Equities closed out a lackluster quarter basically flat, as investors grappled with the effects of the chilly winter and widespread volatility. Though the major indices approached new highs in March, stocks gave in to selling pressure at the end of the quarter. For the quarter, the S&P 500 gained 1.84%, the Dow lost 0.35%, and the Nasdaq fell 0.10%.[1. Google Finance]
On the economic front, the quarter was a bit of a disappointment, though economists hope that a warmer spring will cause improvement in economic indicators. The final jobs report of the quarter showed that employers added 192,000 new jobs in March, though the unemployment rate remained unchanged. The good news is that milder weather and better job prospects are drawing the unemployed back to the job search. January and February job additions were revised upward, meaning the job market was not as weak as first thought.[2. http://www.usatoday.com/story/money/business/2014/04/05/private-sector-jobs-recover-recession-losses/7304473/]
Though economists had hoped for more new jobs in March, the labor market reached a milestone last month when private-sector employment passed its previous all-time high of January 2008.[3. http://www.usatoday.com/story/money/business/2014/04/05/private-sector-jobs-recover-recession-losses/7304473/] Though its taken six years to get here, total employment is finally back where it was before the financial crisis. Unfortunately, the economy still has a way to go to regain its former vitality.
Retailers saw their sales slump last quarter as icy weather caused shoppers to stay home. Excluding automobiles, retail sales have been virtually flat since October, meaning retailer earnings probably took a hit. Major chains will release their March sales data next week and analysts will be looking to see if a warmer March sent more shoppers to the mall.[4. http://blogs.wsj.com/five-things/2014/04/04/5-things-to-watch-on-the-economic-calendar-11/]
The manufacturing sector also experienced a weather-driven slowdown in January, but factories shrugged off the cold winter in February with a surge in new orders, the largest increase since September.[5. http://www.cnbc.com/id/101547909] A different survey showed that manufacturing growth accelerated in March.[6. http://www.cnbc.com/id/101543219]
This January, the Fed welcomed its new chairwoman, Janet Yellen. So far, Yellen has held the party line, continuing to scale back quantitative easing and reducing monthly bond purchases to $55 billion at the March meeting. The Fed also shifted its stance on unemployment, dropping its 6.5% unemployment threshold in favor of more nuanced language.[7. http://www.nytimes.com/2014/03/20/business/fed-cuts-bond-purchases-by-another-10-billion-as-expected.html] Investors reacted badly to hints that the Fed might raise short-term rates before the end of 2015. In a speech last week, Yellen attempted to reassure investors by stating that the economy still needs “extraordinary support” and that she has a strong commitment to maintaining support until the economic recovery is self-sustaining.[8. http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html]
Global events also took their toll on markets last quarter, with a burgeoning crisis between Ukraine and Russia and emerging market issues contributing to a great deal of volatility in U.S. markets. Though the threat of violence in Ukraine appears to be over, markets are still nervous about the effects of economic sanction against Russia may have on U.S. and European companies. Investors, who had sought higher returns in developing economies in previous years, fled signs of structural weakness, causing overbought emerging market equities to fall.[9. http://online.wsj.com/news/articles/SB10001424052702303448204579338803161592252] Many questions remain about the ability of developing economies to survive the end of cheap credit.
Looking ahead at the second quarter of 2014, analysts will be looking for more encouraging economic data that they hope with a warmer spring will cause growth to accelerate. Though this week is light on data, investors will be looking forward to getting a closer look at the minutes from the Federal Open Market Committee (FOMC) mid-March meeting to get more details about the Fed’s thinking behind their shift in guidance. Earnings will soon start trickling in and investors will get a good look at how well firms were able to manage lackluster demand at the beginning of the year.
Though we can’t make predictions about which way markets will go, we’re still optimistic about economic growth and market performance in 2014. We believe that underlying economic fundamentals are still strong and that the seasonal effects of winter will give way to stronger performance this quarter. If you have any questions about how market events may affect your portfolio, please don’t hesitate to reach out.
Wednesday: EIA Petroleum Status Report, FOMC Minutes
Thursday: Jobless Claims, Import and Export Prices, Treasury Budget
Friday: PPI-FD, Consumer Sentiment
Data as of 4/4/2014
Standard & Poor’s 500
U.S. Corporate Bond Index
Data as of 4/4/2014
Treasury Yields (CMT)
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
Gas prices heading higher, but are still below 2010 levels. Gasoline is making its annual trek higher as demand increases ahead of the spring and summer driving season. Nationally, gas prices average $3.55, though areas like California are seeing prices spike over $4.01. Despite the price creep, gas prices are still at their lowest level since 2010.[10. http://philadelphia.cbslocal.com/2014/04/05/aaa-march-gas-prices-lowest-since-2010/ , http://www.usatoday.com/story/money/business/2014/04/05/gas-prices-heading-higher/7320431/]
Mortgage applications fall on low refinance demand. Applications for mortgages fell for the third time in four weeks. A measure of refinancing activity has declined to the lowest level since April 2010, as rising interest rates curb activity.[11. http://www.sddt.com/News/article.cfm?SourceCode=20140402fc&_t=Mortgage+Applications+in+US+Fell+12+Last+Week+on+Refinancing#.U0FMxK1dWHw]
China targeting job growth with stimulus measures. The Chinese premier’s version of the State of the Union Address highlighted China’s need for growth to create jobs for its 7.2 million college grads and the millions of rural Chinese flooding cities looking for work.[12. http://www.businessweek.com/articles/2014-04-04/why-china-needs-such-rapid-gdp-growth-more-jobs?campaign_id=yhoo]
European central bank mulls quantitative easing. Though the ECB has long resisted calls to undertake the unconventional type of asset purchases the Federal Reserve has made, weak inflation and persistently low growth in the EU may force its hand. Setting negative deposit rates might force banks to extend more loans to consumers and asset purchases could bolster the economy.[13. http://online.wsj.com/news/articles/SB10001424052702303532704579478982999818814?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303532704579478982999818814.html]