Whether you are a bull, bear, dove, hawk, day trader or investor; the first quarter gave you something to support your cause. For those open-minded investors, Mother Nature provided enough horrific winter weather to conclude this quarter’s economic numbers themselves may not even be relevant. Market volatility increased as geopolitical events surrounding Ukraine created short-term trading opportunities. Janet Yellen transitioned from Vice Chair to Chair of the Board of Governors of the U.S. Federal Reserve. The leadership change has been smooth and Fed policies of gradual tapering and accommodative monetary policies are continuing as expected.
The bottom line on first quarter data leaves us believing the recovery continues despite adverse weather conditions. The consumer, which represents 70% of the U.S. economy, is receiving modest income gains and their spending trends are positive. This is a key ingredient for current and future growth. Manufacturing reports have been mixed, but the weather may explain some of the slower regions. Spring will either give us an economic bounce back or confirm a slower pace of output. Housing sales have slipped but home prices continue to appreciate in value. A spring thaw will likely keep the economy on the road to recovery in the second quarter.
The markets digested all the information and provided investors with a reasonable quarterly return after coming off the best single year in this five year bull market run.
The biggest asset class surprise was the strength and stability of bond prices and interest rates. The policy continuity at the Federal Reserve helped keep short-term interest rates locked in at low levels and long-term interest rates declined slightly causing bond prices to appreciate. Slow but steady economic growth coupled with low inflation helped the longer end of the yield curve. The Barclays U.S. Aggregate Bond Index returned 1.84 percent in the quarter with long-term US Treasuries providing the best sector return at 7.10 percent and intermediate Treasuries were the weakest contributor at 0.65 percent.
Equities bounced back from a January correction to reach new all-time highs before quarter end. Solid quarterly earnings reports brought stock prices back from the January lows. Performance results were mixed but generally positive for the quarter. Returns ranged from -0.43 percent on the MSCI Emerging Market Index to 3.36 percent on the MSCI EAFE Small Cap Index. The S&P 500 returned 1.81 percent for the first quarter of 2014.
Market nervousness was reflected in strong quarterly commodity price action. Gold rallied 7.70 percent to start the year and a basket of commodities measured by the Dow Jones UBS Index rose 6.99 percent.
At year end, we expected 2014 to bring high single digit returns from the global stock markets and low single digit returns from the U.S. bond market. Our expectations have not changed so as we move through the second quarter and beyond, expect stocks to generate slightly higher returns and bonds slightly lower returns as compared to the first quarter results. The second quarter will confirm if the recent slower economic activity was weather induced or not. If we get an economic bounce back markets will respond positively. If the economy is slowing expect equities to oscillate based on the latest economic news and geopolitical events.
While the market’s short-term path is always uncertain, the path you chose for your portfolio is not. Rank the importance of your investment goals by three key factors: growth of principal, income generation, and preservation of principal. Verify that your portfolio is aligned with your long-term investment goals and objectives and let it work for you over the long haul.