Market Commentary – April 2014

Softer economic data globally and political unrest in several emerging markets made for a challenging start to 2014. The optimism that helped U.S. stocks gain more than 30% in 2013 faded quickly to start the New Year. Harsh winter weather gripped much of the nation, stalling economic activity. Additionally, deflation fears in Europe along with Russia’s aggression toward Ukraine contributed to a volatile climate for global stock investors. After falling 5% in January, the S&P 500 rallied in February and March to finish the quarter up a muted 1.3%.

Although these factors tempered stock returns during the quarter, they helped generate better relative performance for bonds, surprising many pundits who in 2013 had made dire predictions for fixed income performance in 2014. A drop in 10-year Treasury yields during the quarter allowed the Barclays Bond Index to gain 1.8%.

After struggling during 2013 the municipal bond (muni) market reversed course during the first quarter and outperformed most other bond market sectors. Investor optimism regarding munis improved as last year’s fears about sharp rate hikes and widespread municipal credit challenges subsided. In addition, higher federal tax rates made the taxable-equivalent yields of munis more attractive for many investors.

The main driver of both the bond and stock markets continues to be the Federal Reserve (Fed). The Fed started to taper quantitative easing during 2014, scaling back its bond purchases from $85 billion per month to $55 billion. Despite initial uneasiness with the prospect of tapering, the financial markets became more comfortable with the plan as the quarter unfolded. These changing modes of the market have created the roller coaster ride as investors considered the impact of taper on the economy and asset prices.

We continue to believe we are well positioned for the current volatility as we have added non-correlated managers to the portfolio to improve diversification and lower risk over the past few years. In addition, our bond and stock managers have been de-risking their portfolios which should provide additional protection against this current volatile period.

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