Stocks advanced mildly in the first quarter, but the gains were certainly hard won. Beginning with a near full‐percentage point drop for the S&P 500 on the very first trading day of the year, widespread declines continued through January before the market regained its footing. Once the slide stopped, it took the index until the end of February to rise above its year end closing price. Choppy but positive movement in March accounted for most of the markets’ gains during the quarter, with the S&P 500 up 1.8%.
The suddenness of the decline in the market early in the quarter caught many investors off guard. Having grown accustomed to the comfortable and steady advance that occurred during 2013, investors reacted to the market turbulence by rapidly rotating back into more defensive areas of the markets, such as bonds and yield oriented stocks. The likely culprits for market volatility were profit taking from 2013’s gains, geopolitical uncertainty with Russia’s forceful takeover of the Crimea region of Ukraine, and weakness in the economy caused by the extraordinarily harsh winter in the north and northeast.
There was a decided change in leadership of the stock market during the first quarter. Defensive sectors such as utilities that performed poorly in 2013 performed the best, while the more cyclically sensitive sectors such as consumer discretionary and industrials (that led the market last year) performed the worst. More broadly, value oriented stocks performed much better than growth oriented companies, which was also a reversal from last year’s results.
In the bond market, the popular thinking at the end of the year was that interest rates would continue to rise, which would weigh on bond returns. The opposite occurred as yields dropped and bond prices rallied. The worst performing bonds in 2013 were the best performers in the first quarter as 10‐year US Treasury bonds rose 3.4% and 30‐year Treasuries rose 8.1%. But the gains were not limited to conservative government bonds, corporate and municipal issues also posted healthy results.
Bond yields moved lower despite the continuation of the recent Federal Reserve actions to “taper” bond purchases. In the two meetings since recently appointed Fed Chairman Janet Yellen took charge, the Fed has announced two additional reductions in their bond buying program. Expectations remain that they will stop buying bonds altogether by the end of the year and will turn their attention toward raising the Fed funds rate in the coming years from the current target of near zero to a more normalized level of roughly 4%.
The economy hit a soft patch in the first quarter. Many blame the extraordinarily harsh winter as the primary culprit. At its worst, the much publicized “polar vortex” was responsible for record (or near record) levels of snowfall and cold temperatures in many northern and northeastern regions. But most economists believe that the economic activity lost during the winter will be made up in the coming months and that the recovery remains on track. By the most recent measures, GDP grew by 2.6% in the fourth quarter, and unemployment held steady at 6.7% as of the end of March. Most expect economic activity to pick up as we head into the spring and summer.
The first quarter proved to be an unwelcome reminder to investors that despite the smooth ride in 2013, risk, volatility, and uncertainty can return without warning. However, the upward momentum of the economy and the overall health of U.S. companies remains intact, which should continue to support positive returns in the stock market. We are optimistic that recent volatility will prove transient and that the market will soon stabilize and continue to advance higher.
If you would like to discuss our opinions, outlook, or your portfolio in greater detail, please contact us to schedule a meeting or a conference call at your convenience.
Horizon Wealth Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.