For the first two months of the year, markets chopped back and forth in directionless trade with moderate volatility. A variety of factors, ranging from questions about large capital expenditures on data centers supporting artificial intelligence initiatives, to prospects for another government shutdown, to concerns about headline-making problems in private debt markets, to the Supreme Court’s invalidation of the Executive Branch’s attempt to levy arbitrary tariffs, gave investors jitters enough to halt the markets’ advance, especially among the largest stocks. The event with most serious market impact, however, was war with Iran. After the initial military strikes against that country on February 28, markets suffered a general downturn, which lasted almost all of March. A sharp bounce on March 31 — apparently due to hopes that the White House would find a way to declare victory in Iran and withdraw — flattered results, but even so, the S&P 500 index returned –4.33% for the quarter. Smaller stocks sold off during March too, but owing to strength in January and February, the Mid-cap 400 index returned +2.50% for the quarter, and the Small-cap 600 index returned +3.51%. [Index returns: Standard and Poors]
Overseas stocks outperformed large US issues. The MSCI EAFE international equity index returned +0.15% in local currencies. The US dollar strengthened modestly, especially during March. It ended the quarter at $1.1563 against the euro and $1.3232 against the pound Sterling, compared to December 31 figures of $1.1736 and $1.3447, respectively. The weakening of the Japanese yen against the dollar continued: On March 31 a dollar bought 158.73 yen, compared to 156.8 at the end of December. Currency movements trimmed US dollar returns on foreign assets, and EAFE returned –1.24% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Disruptions to international oil flows due to the Iran war raised inflation fears, reducing expectations of possible rate cuts in the near term. Accordingly, interest rates rose moderately. The yield on the two-year US Treasury note ended the quarter at 3.79%, up from 3.47% at the end of December. Longer rates also rose, but not by quite so much. The ten-year yield ended the quarter at 4.30%. At December 31, the ten-year yield was 4.18%. As rates rose, bond prices slipped by about enough to offset bond coupon income, and the Bloomberg US Aggregate Bond index ended the quarter with a return of –0.05%. [Index returns: Bloomberg; bond yields: US Treasury]