Equity markets enjoy a strong April ... The MSCI Emerging Markets Free Index .... The economy continues to chug along, a
M MAAYR C 2 0H1 21 0 1 1
Monthly Market Update Equity markets enjoy a strong April • Equity markets reacted positively to earnings reports and shrugged off bad news. Companies delivered strong earnings by containing costs and also showed robust top-line growth.
○○U.S. investors in the EAFE have gained 9.54 percent year-to-date—mostly because of currency appreciation.
○○Corporate earnings and strong balance sheets boosted investor confidence.
• The weakening dollar has benefited U.S. exporters who experienced gains when overseas profits were translated back into dollars.
○○The Dow Jones Industrial Average was up 4.13 percent for the month and is up 11.49 percent since January 1.
• The MSCI Emerging Markets Free Index returned 2.83 percent in April and has gained 4.57 percent year-to-date.
• The S&P 500 Index was 2.96 percent higher in April and is up 9.06 percent year-to-date. • The MSCI EAFE Index returned 5.98 percent for the month.
○○U.S. investors in emerging markets saw the bulk of their gains from the impact of a weaker dollar.
○○Gains for U.S. investors came from currency fluctuations, as the greenback has fallen 10.63 percent against the euro this year.
Bond markets also saw gains • Most major bond indices moved higher in April. ○○Interest rates eased lower and prices rose, as continued buying by the Federal Reserve (the Fed) helped support bonds. ○○The Barclays Capital Aggregate Bond Index increased 1.27 percent for the month and is up 1.70 percent year-to-date.
• Municipal bonds also gained after taking a bad beating at the end of last year and beginning of this year. ○○The Barclays Capital Municipal Bond Index gained 1.79 percent in April and is up 2.31 percent since January 1.
page 1 of 3
M o n t h l y M a r k e t U p d a t e
M AY 2 0 1 1
Anticipating the end of QE2 ○○Although unlikely, the Fed could take further measures to stem market losses should they occur.
• The market is focusing on the Fed and the end of its second quantitative easing program (QE2) in June (see Figure 1). ○○Many observers anticipate that interest rates will push higher as buying declines, though the current reduction in 10-year Treasury yields suggests the opposite.
Figure 1: Fed Purchases (Billions) $120.00
$100.00
$80.00
• The end of QE2 may also affect equity markets, given that they have moved higher in lockstep with the Fed’s security purchases.
$60.00
$40.00
○○There could be heightened volatility, particularly if markets stall at current levels, as well as negative pressure on markets.
$20.00
$‐
Source: Federal Reserve
The economy continues to chug along, as debt worries persist • The U.S. economic recovery has slowed in 2011. ○○After increasing 3.10 percent in the fourth quarter of 2010, gross domestic product (GDP) grew only 1.80 percent annualized in the first quarter of this year. ○○Consumer spending and inventory restocking were the largest contributors to growth. ○○Reduced government spending shaved more than one percentage point off GDP. • Fed Chairman Ben Bernanke blamed the slowdown on “transitory” factors, such as defense spending, weather, and exports. ○○Over the second quarter, reduced spending by individual states and higher oil prices could remain headwinds. • Signs of inflation cropped up, particularly in prices paid by producers of goods.
○○The April Institute for Supply Management report lost steam, and some regional manufacturing indices showed signs of slowing. ○○Oil prices put upward pressure on input prices. ○○An unemployment rate of 8.80 percent and a weak housing market reduce the likelihood of sustained inflation in the U.S. • To combat inflation, the European Central Bank raised interest rates to 1.25 percent in April, following the lead of many emerging markets nations.
continued on page 3
page 2 of 3
M o n t h l y M a r k e t U p d a t e
M AY 2 0 1 1
Th e e co n o my co nt i n u e s to c h u g along, ad debt worries p ersist (continued)
○○The U.S., along with Japan and Switzerland, is now among the few countries actively continuing to ease monetary policy, offering rates at or below 0.25 percent.
○○Interest rates on Greece’s 2-year paper recently shot up to more than 24 percent, signaling a likely default, unless the country receives assistance or can reschedule debt payments.
○○Brazil and China, for example, have set nominal interest rates at 11.75 percent and 6.31 percent, respectively.
○○The situation has proved divisive among eurozone nations, as anti-bailout sentiment has grown.
• The European debt situation is still worth monitoring, though it has had little to no impact on markets recently.
○○There are renewed concerns that Ireland and Portugal may need additional help.
Easing into the second half of the year • The biggest risks are the role of government and the withdrawal of stimulus, which may add to market volatility. • But the economy has shown resilience, and investor confidence remains fairly high.
○○This should continue to help support markets. • As always, markets may fluctuate in anticipation of future events.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Free Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million. Authored by Simon Heslop, CFA®, director of asset management, at Commonwealth Financial Network. © 2011 Commonwealth Financial Network®
page 3 of 3