March Commentary

For the month of March, the S&P 1500, a broad measure of the U.S. equity markets, returned 1.2%, with large cap stocks gaining 1.1% and small cap stocks advancing 1.6%. At the sector level, energy stocks (+6.0%) and utility stocks (+3.9%) posted the best returns, while on the downside, consumer discretionary stocks shed 0.47% and financial stocks lost 0.95%. Barring the large cap spectrum, growth stocks outperformed value stocks across the broad market.

International markets regained lost ground by the end of the quarter after February’s sell off. The MSCI EAFE Index advanced 1.6% in local currency terms, and was up 2.1% in dollar terms; growth stocks outperformed value stocks. Among developed markets, Austria and Sweden posted the most impressive gains, advancing by 6.2% and 5.6%, respectively. Japan and Ireland lagged, losing 2.1% and 0.9% respectively. The MSCI EAFE Small Cap Index returned 2.2%, and emerging markets gained 3.1%. The BRIC Index recovered from last month’s fall returning 3.6%. 

The fixed income markets were mostly neutral for the month as investors battled the stock market volatility. The 10-Year Treasury ended at 4.65%, up 9 basis points from the prior month. The 30-year Treasury yielded 4.84% at month end, also up 16 basis points from the prior month. The Lehman Aggregate Bond Index returned 0.00%, a result of coupons and falling bond prices offsetting each other. Government bonds gained 0.03%, while corporate bonds lost 0.48%. Mortgage backed bonds managed to chalk up a gain of 0.26%, while municipals lost 0.25%. The high yield market backed by a stabilized equity market and steady interest rates, returned 0.11%. International government bonds gained 0.30% for the month and TIPS also returned 0.24%, as a result of declining yields.

Commodities ended on a positive note in March. The Dow Jones-AIG Commodity Index returned 0.56%, raking in gains in natural gas, unleaded gas, heating oil and copper. Real estate, as represented by the S&P REIT Index, lost 2.24%.

The market had barely recovered from the crash of Asian markets in late February, when it was faced with the turbulence of bankruptcies in mortgage lenders specializing in subprime loans (loans made to the least creditworthy borrowers) in early March. Speculation that subprime woes would exacerbate the housing downturn was at the forefront of concerns for the month as delinquencies among individual subprime borrowers climbed. Home prices, as measured by the National Association of Realtors, have gone down by 2% nationally over the past 15 months. However financial markets seemed to have stabilized in the second half of the month. The Fed left the target short-term interest rate unchanged at 5.25%, contrary to investor expectations of a rate cut to boost economic growth. On an interesting note, global mergers and acquisitions reached $1.1 trillion in volume, 27% higher than the same period in 2006, while in the U.S the volume of deals surged 32% from a year ago to $439 billion according to Thomson Financial.

Expectations for the next few months appear to be tempered, amidst the backdrop of slowing corporate earnings growth, uncertainty about the Fed’s next move and investors’ skepticism about the impact of mortgage defaults and the housing downturn on the economy.