THE QUARTER IN BRIEF (A review of 1Q 2014)
Bulls didn’t quite trample bears in the opening quarter of 2014. The S&P 500 slid 3.56% in January, advanced 4.31% in February and gained another 0.69% in March. Still, Q1 ended with the Dow in the red YTD and only minor YTD gains for the Nasdaq, S&P and Russell 2000; the broad commodities market outperformed the stock market. Some fundamental economic indicators were unimpressive during the quarter, and analysts wondered if a ferocious winter was partly to blame. The Federal Reserve kept tapering QE3 as Ben Bernanke handed the reins to Janet Yellen. Unrest and currency problems hit some key emerging-market economies. Home prices kept rising as home sales leveled off. Wall Street hoped the year wouldn’t mimic the quarter.¹

DOMESTIC ECONOMIC HEALTH 

The quarter ended with a major jump in consumer confidence. The Conference Board’s index reached 82.3 in March, up 4.0 points in a month. Consumer spending improved too, rising 0.2% in January and 0.3% in February. (In a contrasting note, the University of Michigan’s consumer sentiment index slipped 2.5 points across the quarter to a final March mark of 80.0.)^2,3

Manufacturing and service sectors continued to expand, according to the Institute for Supply Management. ISM’s manufacturing PMI rose in each month of the quarter (51.3 to 53.2 to 53.7). Its non-manufacturing PMI rollercoastered from January to March (54.0 to 51.6 to 53.1). Overall durable goods orders picked up 2.2% in February after a 1.3% pullback for January.^2,4,5

Unemployment was at 6.6% in January, 6.7% in February. By February, the good news was that the jobless rate was down a full percent from a year before; the bad news was that 37% of jobseekers had been out of work for at least 27 weeks.⁶

The federal government’s Consumer and Producer Price Indexes recorded little inflation. Wholesale prices retreated 0.1% in February after rising 0.2% for January, and by February the headline PPI had only increased 0.9% in 12 months. Consumer prices rose 0.1% in both January and February, with the headline CPI up 1.1% annually. Speaking of consumers and prices, retail sales declined 0.6% in January but advanced 0.3% the next month.⁷

Janet Yellen kept things lively in her first month as chair of the Federal Reserve. At the press conference following the Federal Open Market Committee policy meeting on March 19, Yellen was asked how long the Fed might wait to raise the benchmark interest rate once QE3 was over. Her response contained the ballpark guess “around six months” – which led to raised eyebrows and a few minutes of rampant selling on Wall Street. Stocks turned north quickly before the trading day ended, though. On March 31, Yellen issued a dovish remark that sparked a rally, noting that the central bank’s stimulus “is still needed and will be for some time.” Across Q1, the Fed trimmed its monthly asset purchases from $85 billion to $55 billion.⁸

GLOBAL ECONOMIC HEALTH
March brought a major geopolitical event – Russia’s annexation of the Autonomous Republic of Crimea, formerly part of Ukraine. At month’s end, roughly 40,000 Russian troops were massed at Ukraine’s borders, suggesting the possibility of a takeover. As the U.S. and other western nations issued economic sanctions against Russia, the crisis affected wheat and natural gas prices in particular. February brought a short-term exodus of capital from the economies of South Africa, Turkey, Brazil, India and Indonesia when the average implied volatility of their currencies touched 3-month lows.^9,10

Word came during February that the eurozone’s recession was over: eurozone GDP was +0.3% in Q4 2013 after four straight negative quarters. Germany saw 0.4% growth in Q4, France 0.3% growth. Eurozone annualized inflation was 0.8% in January, 0.7% in February and 0.5% in March, nowhere near the European Central Bank’s 2.0% target.^11,12

Euro area unemployment was still up at 11.9% in February, but there was a bright spot – the jobless rate fell in each month of the quarter in Germany. The eurozone’s Markit PMI was at 54.0 in January, 53.2 in February and 53.0 in March.¹³

China’s factory sector revved down, and that led some economists to wonder if the PRC might resort to a stimulus to keep growth at its 7.5% target. The HSBC manufacturing PMI for China was below 50 all quarter, and the March reading of 48.0 was an 8-month low. Even China’s official PMI reading was only at 50.3 by March. A stimulus might also be in order in Japan – its manufacturing PMI fell 1.6% in March, and industrial production slipped 2.3% in February.^14,15

WORLD MARKETS

Performances were definitely mixed in Q1. In the Americas, the  MERVAL went +18.23%, the Bovespa -2.12%, the IPC All-Share -5.30% and the TSX Composite +5.24%. In the Asia Pacific region, the Nikkei 225 lost 8.98%, the Shanghai Composite 3.91%, the Hang Seng 4.96% and the Kospi 1.28%; the Asia Dow rose 0.39%, the Jakarta Composite 11.56%, the PSE Composite 9.15%, the KSE 100  7.52% and the Sensex 5.74%. As for Europe, Ireland’s ISEQ gained 10.04%, Italy’s FTSE MIB 14.36%, the DAX just 0.04%, the CAC 40 2.22%, the DJ STOXX 600 1.84% and the Europe Dow 3.22%; the FTSE 100 lost 2.23%. The MSCI World Index rose 0.77% in Q1 while the MSCI Emerging Markets Index slipped 0.80%; the Global Dow advanced 0.74%.^16,17

COMMODITIES MARKETS 

Even with a fall of 2.9% in March, gold gained 6.8% on the quarter, settling at $1,274.70 on the COMEX on March 31. COMEX silver closed Q1 at $19.75 after a 2.0% rise in three months. Platinum rose 3.4% in Q1, palladium 8.2%. The U.S. Dollar Index, on the other hand, gained but 0.07% in three months.^18,19

Commodities on the whole looked very good in Q1: the Thomson Reuters/Core Commodity CRB Index advanced 8.7%. Coming in first out of its 19 futures: Arabica coffee, up 61% in three months on Brazil’s record drought. Lean hog futures were up 48% in the quarter on fears of a porcine virus spreading in the U.S.; corn futures rose 19% in Q1, wheat futures 15% and soybean futures 11%. NYMEX crude gained 3.2% for the quarter and unleaded gasoline rose 4.5%; ethanol futures soared 81%, a new quarterly record.^20,21,22

REAL ESTATE 

Homes weren’t moving like they had in 2013. Sale prices were higher (an effect of tighter inventory), but higher prices were discouraging some potential buyers. Add brutal weather to all this, and the numbers weren’t good. The National Association of Realtors reported a 5.1% decline in existing home sales for January followed by a 0.4% dip in February; by the latter month, resales were down 7.1% year-over-year. Pending home sales, NAR said, were down 0.2% in January and 0.8% in February. When January’s S&P/Case-Shiller Home Price Index came out in March, it showed a 13.2% yearly increase (considering prices across 20 metro markets).^2,23

The Census Bureau initially noted a 9.6% improvement in new home sales for January, but then it revised that gain (way) down to 3.2%. The advance was tempered by a 3.3% February retreat.²⁴

Unsurprisingly, the Census Bureau said groundbreaking decreased 11.2% during January (its revised, final estimate) and another 0.2% in February. Building permits decreased (a revised) 4.6% in January, then rebounded 7.7% the next month.⁷

Interest rates on longer-term home loans descended during the quarter. Freddie Mac’s Primary Mortgage Market Survey had the average interest rate on the 30-year FRM at 4.40% on March 27, compared to 4.53% on January 2. The average rate on the 15-year FRM declined from 3.55% to 3.42% in that interval. While the average interest rate for the 5/1-year ARM rose 0.05% to 3.10% across the same period, the average rate on the 1-year ARM declined 0.12% to 2.44%.²⁵

LOOKING BACK…LOOKING FORWARD 

The Q1 scorecard reveals a rather humdrum performance for U.S. equities. The Russell 2000 rose 0.81% for the quarter, the CBOE VIX 1.17%. An exception: the NYSE Arca Biotechnology Index climbed 10.98% in three months.¹⁶

Sources: online.wsj.com, bigcharts.com, treasury.gov – 3/31/14^16,26,27,28

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

At the start of 2014, analysts figured a plateau was ahead for the market this year. So far, stocks are doing little to prove them wrong. The S&P 500 can’t gain nearly 30% every year, and already some are worried about a bubble. Maybe this statistic will offer some reassurance: at the end of March, fewer than 4% of industries making up the S&P’s market value have conventional P-E ratios higher than 30 (about two times the historical average). Just before the dot-bomb of 2000, 70% did. April often proves to be a strong month for equities, and fundamentals seem acceptable right now. If (as Janet Yellen and other economists speculate) the weather hindered America’s economy in January and February, March and April indicators might surprise to the upside more than the bears think. Even if the upcoming earnings season is mediocre, stocks might have enough momentum to move slightly higher off of those improved indicators. If geopolitical developments don’t cause Wall Street to think twice, spring might bring some nice gains and Q2 might be much more encouraging for the investor.²⁹

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