Last year’s blistering stock returns were followed in the first quarter by moderation. After falling in January, the US stock market recovered in February and advanced enough in March to post a total return of 1.81% for the first quarter overall. Small stocks and developed markets international stocks were each up by smaller amounts, and emerging market stocks produced slightly negative returns. Taxable bond returns for the quarter of 1.97% topped all of those. Inflation hedges produced positive returns, led by diversified commodities and gold. Following a poor showing last year, the All Equity REIT index surged in the first quarter with a total return of 8.52%.
The economic recovery continues. There were pockets of weakness in reported economic data in the first quarter that many have attributed to weather and we’ll have a better sense of that soon. But housing has experienced a strong recovery and last year’s fiscal drag is fading. US inflation has remained tame. After rising from under 2% at the beginning of last year and over 3% at the end of the year, ten year Treasury bond interest rates remain relatively low in the area of 2.75%.
But geopolitical risks have been rising, inflation in emerging markets is rising, the combination of a property bubble and slowing economic growth in China is of special concern. Moreover, the Federal Reserve continues to distort prices of financial assets, stock valuations are relatively high, and, as we recently mentioned in a separate communication, we’ve just entered a period of historical seasonal weakness for US stocks.
We continue to believe extra caution is in order, and we’re pleased that over the past year we’ve been able to establish some truly non-correlated positions in most managed portfolios which improve diversification and lower risk.