Quarterly Recap - 1st Quarter 2014

The S&P 500 ended the first quarter on a high note, rising 0.8% on March 31st, its biggest gain in two weeks, capping March and the first quarter with modest gains. The benchmark equity index more than recouped January's 3.5% loss in February, set three new all-time highs in early March and extended gains for a fifth straight quarter. Records show that the S&P 500 has risen for five consecutive quarters only seven times since 1957. Yet bonds outperformed stocks during the quarter as investors grappled with escalating geopolitical risks and interest rate concerns. Russia's annexation of Ukraine's Crimean peninsula and military build-up along the Ukrainian border prompted western nations to impose selective financial sanctions. Complicating risks, Federal Reserve Chair Janet Yellen indicated that after ending its monthly bond purchase program later this year, the central bank may raise its Fed Funds key lending rate target sooner than had been anticipated.

Smaller capitalized U.S. companies underperformed large-cap stocks during the quarter as the Russell 2000 Index, a broad measure of small-cap equity performance, fell 0.7% in March and rose 1.1% during the quarter. The small-cap measure also completed a new record, capping its seventh straight quarterly gain.

Illustrating a change in investors' risk appetites, value stocks outperformed growth in March and during the quarter. The Russell 1000 Value Index rose 2.4% last month whereas the Russell 1000 Growth Index fell 1%. During the quarter (and year to date), the Russell 1000 Value Index advanced 3%, while the Russell 1000 Growth Index rose 1.1%. Five of the ten major S&P 500 sector groups rallied in March with Telecom (+4.8%), Utilities (+3.4%) and Financials (+3.2%) gaining the most, while Consumer Discretionary (-2.8%) and Healthcare (-1.3%) led to the downside. Utilities (+10.1%), Healthcare (+5.8%) and Materials (+2.9%) are this year's top performing sectors.

Developed markets outside the U.S. and Canada, as measured by the MSCI EAFE Index, widely underperformed domestic indices during the month (-0.6%) and quarter (0.7%). Emerging markets, as measured by the MSCI Emerging Markets Index, rose 3.1% in March, trimming its quarterly and YTD loss to 0.4%. Commodities, as measured by the S&P GSCI Index of 24 raw materials, gained 0.1% in March, extending its quarterly gain to 2.9%. Commodities have fully recovered from their 1.2% loss last year. Gold futures fell 3.2% in March, trimming its 2014 rally to 6.5%, while crude oil futures slipped 0.2% last month, trimming 2014 gains to 3.8%.

In the bond markets, the Barclays U.S. Government Bond Index lost 0.3% in March, paring its quarterly gain to 1.3%. This is welcome news after the index had lagged by 0.7% during the fourth quarter. At the other end of the credit quality spectrum, below-investment grade corporate bonds returned 0.2% in March and 3% during the quarter, as measured by the Barclays U.S. Corporate High Yield Index. Higher quality investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, lost 0.2% in March, trimming its quarterly return to 1.8%. The Barclays Municipals Index rose 0.2% last month, extending YTD gains to 3.3%.

1. Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest)
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