Equity Markets

U.S. equity markets had no problem erasing the pain of the fourth quarter as the S&P 500 rose 13.7% with double-digit gains across capitalization and style spectrums. On a relative basis, growth outperformed value (Russell 1000 Growth: +16.1% vs. Russell 1000 Value: +11.9%), small cap outperformed large cap (Russell 2000: +14.6% vs. Russell 1000: +14.0%), and virtually all sectors delivered double-digit results, with the exceptions being Financials (+8.6%) and Health Care (+6.6%).

Volatility returned to more normalized levels, with just a few trading days seeing market movement of more than 2% in either direction (versus nearly 20% in the fourth quarter).

Non-U.S. developed (MSCI EAFE: 10.0%) and emerging market equities (MSCI Emerging Markets: +9.9%) also rebounded strongly in the first quarter, but trailed their U.S. counterparts (and failed to make up for the pain felt in the fourth quarter). The U.K. (+11.9%), Canada (+15.4%), and Italy (+14.6%) were among the standout performers, while Japan (+6.7%) was a laggard but positive nonetheless. Similarly, emerging market performance was robust across the board with all the BRIC countries up strongly: China (+17.7%), India (+7.2%), Russia (+12.2%), and Brazil (+8.1%). Turkey’s GDP dropped 3% year-over-year in the fourth quarter amid economic and political woes and was the worst-performing country (-3.2%).

Fixed Income Markets

In the U.S., the Bloomberg Barclays US Aggregate Bond Index rose 2.9% for the quarter, with investment grade corporates (Bloomberg Barclays Corporate: +5.1%) up the most. Yields fell sharply in March as the market digested unexpectedly dovish comments from the Fed. The 10-year U.S. Treasury returned 2.8% and its yield closed the quarter at 2.41%, down nearly 30 basis points from year-end and significantly from the multi-year high of 3.24% hit in early November. Portions of the yield curve inverted, but the widely watched spread between the 2- and 10-year Treasury note remained positive at 14 bps.

The high yield corporate bond market (Bloomberg Barclays High Yield: +7.3%) soared and the sector’s yield-to-worst ended the quarter at 6.4% after surging to nearly 8% in the fourth quarter. Similarly, leveraged loans were up 4.0% after falling 3.5% (S&P LSTA) in the fourth quarter. While the fundamental picture for corporations remains intact, these returns were driven primarily by a strong technical tailwind on the back of a very weak December.

Municipal bonds (Bloomberg Barclays Municipal Bond: +2.9%) outperformed U.S. Treasuries and were also helped by a favorable supply/demand backdrop. Municipal mutual funds absorbed roughly $24 billion in inflows—the best first quarter since data collection began in 1992.

The Global Aggregate Index rose 2.2% for the quarter on an unhedged basis. On a hedged basis, the Index gained 3.0%. The dollar appreciated modestly vs. the euro and yen, but lost ground vs. the U.K. pound and Canadian dollar. In Germany, the yield on the 10-year bond turned negative for the first time since late 2016 and closed the quarter at -0.07%. Emerging market debt also benefited from the reversal in risk appetite. The U.S. dollar-denominated JPM EMBI Global Diversified Index gained 7.0% with none of the index’s 60+ countries delivering a negative result.

Local currency emerging market debt, as measured by the JPM GBI-EM Global Diversified Index, was up a more modest 2.9%, with notable underperformers being Turkey (-10.2%) and Argentina (-10.5%).

Real Assets

Real assets of all varieties enjoyed a strong first quarter of the year, perhaps none more than crude oil as the price of West Texas Intermediate extended over +30% through the end of March. Energy as a whole (measured by the Bloomberg Commodity Energy subindex) was up nearly 16%, while commodities broadly produced a more modest positive return in the first quarter (Bloomberg Commodity TR Index: +6.3%) as gains in energy and metals were offset by negative returns for natural gas and the agriculture complex as a whole (Bloomberg Commodity Agriculture subindex: -3.2%).

Other, yield-oriented real asset categories also saw healthy gains. Somewhat influenced by the buoyant price of oil (and equity markets as well), MLPs (Alerian MLP Index: +16.8%) also enjoyed a strong start to the year with the yield spread between the Alerian Index and the 10-year Treasury remaining fairly wide at +500 bps. Both U.S.- and non-U.S.-listed real estate saw double digit gains in the first quarter (FTSE NAREIT Equity: +16.3%; FTSE EPRA/NAREIT Global: +15.0%) as did listed infrastructure assets (Dow Jones Brookfield Global Infrastructure: +15.7%).