Domestic equity markets posted mixed results in March, with certain indices extending February’s gains, while others wavered. Geopolitical tensions were a key factor impacting performance, with Russia’s annexation of Crimea and the Russian army’s subsequent massing along the Ukraine border causing concern throughout Europe and Washington. Economic data remained rather sluggish, with the extraordinarily severe winter weather causing short-term distortions that extended into March. Employment gains in March were 192,000, slightly below expectations, but strong enough to indicate a further acceleration may be in the offing. The unemployment rate remained at 6.7%, even with additional workers reentering the workforce. Estimates of gross domestic product (GDP) growth in the fourth quarter were increased somewhat, to 2.6% from the prior estimate of 2.4%. Within this landscape, stocks had difficulty establishing a trend. The S&P 500 rose +0.8% for the month, and the Dow Jones Industrials gained +0.9%. However, the tech-heavy Nasdaq Composite Index struggled, declining -2.5%. The Russell 1000 Index of large cap stocks and Russell 2000 Index of small cap stocks diverged somewhat during the month, posting returns of +0.6% and -0.7%, respectively. Value stocks strongly outperformed growth stocks. In terms of sector performance, telecommunications services was the strongest performer on a relative basis, gaining +4.8%, while consumer discretionary was the poorest performer, posting a decline of -2.8%.
International equity markets also generated varied results in March. The MSCI World ex-U.S. Index declined -0.4% for the month. After a long stretch of underperformance, emerging markets finally found solid ground, and performed quite well relative to developed markets. Investors believed the adverse effects of the Federal Reserve’s tapering had been fully discounted, using low perceived valuations as a buying opportunity. The MSCI Emerging Markets Index gained +3.1% for the month. In contrast, the MSCI EAFE Index, which measures developed markets performance, dropped -0.6% for the month, with a primary reason being the aforementioned Russia-Ukraine tensions. Regionally, Latin America and Pacific ex-Japan were the best performers on a relative basis, with the MSCI EM Latin America Index and the MSCI Pacific ex-Japan Index gaining +8.8% and +2.4%, respectively. Eastern Europe and China were among the poorest performers, with results of -2.1% and -1.7%, respectively.
Fixed-income markets generally trailed off in March, as investors digested mixed economic data and statements from Janet Yellen, the Fed chairman. The Fed continued its tapering of its asset purchase program during the month, reducing purchases by an additional $10 billion. As stated above, economic data during the month was mixed, and investors strived to determine just how much weather was to blame. In this environment, the benchmark 10-year U.S. Treasury yield ended the month at 2.72%, up slightly from the 2.66% the level of February 28th. Broad-based fixed-income indices posted slightly negative results in March, with the Barclays U.S. Aggregate Bond Index easing -0.2% for the month. Global fixed-income markets were essentially unchanged, with the Barclays Global Aggregate ex-U.S. Index inching down -0.01% for the month. Intermediate-term corporate bonds were soft, as the Barclays U.S. Corporate 5-10 Year Index fell -0.1%. The Barclays U.S. Corporate High Yield Index posted a gain of +0.2% for the month. Municipals also performed relatively well, advancing +0.2%.
By Prateek Mehrotra, CIO
