Market Reviews 2013

The stock market staged a remarkably consistent advance throughout 2013, and December provided a suitable finish for such a strong year. The market had drifted lower for the first half of the month, but on December 18 the Federal Open Market Committee announced that it is finally ready to begin slowing the pace at which it is buying Treasury and mortgage-backed securities. The market’s reaction to this so-called “tapering” announcement was strongly favorable, and stocks spent the remainder of the year moving higher. The S&P 500 advanced by +2.53% for the month, bringing its fourth-quarter return to +10.51%, and the return for the full year to +32.39%. The Mid-cap 400 returned +3.09% (Dec), +8.33% (4Q13), and +33.50% (2013); and the Small-cap 600 returned +1.45% (Dec), +9.83% (4Q13), and +41.31% (2013). [Index returns: Standard and Poors]

International stocks also staged a modest advance, as the MSCI Barra EAFE International Equity Index returned +1.39% in local currencies (+6.36% for the quarter, and +26.93% for the full year). In spite of the taper announcement, the US dollar slipped against European currencies, falling to $1.3779 against the euro (from $1.3606 on 11/30), and $1.6574 against the pound Sterling (from $1.6373 a month earlier). The yen was far weaker, so the dollar advanced to 105.25 yen at year’s end, from 102.45 on November 30. The currency move, overall, was slightly favorable to US investors, and EAFE returned +1.50% in US dollars for the month (+5.71% for the quarter, and +22.78% for the year). [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Not surprisingly, interest rates moved higher in response to the Fed’s announcement, and the yield curve steepened, as the purpose of the Fed’s asset purchases is to hold down long-term rates (so slowing down those purchases should allow long-term rates to rise). The yield on the two-year US Treasury note rose to 0.38% on 12/31, from 0.28% at the end of November. Over the same interval, the yield on the 10-year rose to 3.04% from its month-earlier level of 2.75%. As a result, the Barclays Capital US Aggregate Bond Index returned -0.57% for December. That index slipped by -0.14% for the quarter, and, unusually, it had a negative return, -2.02%, for the full year. [Index returns: Barclays Capital; Treasury yields: US Treasury]

The month of November saw the continuation of the steady advance the markets have made during most of 2013. Corporate earnings were fairly good; economic data showed continued, if modest, growth; the political scene in Washington was quiet for a change; and Federal Reserve officials hinted that while they are beginning to think about shifting away from exceptionally easy monetary policy, they are not in any hurry. In this absence of downward pressure, the market drifted higher, eventually reaching record levels above 1800 (the S&P 500 index) and 16,000 (the Dow Jones Industrial Average). Overall, the S&P 500 returned +3.05% for the month. The Mid-cap 400 index returned +1.32%, and the Small-cap 600 index returned +4.50%. Growth out-performed value in all capitalization ranges. [Index returns: Standard and Poors]

International equity markets mirrored the US market’s strength. The MSCI Barra EAFE international equity index returned +1.54% in local currencies. The US dollar turned in mixed results. It jumped sharply, to 102.45 yen, from a level of 98.10 yen at the end of October. The dollar hardly moved against the euro, ending November at $1.3606 euros, compared to $1.3594 a month earlier. Yet the US currency slipped to $1.6373 against the pound Sterling, from $1.6068 at the end of the previous month. Overall, the currency movements worked against US investors, and EAFE returned +0.77% in US dollars. [Index returns: MSCI Barra; currency rates: Federal Reserve H.10 release]

The continued upward drift of the stock market, along with a general sense that the Federal Reserve may shift policy before too long, pushed interest rates higher, at least at the longer end of the yield curve. The yield on the ten-year US Treasury note rose to 2.75% on November 29, compared to 2.57% at the end of October. The two-year yield ended November at 0.28%, compared to 0.31% a month earlier. The Barclays Capital US Aggregate Bond Index returned -0.37% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

We began September concerned about a possible military crisis in the Middle East, and ended it worried about a potential political crisis in Washington. As the month began, the market’s main preoccupation was the possibility that the US might launch some kind of military action against Syria. That crisis wound down when Syria, Russia, and the United States struck an agreement under which Syria would give up its chemical weapons, giving the US an opportunity to back away from its aggressive posture toward that nation. When that threat eased, stock markets rallied. On September 18, the Federal Reserve gave them a further boost by announcing that, contrary to the expectations of many, it would not reduce the size of its security purchasing program, but maintain its current posture of aggressive monetary easing. The market jumped that afternoon and the S&P 500 touched a new all-time high on September 19. That initial response wore off, though, and the market began to drift lower. As the end of the month approached, and with it the end of the Federal government’s fiscal year, concerns increased that Congress would fail to renew the spending authorization that keeps the Federal government open. That issue put further downward pressure on the market, but while stocks declined in price over the last ten days of the month, the retreat was gradual and orderly. As a result, for the full month the S&P 500 returned +3.14%. The Mid-cap 400 index returned +5.21%, and the Small-cap 600 returned +6.23%. Growth was stronger than value among large- and mid-cap stocks. [Index returns: Standard and Poors]

The easing of international tensions also helped international stocks, and the MSCI Barra EAFE international equity index returned +4.60% in local currencies. The combination of continued Fed easing and worries about US fiscal policy drove the US dollar lower against European currencies, although it held its ground against the yen. The US currency stood at 98.3 yen on 9/27 (no 9/30 figures because of the shutdown) compared to 98.22 yen on August 31. Over the same interval, though, it fell sharply to $1.3537 against the euro and $1.6135 against the pound Sterling, from August levels of $1.3198 and $1.5468. As a result, EAFE returned +7.39% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

The Fed’s actions outweighed fiscal worries in the bond market, and interest rates generally fell. The yield on the two-year US Treasury note fell to 0.33%, from 0.39% on August 31, and the ten-year yield fell to 2.64% from 2.78%. As a result, the bond market had a strong month, with the BarCap US Aggregate Bond Index returning +0.95% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

The summer quarter began quietly, with reports of modest economic growth, reasonably solid corporate earnings, and early indications from the Federal Reserve officials that while they are looking ahead toward reducing the pace of monetary stimulus, they are not in any hurry. Markets advanced strongly in July, but they lost momentum in the first part of August. During the second half of that month the possibility of US military intervention in Syria rattled markets, and they fell further. When that crisis eased early in September, markets rallied again. Contrary to the expectations of many, the Federal Reserve announced on September 18 that it would not reduce the size of its security purchasing program, but maintain its current posture of aggressive monetary easing. The market jumped that afternoon, and the S&P 500 touched a new all-time high on September 19. But as the end of the month approached, and with it the end of the Federal government’s fiscal year, concerns increased that Congress would fail to renew the spending authorization that keeps the Federal government open. That issue put downward pressure on the market, and stocks staged a gradual and orderly retreat over the last ten days of the quarter. After all the ups and downs, the S&P 500 returned +5.24% for the quarter. The Mid-cap 400 index returned +7.54%, and the the Small Cap 600 gained +10.73%. Growth out-performed value in all capitalization ranges. [Index returns: Standard and Poors]

Overseas markets broadly followed the same pattern as US markets, and the MSCI Barra EAFE international equity index returned +7.50% in local currencies. The combination of continued Fed easing and worries about US fiscal policy drove the US dollar lower. It fell sharply, to $1.3535 against the euro and $1.6179 against the pound Sterling, from $1.3010 per euro and $1.5210 per pound Sterling three months earlier. It also weakened to 98.29 yen, compared to 99.21 yen on June 30. The overall currency effect was favorable for US investors, and EAFE returned +11.56% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Interest rates rose during the first part of the quarter, but in September the Fed’s actions outweighed fiscal worries in the bond market, and rates generally fell back. The yield on the two-year US Treasury note ended the quarter at 0.33%, down from 0.36% at the end of June, while the yield on the ten-year Treasury ended the quarter at 2.64%, higher than its 2.52% level of the end of June, but down from its peak of 2.98% in early September. The Barclays Capital US Aggregate Bond index returned +0.58% for the quarter.

We began September concerned about a possible military crisis in the Middle East, and ended it worried about a potential political crisis in Washington. As the month began, the market’s main preoccupation was the possibility that the US might launch some kind of military action against Syria. That crisis wound down when Syria, Russia, and the United States struck an agreement under which Syria would give up its chemical weapons, giving the US an opportunity to back away from its aggressive posture toward that nation. When that threat eased, stock markets rallied. On September 18, the Federal Reserve gave them a further boost by announcing that, contrary to the expectations of many, it would not reduce the size of its security purchasing program, but maintain its current posture of aggressive monetary easing. The market jumped that afternoon and the S&P 500 touched a new all-time high on September 19. That initial response wore off, though, and the market began to drift lower. As the end of the month approached, and with it the end of the Federal government’s fiscal year, concerns increased that Congress would fail to renew the spending authorization that keeps the Federal government open. That issue put further downward pressure on the market, but while stocks declined in price over the last ten days of the month, the retreat was gradual and orderly. As a result, for the full month the S&P 500 returned +3.14%. The Mid-cap 400 index returned +5.21%, and the Small-cap 600 returned +6.23%. Growth was stronger than value among large- and mid-cap stocks. [Index returns: Standard and Poors]

The easing of international tensions also helped international stocks, and the MSCI Barra EAFE international equity index returned +4.60% in local currencies. The combination of continued Fed easing and worries about US fiscal policy drove the US dollar lower against European currencies, although it held its ground against the yen. The US currency stood at 98.3 yen on 9/27 (no 9/30 figures because of the shutdown) compared to 98.22 yen on August 31. Over the same interval, though, it fell sharply to $1.3537 against the euro and $1.6135 against the pound Sterling, from August levels of $1.3198 and $1.5468. As a result, EAFE returned +7.39% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

The Fed’s actions outweighed fiscal worries in the bond market, and interest rates generally fell. The yield on the two-year US Treasury note fell to 0.33%, from 0.39% on August 31, and the ten-year yield fell to 2.64% from 2.78%. As a result, the bond market had a strong month, with the BarCap US Aggregate Bond Index returning +0.95% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

After the markets’ strong gains in July, a combination of questions about future Federal Reserve policy, mediocre corporate earnings reports, and some soft economic data lent the markets a more cautious tone during the first part of August. Those factors alone might have been enough to produce a modest decline for the month, but world events — this time concerning the possibility of US military intervention in the ongoing civil war in Syria — introduced an additional uncertainty, and equity markets turned downward a bit more sharply in the latter part of August. Despite the jitters, the market’s retreat was orderly, and equity prices even firmed a bit in the last couple of days of the month. For all of August, though, the S&P 500 lost -2.90%. The mid-cap 400 index returned -3.75%, and the small-cap 600 index fell by -2.44%. Growth performed a bit better than value in all capitalization ranges. [Index returns: Standard and Poors]

Global equity markets didn’t fare much better than those in the US. The MSCI Barra EAFE international equity index returned -1.42% in local currencies. The US dollar was fairly steady against other currencies, ending August at 98.22 yen, compared to 98.35 yen at the end of July, and $1.3196 to the euro, slightly stronger than the July 31 level of $1.3282. The dollar slipped a bit against the pound Sterling, ending August at $1.5468 to that currency, from $1.5177 a month earlier. Overall, the currency movement helped US investors a bit, and EAFE returned -1.32% in US dollars. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Against the backdrop of a possible shift in Federal Reserve policy and possible military action against Syria, interest rates continued to move higher, and the yield curve continued to steepen. The yield on the two-year US Treasury note rose to 0.39% at the end of August, from 0.33% at the end of July, and the ten-year yield rose to 2.78%, from 2.63% a month earlier. Bonds fell as a result, and the Barclays Capital US Aggregate Bond Index returned -0.51% for the month. [Index return: Barclays Capital; Treasury yields: US Treasury]

With employment and overall economic activity continuing their recent trend of modest, but uninspiring growth, global equity markets resumed in July the trend of solid advances that had been in place for much of the first half of 2013. Corporate earnings reports, which began to emerge early in the month, continued to show solid profitability in the corporate sector, even though growth in revenues disappointed some observers. At the same time, various Federal Reserve officials indicated that while they are looking ahead toward eventually reducing the pace of monetary stimulus, they are not in any hurry. In the end, the US equity market delivered its best performance since January. The S&P 500 index returned +5.09% for the month of July; the mid-cap 400 index returned +6.20%; and the small-cap 600 index returned +6.84%. Value and growth were fairly close to each other throughout the market. [Index returns: Standard and Poors]

International stocks also performed well, particularly in the developed markets. The MSCI Barra EAFE international equity index returned +4.26% in local currencies. The Fed officials’ comments pushed the US dollar a bit lower overall, though not against all currencies. The dollar fell to $1.3282 against the euro from $1.3010 on June 30; it also fell to 98.35 yen, compared to 99.21 yen a month earlier. The US currency did creep upward a bit, to $1.5177 against the pound Sterling, from $1.5210 a month earlier. (Remember that by convention, we quote the number of yen to the dollar, but the number of dollars to the euro and the pound Sterling). As a result of the currency moves, EAFE returned +5.28% in US dollars for the month. The MSCI All-Country World ex-USA index, which includes emerging markets, returned +4.38% in dollars for the month. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Interest rates were rather volatile during July, but over the full month their change was modest. The yield curve steepened a bit during the month, though. The yield on the two-year US Treasury note fell to 0.31% on July 31, from 0.36% on June 30. The ten-year yield, in contrast, rose to 2.60%, from 2.52% at the end of June. The overall result was a slightly positive return in the bond market, with the Barclays Capital US Aggregate Bond index returning +0.14% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

After the S&P 500 regained the 1500 level in the first quarter of 2013, commentators began to jostle for position as the doomsayer forecasting the next major market decline. They cited negatives including fiscal difficulties in Europe, slowing growth in China, the broad-based cuts in US Government spending that took place early in the year, and the possibility that the Federal Reserve may rein in its exceptionally easy monetary policy before long. In the event, corporate earnings reports were mostly encouraging, and other economic indicators, while not especially strong, were solid enough. The tone of the market remained modestly positive until mid-June, when Federal Reserve Chair Ben Bernanke offered remarks that some market participants took as foreshadowing a “tapering off” of the Fed’s monetary stimulus. At that point, the market gave back a portion of its earlier gains. Even so, the S&P 500 index ended the quarter with a gain of +2.91% (+13.82% year to date), the Mid-cap 400 returned +1.00% (+14.59% YTD), and the Small Cap 600 gained +3.92% (+16.19% YTD). Value out-performed growth in the large- and small-cap ranges. [Index returns: Standard and Poors]

Overseas markets varied widely. Japan showed strength early as unusual fiscal stimulus there seemed to take hold, but that market subsequently sold off. Emerging markets were generally weak, and most global markets fell during June. Even so, the MSCI Barra EAFE international equity index returned +1.21% in local currencies (+11.01% year-to-date) for the quarter. The US dollar strengthened to 99.21 yen, compared to 94.16 on March 31, but it eased to $1.3010 against the euro, and $1.5210 against the pound Sterling, from $1.2816 and $1.5193, respectively, three months earlier. The overall currency effect was unfavorable for US investors, and EAFE returned -0.98% in US dollars (+4.10% YTD). [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Indications of a possible upcoming change in Fed policy hit the bond market hard. Interest rates jumped higher, especially in June. The yield on the two-year US Treasury note ended the quarter at 0.40%, up from 0.25% at the end of March, while the yield on the ten-year Treasury jumped to 2.73%, from 1.87% three months earlier. The Barclays Capital US Aggregate Bond index returned -2.32% for the quarter, and -2.44% year to date. [Index returns: Barclays Capital. Treasury yields: US Treasury].

Gold also fell sharply, dropping nearly -23% during the quarter [based on prices of gold ETFs], as inflation fears abated and the metal lost its safe-haven appeal for many investors.

After seven consecutive months of stock market gains, many investors came into June looking for a reason for the stock market to retreat, or at least to pause in its climb. That reason seemed to come from Federal Reserve Chair Ben Bernanke. His remarks at the news conference following the mid-month meeting of the Federal Open Market Committee (FOMC) seemed to many market participants to foreshadow a “tapering off” of the Fed’s current program of holding down interest rates by buying fixed income securities. Interest rates jumped, and the stock market eased lower, although it recovered some of its losses in the final days of the month. For the month, the S&P 500 returned -1.34%, bringing its return for the second quarter to +2.91%. The Mid-cap 400 index returned -1.85% for June (+1.00% for the quarter), and the Small-cap 600 returned -0.15% for the month (+3.92% for the second quarter). Value out-performed growth for the month in all capitalization ranges [Index returns: Standard and Poors]

International equities reflected similar weakness to US stocks, with additional uncertainty over prospects for slowing growth in China, renewed political unrest in the Middle East, and revived worries about the fiscal condition of some European countries, particularly Portugal. The MSCI Barra EAFE international equity index returned -3.65% in local currencies for the month, and +1.21% for the quarter. The US dollar moved modestly against other currencies in June; it ended the month at 99.21 yen, compared to 100.83 on May 31 and 94.16 at the end of March. The dollar also eased to $1.5210 against the pound Sterling, from $1.5185 a month earlier and $1.5193 at the end of the previous quarter. It ended June at $1.3010 to the euro, compared to $1.2988 on May 31 and $1.2816 at the end of March. The currency effect on US investors was just slightly favorable, and EAFE returned -3.55% in US dollars in June, and -0.98% for the quarter. Emerging markets fared worse than developed ones, as the MSCI Emerging Markets index returned -5.09% in local currencies, and -6.37% in the US dollar, for June. [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

Shortly after the FOMC meeting and announcement on June 19, interest rates began rising sharply. The yield on the two-year US Treasury note ended June at 0.40%, up from 0.31% at the end of May and 0.25% at the end of March. The ten-year yield jumped even more sharply, rising to 2.73% on June 30, from 2.13% on May 31 and 1.87% on March 31. As a result, the Barclays Capital US Aggregate Bond index fell substantially, returning -1.55% for June, and -2.32% for the second quarter. [Index returns: Barclays Capital. Treasury yields: US Treasury]

The stock market rally that has been driving stocks higher since around the first of the year continued into May, but market participants displayed increasing nervousness, as though looking over their shoulders for some event that would give them reason to sell. That event seemed to occur around the middle of the month, as comments from Ben Bernanke and other Federal Reserve governors hinted that the Fed may begin to reduce its purchases of bonds and mortgage-backed securities before too long. US Treasury yields jumped sharply on those reports, and equity markets fell. At about the same time, both the stock and bond markets in Japan fell dramatically, as global markets re-priced the prospects for dramatic monetary stimulus to revive economic growth in that country. In spite of the month-end drama, the S&P 500 ended May with a return of +2.34%, with value slightly out-performing growth. The Mid-cap 400 index returned +2.26%, while the Small-cap 600 returned +4.35%. Value and growth were about even among the mid- and small-caps. [Index returns: Standard and Poors. Other indices: S&P 1500 Composite +2.40%; Russell 3000 +2.36% (Russell Investments)]

Japan was weak during May, but Europe was fairly stable, and the MSCI Barra EAFE international equity index returned +0.57% in local currencies. However, the weakness in Japan, along with the sense that US interest rates may rise, lent strength to the US dollar, which rose during the month. The dollar ended May at 100.83 yen, against 97.52 yen on April 30. The dollar strengthened to $1.2988 against the euro (from $1.3168 on 4/30), and to $1.5185 against the pound Sterling (from $1.5539 a month earlier). The dollar’s strength worked against US investors in international equities, and EAFE returned -2.41% in US dollars. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 release. Other index: MSCI All-Country World Index ex-US, in dollars: -2.31%]

As I’ve noted, interest rates jumped sharply during May. The yield on the two-year US Treasury rose to 0.30% on May 31, compared to 0.22% a month earlier. The yield on the ten-year rose to 2.16%, from 1.70% on April 30. The rise in rates hit the bond market hard, and the Barcap US Aggregate Bond index fell, returning -1.78% for the month. [Index return: Barclays Capital; Treasury yields: US Treasury]

After the S&P 500 index regained the 1500 level in the first quarter of 2013 — a level it had visited last in 2007, and not since 2000 before that — skeptical commentators began to jostle for position as the next prescient doomsayer, forecasting the next major market decline. These commentators offered a number of arguments for their bearishness. Growth in employment and in overall economic activity, while positive, remains tepid. The Federal Reserve continues to supply extraordinary liquidity to the economy, leading some to suggest that the stock market’s advance is artificial. The sequester, those broad-based cuts in US Government spending that began when Congress was unable to reach a taxation and spending agreement earlier this year, might undermine growth — though some worry that the sequester will directly reduce a major component of economic activity, while others fear that the cuts are in the wrong places, preserving the Government’s ability to persist with spending they regard as wasteful. Europe also continues to threaten to cause major problems, and China, which until recently seemed set to overwhelm us with their extremely rapid growth, now threatens to undermine the global economy by slowing down too much. In spite of it all, corporate earnings reports during April were mostly encouraging, and other economic indicators, while not especially strong, remained solid enough. In the end, the S&P 500 returned +1.93% for the month, with growth out-performing value. The advance was narrower than it may have appeared, though — the Mid-cap 400 index returned just +0.63%, and the Small cap 600 slipped, returning -0.27%. [Index returns: Standard and Poors. Other indices: S&P 1500 Composite +1.74%; Russell 3000 +1.64%; source Russell Investments]

I don’t usually report on precious metals, but gold fell dramatically at mid-month, as inflation fears seemed to abate. Some market participants may have encountered margin calls, accelerating the selling. For example, the iShares Gold Trust ETF (IAU), whose price is usually around 1/100 the spot price of the metal, fell from a closing price of $15.18 on April 11 to $13.19 on April 15, a drop of more than -13% in two trading days. The metal recovered toward the end of the month, but the IAU still lost -7.5% for the month. [Prices: Yahoo! Finance]

International equity markets were, if anything, firmer than the US market, as markets stabilized in Europe, and fiscal stimulus in Japan appeared to take hold. The MSCI Barra EAFE international equity index returned +4.45% in local currencies. The US dollar strengthened to 97.52 yen, from 94.16 yen a month earlier, but the dollar weakened against European currencies. It ended April at $1.3168 to the euro, compared to $1.2816 at the end of March. It also eased to $1.5539 against the pound Sterling, from $1.5193 at the end of the previous month. The currency movement favored US investors, and EAFE returned +5.21% in dollars. [Index returns: MSCI Barra; currency rates Federal Reserve H.10 release. Other index: MSCI all-country world index, ex-US (includes emerging markets): +3.68% in US dollars]

Even with the continuing strength in equity markets, the bond market also strengthened, as the Federal Reserve reaffirmed its policy of monetary accommodation. The yield on the two-year US Treasury note fell to 0.20% on April 30, from 0.25% on March 31. The yield on the ten-year fell to 1.70%, from 1.92% a month earlier. The overall bond market reflected the strength in Treasuries, and the Barclays Capital US Aggregate Bond Index returned +1.01% for the month. [Index returns: Barclays Capital; Treasury yields: US Treasury]

In the first major news event of 2013, the outgoing Congress enacted a measure to delay the most severe of the automatic tax increases and government spending cuts that had been set to take place at the first of the year. The stock market reacted as though the action released a brake that had been holding it back, and began the year with a sharp advance. It continued to rise strongly for the rest of the quarter, in spite of speed bumps in the form of an Italian election that cast doubt on Europe’s ability to impose the austerity measures it required of that country in exchange for financial assistance, and a banking crisis in Cyprus that reminded investors of the parlous state of banks throughout the Continent. Even the expiration of the extension Congress had granted itself to prevent those automatic spending cuts didn’t bother the markets much. Instead, main US market indices regained levels they had last reached in 2007, before the losses of 2008 and the first part of 2009. The S&P 500 index ended the quarter with a gain of +10.61%, the Mid-cap 400 returned +13.45%, and the Small Cap 600 gained +11.81%. Value out-performed growth in the large- and mid-cap ranges. [Index returns: Standard and Poors]

Overseas markets were also strong, especially outside Europe. The Bank of Japan continued to stress its intention of creating monetary stimulus far beyond what the US Federal Reserve has provided. The Japanese market jumped, and the yen weakened dramatically. The MSCI Barra EAFE international equity index returned +9.67% in local currencies for the quarter. The dollar strengthened to $1.2816 against the euro, from $1.3186 on December 31, and to $1.5193 against the pound Sterling, from $1.6262 three months earlier. The dollar jumped even more strongly against the yen, closing the quarter at 94.16 yen, compared to 86.64 at the end of last year. The overall currency effect was unfavorable for US investors, and EAFE returned +5.12% in US dollars. [Index returns: MSCI Barra. Exchange rates: Federal Reserve H.10 release]

Interest rates drifted higher during February, but returned in March to near the levels at which they had started the year. The Federal Reserve continued its policy of holding interest rates very low. The yield on the two-year US Treasury note ended the quarter at 0.22%, down slightly from 0.25% at the end of December, while the yield on the ten-year Treasury ended unchanged from three months earlier at 1.78%. The broad bond market slipped, however, and the Barclays Capital US Aggregate Bond index returned -0.12% for the quarter, an unusual negative return. [Index returns: Barclays Capital. Treasury yields: US Treasury].

The US stock market continued its remarkable, and remarkably steady, climb in March. The principal indexes reached levels they had not seen since their peak in 2007 — a complete recovery from the losses they incurred during the financial disruptions of the period from late 2007 into 2009. The daily moves were generally modest, but they were also mostly upward, showing little sign of the volatility that has characterized the markets at times over the past few years. For most of the month, the economic news around the world was mild, and indicators in the US were generally encouraging. Toward the end of the month, though, news emerged that the banking system in Cyprus, a small Mediterranean country, faced an insolvency crisis. Cyprus is a member of the Eurozone, so the problem has international implications in spite of the relatively small sums involved. US markets faltered a bit on the news, but they steadied as the sense grew among market participants that even if Cyprus’s distress spread further in Europe, it would still be unlikely to disrupt markets here. The S&P 500 index gained +3.75% for the month, and +10.61% for the first quarter. The mid-cap 400 index gained +4.78% (+13.45% for the quarter), and the small cap 600 index returned +4.24% for March (+11.81% for the quarter). Mid-cap value was a bit stronger than mid-cap growth, but value and growth were about even in the other capitalization ranges. [Index returns: Standard and Poors]

European markets ended about flat for the month in spite of the trouble in Cyprus, but Japan was particularly strong, as markets there responded to news that the Bank of Japan would adopt Bernanke-style monetary stimulus. The MSCI Barra international equity index returned +1.73% in local currencies for the month, and +9.67% for the quarter. Those returns were solid, but the combination of European jitters and Japanese monetary easing seemed to drive global investors toward the US dollar, which continued its recent rise. The dollar ended March at 94.16 yen, up from 93.38 on February 28 and 86.64 on December 31. It also appreciated against the euro; $1.2816 bought a euro on March 31, compared to $1.3079 a month earlier at $1.3186 at year-end. The dollar remained steady against the pound Sterling ($1.5193 on 3/31, vs. $1.5192 on 2/28), but that was after a sharp appreciation from the $1.6262 level on December 31. The currency movement worked against US investors holding foreign assets, so EAFE returned only +0.82% in dollars (+5.12% for the quarter). [Index returns: MSCI Barra; Currency rates: Federal Reserve H.10 release]

In spite of the strength in the equity market, US Treasury yields remained fairly steady, reflecting continuing indications by the Federal Reserve that it intends to maintain its efforts to keep rates low. The yield on the two-year US Treasury note ended the month at 0.22%, compared to 0.25% on both February 28 and December 31. The 10-year yield fell back to 1.78%, the level at which it began the year, after having crept up to 1.89% at the end of February. In spite of the mild decrease in Treasury yields, the overall bond market hardly moved during March, and the Barclays Capital US Aggregate Bond index returned +0.08% for the month. The index lost ground for the quarter, however, returning -0.12% so far this year. [Index returns: Barclays Capital; Bond yields: US Treasury]

For the first part of February, markets seemed inclined to follow up their strong January performance with further, steady gains. Equities remained firm in spite of increasingly confusing political posturing over the automatic cuts in Federal government spending due to occur at the beginning of March. Some observers suggested that the markets had reached a point of budget fatigue, where news from Washington regarding fiscal (taxation and spending) policy simply failed to affect the markets much any more. Even so, the market stumbled a bit when reports emerged suggesting that some Federal Reserve policymakers have expressed doubts about the Fed’s exceptionally easy monetary (interest rates and money supply) policy. Fed Chair Bernanke made clear in his testimony before Congress, however, that the Fed will keep rates low for some time. One other event that seemed to spook the market was the Italian election, which seemed to represent a rejection of the austerity program that Prime Minister Monti had instituted in response to the European debt crisis. The market gave up its gains for the month the day of that event, but it bounced again on the last day, and the S&P 500 ended February with a return of +1.36% for the month. The Mid-cap 400 index returned +0.98%, and the Small Cap 600 returned +1.41%. Large cap value and growth had identical +1.36% returns, but value out-performed growth among mid- and small-cap stocks. [Index returns: Standard and Poors]

Global equities were generally strong, and the MSCI Barra EAFE international equity index returned +1.81% in local currencies. The US dollar strengthened sharply against foreign currencies, however. Japan continued its shift toward monetary easing, and the dollar increased to 92.36 yen, from 91.28 a month earlier. General economic weakness and political uncertainty undermined Sterling, and the pound fell sharply, ending February at $1.5192, from $1.5856 at the end of January. The euro weakened as well, as the dollar-euro rate fell to $1.3079, compared to $1.3584 a month earlier. The sharp currency move worked against US investors in foreign assets, and in spite of its strong local-currency return, EAFE returned -0.95% in US dollars. [Index returns: MSCI Barra. Currency rates: Federal Reserve H.10 Release]

Unusually for a period of dollar strength, US interest rates fell, perhaps in response to an expectation of US deficit reduction. The yield on the two-year US Treasury note fell to 0.25%, from 0.27% at the end of January. The ten-year yield fell more sharply, ending February at 1.89%, compared to 2.02% a month earlier. As a result of the falling rates, the Barclays Capital US Aggregate Bond Index returned +0.50% for the month. [Index return: Barclays Capital. US Treasury yields: US Treasury]

For much of December, the markets had marked time, waiting for the outcome of negotiations in Washington concerning the set of automatic tax increases and government spending cuts that were set to take place at the turn of the year.  Over the New Years holiday, Congress finally enacted a measure to forestall the most severe of those changes, and the market reacted favorably.  At about the same time, the Bank of Japan announced a change in policy, substantially easing its monetary stance with the aim of weakening the yen and reversing more than fifteen years of deflation.  Meanwhile, fears of a real economic catastrophe in Europe also abated.  These steps drew the market out of its holding pattern, and resulted in a steady climb for US equities during January.  The S&P 500 returned +5.18% for the month, while the Mid-cap 400 Index returned +7.22%, and the Small-cap 600 Index returned +5.78%.  Value out-performed growth among S&P 500 stocks, and the difference between the two was small in the Mid- and Small-cap ranges.  [Index returns: Standard and Poors]

The generally favorable tone of economic news lifted overseas stocks as well.  The MSCI Barra EAFE international equity index returned +5.89% in local currencies.  As expected, the Bank of Japan’s policy shift weakened the yen, and the yen-dollar exchange rate jumped sharply, closing the month at 91.28 yen to the dollar, compared to 86.64 a month earlier.  The dollar also strengthened against the pound Sterling; at the end of January $1.5856 bought a pound, where the rate had been $1.6262 on December 31.  The US dollar fell against the euro, though, closing January at $1.3584 to the euro, from $1.3186 at the end of December.  The currency moves were fairly large, but they weren’t all the same direction.  Overall, they worked somewhat against US investors, and EAFE returned +5.27% in dollars.  [Index returns:  MSCI Barra.  Exchange rates:  Federal Reserve H.10 release]

Some upward pressure on interest rates accompanied the strength of the stock market, and nothing in the Fed’s words or actions discouraged the rise.  The yield on the two-year US Treasury note ticked up to 0.27%, from 0.25% at the end of December.  The change at the longer end of the yield curve was greater – the 10-year yield increased to 2.02% on January 31, from 1.78% a month earlier.  As a result, bonds fell in price, and the Barclays Capital US Aggregate Bond Index returned –0.70% for the month.  [Index return:  Barclays Capital.  Bond yields:  US Treasury]