The global equity markets began the year with heightened volatility, but all major equity markets, with the exception of the United Kingdom, ended the quarter in positive territory. There was a divergence of central bank monetary policies as the U.S. Federal Reserve (the “Fed”) indicated interest rate normalization in the near term, while European, Japanese and Emerging Markets’ central banks continued to loosen their monetary policies. The strength of the U.S. dollar and weakening commodity prices, predominantly the decline in oil prices, continued to weigh on firm profitability.
The non-U.S. equity markets experienced modest gains for the quarter due to positive headlines emerging from Europe and Japan. The European markets reacted favorably upon the implementation of a quantitative easing program by the European Central Bank (the “ECB”) in March. The €1.1 trillion program will consist of €60 billion in monthly purchases of sovereign debt in an effort to combat declining inflation and weak growth in the Eurozone. The Bank of Japan continues to inject stimulus into their economy in an attempt to meet their inflation target, but weakening consumer and producer demand weighed on growth prospects for the nation. The same slowdown was experienced in China as the People’s Bank of China further reduced rates in March and the growth target was revised downward to 7% from 7.5%.
The U.S. equity markets, as measured by the S&P 500, ended the quarter in relatively neutral territory after reaching all-time highs during the quarter. Growth strategies outperformed their respective value strategies, with small capitalization firms continuing their rally from the previous quarter. The strength of the U.S. dollar negatively impacted large capitalization firms that generate a large portion of their revenues from overseas. Within the S&P Index Sectors, healthcare and consumer discretionary were the strongest performing sectors and energy and utilities returned negative performance for the quarter.
All of the fixed income sectors ended the quarter in positive territory. High yield was the strongest performing sector due to increasing investor demand in a low interest rate environment. Demand was further enhanced as the sharp decline in oil prices stabilized and the fear of default from energy-related issuers within the category subsided. The U.S. Treasury market ended the quarter up 1.6% following a sharp decline in February.
The domestic economy continues to improve, but concerns remain on slowing U.S. growth. Jobs growth slowed for the quarter, but the economy has gained 12 million jobs since losing 8.8 million in 2008-2009. The unemployment rate declined to 5.5%, the lowest rate since May 2008, but wage growth remains low. Lower energy costs and the strength of the U.S. dollar supported consumer spending and household disposable incomes and purchasing power increased as a result. However, the strength of the U.S. dollar reduced exports and capital expenditures from multinational corporations. The Fed is continuing to rollover existing maturities and interest payments of the credit assets on their balance sheet which totals approximately $4 trillion. The timing of monetary policy tightening remains ambiguous, but expectations are that rates will be increased at a slower pace.