There was plenty of noise surrounding the financial markets in April. Some of the news brought markets to new highs while other stories gave investors reason to pause. Interestingly, after numerous intermonth gyrations, the market settled in very close to where the month began.
The continued geopolitical events and tensions in Ukraine added to global market volatility. First quarter corporate earnings produced mostly positive surprises with a few disappointments. Some companies were issued a bad weather pass and will need to prove the first quarter was an exception and not the rule. The economy tells us the U.S. consumer is strong, they are spending and confidence is high; employment is gradually improving, while the real estate market treads water. It also told us first quarter GDP was barely positive at 0.1% compared to the fourth quarter 2.6% growth rate. Is this a new trend or a weather related setback? We believe it is temporary and the second quarter will bounce back with stronger demand for goods and services.
The Fed’s message is: the economy is getting better and we are here to help. Janet Yellen calmed the markets with speeches highlighting Fed policies of measured tapering and accommodative monetary policies. The Fed announced their fourth monthly $10 billion cut to bond purchases, so the Taper remains as scheduled and the Fed is now purchasing bonds at the rate of $45 billion per month, down from $85 billion at year end. The target Fed Funds rate remains at zero.
Interest rates, much like our Minnesota lakes, are frozen in time. April began with the 2, 10 and 30-year U.S. Treasury yielding 0.44%, 2.73% and 3.56% respectively. These yields at month end were: 0.42%, 2.65%, and 3.46%. The bond market likes low inflation, slow economic growth and a consistent Federal Reserve and it continues to get all three. The Barclays U.S. Aggregate Bond Index returned 0.84 percent in April with long-term US Treasuries providing the best monthly return at 2.00 percent and intermediate Treasuries were the weakest contributor at 0.36 percent.
Equities bounced around throughout the month. While many of the major indices were little changed, there was a noticeable change in leadership within the indices. Recent growth and momentum stocks like Priceline, Amazon, and Netflix which moved higher like clockwork suddenly hit the wall. Investors rotated from the high fliers into value companies in the utility and energy sectors and other well-known blue chip dividend payers. This is reflected in the returns as the NASDAQ declined 1.96 percent and the MSCI EAFE Small Cap Index was down 0.81 percent. The S&P 500 returned 0.74 percent in April.
Commodity prices are off to a much better start this year and April added to the recent gains. Gold was basically unchanged with a -0.15 percent return in April and a basket of commodities measured by the Dow Jones UBS Commodity Index rose 2.44 percent for the month.
Investing requires patience. Sometimes we sit and watch the pot of water on the stove and wonder if it’s ever going to boil. April was much like that in the financial markets. The broad markets are relatively flat but below the surface there are subtle changes occurring. We still expect stocks to outperform bonds in 2014, but returns from both asset classes will likely be in single digit territory. The second quarter will confirm if the first quarter economic slowdown was weather induced or not. If the economy bounces back the stock markets will respond positively. If the economic activity remains slow expect more months like April in our future.