Volatility returned to the market during the first quarter. The S&P 500 declined 5.76% between January 15 and February 3, marking the first notable correction since June of last year. Profit taking and disappointing reports from the emerging markets were the main contributors to the sell-off. However, markets quickly rebounded. The S&P 500 once again gained new highs during the quarter and ended in positive territory up 1.6%.
Record snowfall and frigid temperatures throughout most of the nation have likely distorted economic data, at least in the short-term. Employment and housing data have been affected most by the weather. Conversely, manufacturing and sentiment reports continued to show signs of continued expansion. Modest GDP growth is expected in the first quarter, but will pick up as we enter the summer months.
Interest rates fell for most of the quarter. The 10-year Treasury began the year yielding 3.03% and fell to 2.72% by March 31. The new Federal Reserve Open Market Committee Chairperson, Janet Yellen, reiterated the Fed’s commitment to slowly taper quantitative easing should economic conditions continue on the current path of improvement. Yellen indicated that the Fed may begin to raise the fed funds rate six months after the end of tapering. Fed futures predict the Federal Reserve will begin to raise the fed funds rate from near zero by the middle of 2016.
Equity markets have rallied substantially over the last several quarters. While earnings have been strong, valuations (as measured by price-to-earnings multiples) have returned to average levels. We continue to believe that stocks provide the best opportunity for growth over the intermediate and long-term horizons. However, we recognize there is greater vulnerability to negative surprises such as global events including those that are occurring on the Crimean peninsula in Ukraine.
A 10% market correction has not occurred in more than three years, and one typically occurs on average every twelve to eighteen months. The Trust and Wealth Management Investment Committee has maintained an overweight position in customers’ common stock portfolio allocations for several quarters. We are also using record market levels to rebalance accounts that have grown outside of their strategic range. It never hurts to reward the market by harvesting gains.
We expect interest rates on bonds to reverse course and continue on an upward pace, dampening total returns in bonds for the next few years. It is hard to say how quickly or dramatically rates might rise. We happen to think it will occur slowly. While rising rates will mean that bond values will decline, the more positive view is that income will return to more meaningful levels. This will improve the bond allocation’s ability to cushion portfolios during times of stock market stress.
Please feel free to contact your account administrator at 1-800-899-8858 to review your account and determine if the current allocation is still appropriate for your circumstance.Investment products are not a deposit, not FDIC insured, not insured by any federal government agency, carry no bank guarantee, and may go down in value.