had followed in late December. Comments by market participants suggested that business leaders, or at least those of the large companies whose shares populate the major stock indexes, viewed hopefully the possibility that the incoming Administration and Republican-controlled Congress would quickly deliver significant tax cuts and reductions in regulation, which they expect to boost their profitability. The advance continued into February, but it stalled in March, mirroring the stagnation of various policy initiatives in Washington. The pause may also reflect gathering uncertainty regarding the relative importance of the economy’s momentum, the policy proposals the Administration has sold as “pro-growth,” and the gradual tightening of monetary policy by the Federal Reserve. For the quarter, the S&P 500 index returned +6.07%. Large stocks out-performed smaller stocks, perhaps reflecting the degree to which the President’s proposals and statements seem to favor large, established companies over smaller, more dynamic ones. The Mid-cap 400 index returned +3.94%, and the Small-cap 600 returned +1.06%. [Index returns: Standard and Poors.]

Global markets posted solid advances, reflecting general economic optimism and the resolution of a bit of the uncertainty connected with the UK’s exit from the European Union. The MSCI Barra EAFE international equity index returned +4.71% in local currencies for the quarter. The dollar fell against other currencies. It ended the quarter at $1.0698 to the euro and $1.2537 to the pound Sterling, weakening from its December 31 levels of $1.0552 and $1.2337, respectively. The dollar fell sharply, to 111.41 yen, from 116.78 yen three months earlier. The overall currency effect reinforced the stock gains, and EAFE returned +7.25% in US dollars. [Index returns: MSCI Barra; Exchange rates: Federal Reserve H.10 release]

In mid-March, the Federal Reserve, as expected, raised its target for its main short-term policy interest rate by +0.25%. The Fed had telegraphed the move well ahead of time, and the market’s reaction was muted. Overall, the yield curve flattened during the quarter. The yield on the two-year US Treasury note rose to 1.27% at the end of March, from 1.20% at the end of December. Over the same interval, the ten-year yield fell to 2.40%, from 2.45% on December 31. The Bloomberg Barclays US Aggregate Bond index returned +0.82% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

After rising steadily for the first few months after the election, the US stock market took a breather in March. Volatility was low, but stock prices remained on their plateau, rather than either continuing or reversing their trend. The market’s stall mirrored the stagnation of various policy initiatives in Washington, but it may also reflect gathering uncertainty regarding the relative importance of the economy’s momentum, the policy proposals the Administration has sold as “pro-growth,” and the gradual tightening of monetary policy by the Federal Reserve. For the month, the S&P 500 index returned just +0.12%. Large stocks continued to out-perform smaller stocks, perhaps reflecting the degree to which the President’s proposals and statements seem to favor large, established companies over smaller, more dynamic ones. The Mid-cap 400 index returned -0.39%, and the Small-cap 600 returned -0.12%. [Index returns: Standard and Poors]

Overseas stocks performed well during the month, partly, perhaps, because they attracted capital from investors that regard the US market as fully-valued. The MSCI Barra EAFE international equity index returned +2.41% in local currencies. The dollar slipped against other currencies, possibly also reflecting those flows. The dollar ended March at 111.41 yen, down from 112.06 at the end of February. It also fell to $1.0698 against the euro and $1.2537 against the pound Sterling, from $1.0618 and $1.2427, respectively, a month earlier. The currency effect was slightly favorable to US investors, and EAFE returned +2.75% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

At mid-month, the Federal Reserve, as expected, raised its target for its main short-term policy interest rate by +0.25%. The Fed had telegraphed the move well ahead of time, and the market’s reaction was muted. Interest rates did rise a bit during the month, though. The yield on the two-year Treasury note ended March at 1.27%, up from 1.22% a month earlier. The 10-year yield rose to 2.40%, from 2.36% at the end of February. The Bloomberg Barclays US Aggregate bond index returned -0.05% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

The US stock market rose steadily during February, seeming to post a small gain nearly every day of the month. Volatility was unusually low, and some in the markets expressed the type of unease the might lead the detective in a hardboiled crime novel to say, “It was quiet. Too quiet.” Others chose to hope that the new Administration’s industrial policy would emerge and be friendly toward US business. In any event, the S&P 500 index returned +3.97% for the month. Interestingly, large stocks were easily the best performers in the market, suggesting a market expectation that policy-related gains would accrue most heavily to large companies. The Mid-cap 400 index returned +2.62%, and the Small-cap 600 index returned +1.59%. [Index returns: Standard and Poors]

International equity markets also performed well, and the MSCI Barra EAFE international equity index returned +2.15% in local currencies. Expectations that the US might erect trade barriers and that the Federal Reserve might continue on the course of monetary tightening pushed the US dollar higher against European currencies. The dollar strengthened to $1.0618 against the euro and $1.2427 against the pound Sterling at the end of February, compared to $1.0794 and $1.2585, respectively, at the end of January. The dollar eased a bit against the yen, to 112.06 yen on February 28, from 112.72 a month earlier. The currency effect dampened international stock returns a bit for US investors, and EAFE returned +1.43% in US dollars. [Index returns: MSCI Barra; exchange rates: Federal Reserve H.10 release]

Interest rates moved only modestly as bond investors evinced a more cautious attitude toward industrial, fiscal, and monetary policy than their colleagues in the equity markets. The yield curve did flatten a little, however. The yield on the two-year US Treasury note edged up to 1.22% at the end of February, from 1.19% a month earlier. The yield on the 10-year Treasury fell to 2.36%, from 2.45% at the end of January. The Bloomberg Barclays US Aggregate bond index returned +0.67% for the month, largely on the strength of the lower rates at the long end of the curve. [Index returns: Bloomberg; Treasury yields: US Treasury]

The US equity market started the year with a smart two-day advance before settling back into the dull pattern it had followed in late December. Comments by market participants suggested that business leaders, or at least those of the large companies whose shares populate the major stock indexes, viewed hopefully the possibility that the incoming Administration and Republican-controlled Congress would quickly deliver significant tax cuts and reductions in regulation, which they expect to boost their profitability. This sentiment is so strong that on days when the President directs his attention to other matters — immigration, trade, foreign affairs, or his public image — the market seems to idle or slip. It only seems to advance on days the President concentrates on taxes and regulation. For the month, the S&P 500 returned +1.90%. The gains were uneven, however. The Midcap 400 index returned +1.68%, and the Small Cap 600 index fell by -0.40%. Growth outperformed value by a sizable margin in all capitalization ranges. [Index returns: Standard and Poors]

Overseas markets did not broadly share the US market’s strength. The MSCI Barra EAFE international equity index returned +0.10% in local currencies. The US dollar, however, gave up some of the strong gains it had recorded against other currencies in recent months. It slipped to $1.2585 against the pound Sterling and $1.0794 against the euro, from levels of $1.2337 and $1.0552, respectively, at the end of December. It also fell to 112.72 yen, from 116.78 yen at year’s end. The currency move was strongly favorable for US investors, and EAFE returned +2.90% in US dollars. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 release]

Interest rates remained nearly unchanged for most of the course of the month. The yield on the two-year US Treasury note ended January at 1.19%, compared to 1.20% at the end of December. The ten-year yield ended January at 2.45%, unchanged from its year-end level. The Bloomberg Barclays US Aggregate bond index returned +0.20% — really representing the bonds’ interest, with very little price change. [Index returns: Bloomberg. Bond yields: US Treasury]