Economic Backdrop

Economic growth remains mixed across the globe, and inflation was tame in most regions. Given this, central banks continue to support accommodative policies with additional stimulus measures varying by region. In the U.S., the Federal Open Market Committee (FOMC) kept rates steady but further reduced the size of its bond purchase program in April. In recent minutes, the FOMC stated a belief that there is sufficient strength in the underlying economy to further support gradual improvement in employment. Total bond purchases were reduced another $10 billion to a total of $55 billion as agency mortgage-backed securities (MBS) and longer-term Treasury securities were pared by $5 billion each. The European Central Bank (ECB) also maintained historically low interest rates. President Mario Draghi shared that ECB members discussed unconventional policy measures, in a tacit acknowledgement that deflation risk concerns are intensifying. The Bank of England kept interest-rate and asset-purchase targets unchanged, as well, in response to steady growth and falling inflation. Finally, the Bank of Japan reaffirmed its intention of conducting money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen with an aim of achieving an inflation target of 2%.

In the U.S., the first quarter estimate of economic growth indicated an increase of 0.1% from the fourth quarter of 2013. The modest increase reflected gains in personal consumption expenditures, while exports, inventory investments, residential and non-residential fixed investments and government spending decreased. With the impacts of a harsh winter fading, the Federal Reserve (Fed) beige book reported that 10 out of 12 Fed regions saw moderate economic expansion from late February to early April. The retail-sales rebound that began in February increased in March with sales 1.1% higher than the prior month, helped by automobile purchases. Consumer sentiment surpassed the top of the consensus range in mid-April, according to the University of Michigan. Housing, however, has slowed with the percent of existing home sales and sales of new homes falling. With lending rates higher, first quarter mortgage lending came in 23% below the fourth quarter of 2013 and 58% lower than the same period a year earlier, according to Inside Mortgage Finance. Inflation remains below the Fed’s 2% target with the March release at 1.5%, and the unemployment rate was unchanged at 6.7%.

U.K. economic growth increased by 0.8% in the first quarter of 2014 and was led by gains in services, production and construction. Given the momentum in economic activity, the labor market continued to improve in March, as claims fell and the unemployment rate declined. Retail sales rose, exceeding expectations for a March contraction and increasing their annual growth rate. Consumer prices underwent a small increase during March and from a year prior, continuing a falling growth trend that began in the summer of 2013. Producer prices were also tame. Home prices rose in March for the fifteenth consecutive time, helped by low borrowing rates and economic growth. Construction sector optimism reached its best level in March since 2007. Labor markets continued to improve in March, as claims fell and the unemployment rate declined to 6.9% from 7.1%.

Eurozone economic activity remains modestly positive, while overall inflation remains quite low. Eurozone manufacturing decreased in March but maintained growth. Germany’s expansion eased, while France hit a 33-month high and Ireland experienced a sharp acceleration. Spain underwent growth acceleration and Italian exports supported continued expansion. Greece returned to contraction. The preliminary Eurozone Purchasing Managers Index expanded more than expected in April. Germany contributed to growth, while France detracted, highlighting a regional performance gap. Consumer prices rose at a faster pace in March (0.7%) than the prior month (0.5%), but by less than expected. The year-over-year rate fell to a level not seen since late 2009. The unemployment rate was 11.9% in February with the lowest rates reported in Austria, Germany and Luxembourg.

Market Impact

Global bond yields generally fell in the month as most major markets—U.S., U.K., Japan and the eurozone—experienced a modest decrease in 10-year government bond yields. Investors appeared to show some concern regarding the potential fallout of tensions in Ukraine. In this environment, longer-dated bonds performed best. In investment-grade debt, corporate bonds outpaced government bonds, while the securitized markets (asset-backed securities and MBS) trailed but posted positive results as well. Outside of investment-grade debt, emerging-market debt performance was strong as the asset class continues to build on its momentum from the latter half of the first quarter. High-yield bonds were contributors in an absolute sense but lagged the overall investment-grade market.

In a market of declining bond yields, global equity markets showed impressive resiliency and were again positive. Optimism for growth in Europe continues to drive the region to some of the strongest gains, leading developed markets to again outpace emerging markets. Performance was mixed across the sectors of the MSCI AC World Index. Energy clearly led all other areas and was followed by the traditionally more defensive sectors of consumer staples and utilities. Negative results were found in the traditional growth sectors of consumer discretionary and information technology, which had been some of the strongest areas over the past year. Regionally, investors continue to find value in Europe as the region appears to have found some stability in economic activity, while negative returns in Japan again weigh on Asian stocks. In emerging markets, Latin America markets led as Brazil rebounded, while the Russian stock market negatively impacted Eastern European markets.

Index Data

  • The Dow Jones Industrial Average Index returned 0.87%.
  • The S&P 500 Index increased 0.74%.
  • The NASDAQ Composite Index fell 1.96%.
  • The MSCI AC World Index, used to gauge global equity performance, returned 0.95%.
  • The Barclays Global Aggregate Index, which represents global bond markets, returned 1.13%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” decreased in the month as a whole, moving from 13.88 to 13.41.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $101.58 a barrel at the end of March to $99.74 on the last day in April.
  • The U.S. dollar weakened against the euro and sterling, while it was relatively flat versus the yen. The U.S. dollar ended January at $1.39 against the euro, $1.69 versus sterling and at 102.15 yen.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Diversification may not protect against market risk. There is no assurance the objectives discussed will be met. Past performance does not guarantee future results Index returns are for illustrative purposes only and do not represent actual portfolio performance. Index returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index.