05 April 2011
Markets show resiliency
U.S. equity markets proved resilient over the quarter. Despite heightened volatility, domestic equity markets finished strong, experiencing the best first quarter since 1999. Stocks sold off briefly on external shocks, including geopolitical unrest in North Africa and the Middle East and a natural disaster in Japan, but quickly rebounded (see Figure 1). The Dow Jones Industrial Average gained almost 750 points, returning 7.07 percent for the quarter, while the S&P 500 Index rose 5.92 percent.
International investors saw gains during the quarter as well, though international markets weren’t able to keep pace with the U.S. The MSCI EAFE Index returned 3.37 percent for the quarter, slowed by a 2.24-percent decline in March. Added volatility overseas left the MSCI Emerging Markets Index up only 1.69 percent, despite a 5.70-percent gain in March.
Bonds were additive to investor portfolios during the quarter. The Barclays Capital Aggregate Bond Index gained a modest 0.42 percent. Investors showed an appetite for riskier fixed income assets, demonstrated by the Barclays Capital High Yield Bond Index’s 1.65-percent gain for the quarter. Companies have built strong balance sheets and appear to be in good financial health. Refinancing activity has helped push down borrowing costs and made corporate and high-yield bonds appear more attractive. Although gains in those asset classes have brought pricing more in line with longer-term historical averages, they can still offer attractive coupons when compared with Treasuries.
Figure 1: First Quarter 2011: S&P 500 Performance Vs. Chicago Board Options Exchange Volatility Index
Continued unrest in the Middle East and North Africa
Unfolding turmoil in North Africa and the Middle East dominated headlines over much of the quarter. What began as civil unrest in Tunisia eventually spread across North Africa and the Middle East. The result, to date, has been regime change in Tunisia and Egypt and international intervention in Libya. Turbulence across the region hasn’t subsided; instead, protests have spread and become more violent.