Commentaries

PMC Weekly Review - April 1, 2016

A Macro View – March Monthly Recap

Domestic equity markets delivered strong gains in March, extending a sharp rebound from the historically poor performance of the first few weeks of the year. The primary catalyst for the rally that has occurred over the past six weeks has been world central banks’ willingness to stand ready to support the sluggish economies of many regions in Europe, Asia, and emerging markets. Investors thus became convinced that the slowdown in places like China would not spread to the U.S., and bid up the prices of risk assets. Notwithstanding the robust performance in March, investors continue to grapple with several issues that could affect prices going forward, including the health of the Eurozone’s financial institutions and the region’s ability to deal with the influx of refugees; the trend of global economic growth; the next steps for the Federal Reserve’s interest rate policy; an unsettled domestic political landscape; and various geopolitical threats. The domestic economy continued to demonstrate modest, but slightly slowing, growth. One encouraging sign has been the employment situation, which has been resilient throughout the past few months. The March employment report, released today, was encouraging in that employers added 215,000 jobs during the month. While the unemployment rate ticked up to 5.0%, more workers entered the work force, and average wages also increased. Overall, domestic economic data showed slowing growth, with the final estimate of fourth quarter real gross domestic product (GDP) coming in at +1.4%, above the +1.0% growth of the prior estimate, but lower than the +2.0% growth of the third quarter.

Within this context, broad market indices were higher. The S&P 500 advanced by +6.8%, and is now up +1.4% year-to-date. The Dow Jones Industrial Average (DJIA) also marched higher, delivering a gain of +7.2%. The tech-heavy Nasdaq Composite Index climbed +6.9% in March. The Russell 2000 Index of small cap stocks slightly outperformed the Russell 1000 Index of large cap stocks, with returns of +8.0% and +7.0%, respectively. Value stocks outperformed growth stocks. In terms of sector performance, the top performers were energy and information technology, with returns of +9.3% and +9.2%, respectively. Healthcare and consumer staples were the poorest performers on a relative basis, with returns of +2.8% and +4.8%, respectively. Commodities stabilized, rising +3.8% as oil prices rose to near $40 a barrel. REITs posted strong gains of +10.4% in March as a result of the benign interest rate environment.

International equity markets also generated stellar gains in March, with regions posting double-digit gains. The MSCI World ex-U.S. Index leapt by +6.8%. Emerging markets surged after many quarters of extremely poor relative performance. The MSCI Emerging Markets Index rocketed up +13.2%, and the MSCI EAFE Index, which measures developed markets performance, gained +6.5%. Regionally, Latin America, Eastern Europe and China were the top performers, rallying +20.4%, +15.7% and +119%, respectively. Japan and Europe were the poorest relative performers, posting gains of +4.7% and +6.3%, respectively.

Fixed income markets were generally higher in March, even though investors flocked to equities in a risk-on environment. Yields on Treasury securities meandered, but remained low throughout the month. Bond investors digested recent comments by Federal Reserve chairman Janet Yellen, who indicated that the Fed is carefully analyzing the global economic situation to determine what impact it may have on the U.S. The Fed also announced at its March meeting that it was leaving interest rate policy unchanged, and also reduced the expected number of interest rate hikes for the remainder of the year to two from four. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.77%, up three basis points from the 1.74% level of February 29. Performance of broad-based fixed-income indices was also generally higher in March, with the Barclays U.S. Aggregate Bond Index advancing +0.9%. Global fixed-income markets generated very strong gains, with the Barclays Global Aggregate ex-U.S. Index tacking on another +4.1%. The index is up more than 8% through the first three months of the year. Intermediate-term corporate bonds were also higher, as the Barclays U.S. Corporate 5-10 Year Index gained +2.4%. The Barclays U.S. Corporate High Yield Index jumped +4.4%. Municipals posted a modest advance, gaining +0.3% for March.

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