1Q11 Global Capital Markets Summary
The U.S. economic recovery picked up in the quarter despite multiple headwinds; political uprisings, price spikes in key commodities and a massive earthquake in Japan. Private sector employment continued its recovery and the unemployment rate finished the quarter at 8.8%. A spike in oil and food prices led to a sharp rise in consumer inflation with the CPI at 1.96% by quarter-end. The Federal Reserve held steady with its historically low target Fed Funds rate of 0 – 0.25%.
U.S. equities maintained their momentum from fourth quarter 2010. Growth stocks outperformed value stocks in both the large and small capitalization ranges. Small cap stocks continued their outperformance of large cap stocks with small growth outperforming all major style segments for the quarter. All sectors posted positive returns for the second consecutive quarter. Energy (+16.73%), Industrials (+8.72%) and Healthcare (+5.65%) were the top performers. Consumer Staples (+2.47%) lagged all sectors for the quarter.
Despite numerous geopolitical events, U.S. bond markets remained stable. The yield curve steepened across all maturities with 2-year U.S. Treasuries rising 18 basis points to .78% and 30-year Treasuries increasing 16 basis points. Long-maturity Treasuries (Barclays Long Treasury, -1.01%) underperformed short-term Treasuries (Barclays 1-3 Year Treasury, +.02%). Low interest rates continued to drive investor demand for credits, with yield spreads tightening broadly (Barclays U.S. Credit, +.89%; Barclays U.S. Mortgage, +.58%). High yield bonds continued their outperformance of all U.S. bond sectors (Barclays U.S. High Yield, +3.88%).
Overseas markets were highly volatile in the quarter due to various global events. Strengthening fundamentals in the major European economies were partially offset by the continuing financial crises in Portugal, Greece and Ireland (MSCI Europe, +6.46%). The March 11 earthquake in Japan drove Pacific region equities lower for the quarter (MSCI Pacific, net, -2.03%). Emerging market equities were slowed by higher oil prices, food prices and global volatility (MSCI Emerging Markets, net, 2.05%).
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