Economic Backdrop

In its latest outlook, the International Monetary Fund recently highlighted expectations of stronger growth in 2014 while recognizing that economic output is below potential and downside risks remain in many nations that should keep global central bank policy accommodative. The U.S. Federal Open Market Committee did not meet in February after welcoming Dr. Janet Yellen as the new Chair of the central bank at the end of January. To date, the target range for the Federal funds rate remains at 0.00% to 0.25% with continual monitoring of the unemployment rate and inflation, while the bond purchase program stands at $65 billion per month. The Bank of England’s (BoE) Monetary Policy Committee left monetary policy and the base lending rate unchanged, as expected. The size of the asset purchase program was held firm at £375 billion. Despite a decrease in the unemployment rate that triggered immediate investor concern of a rate hike happening sooner than currently expected, Governor Carney noted that the recovery needs more time before any rate increase will happen. The European Central Bank also held constant with the key interest rate at a record low of 0.25% and the deposit rate at 0.00%. This was highly anticipated, as the eurozone economy has shown only slow measures of improvement. Finally, the Bank of Japan signaled ongoing commitment to monetary easing with an aim of achieving an inflation target of 2%.

The U.S. economy continues to experience a soft patch, driven to some extent by severe winter weather and ongoing weakness in the housing market. Fourth-quarter U.S. economic growth was revised down sharply to 2.4% from an initial estimate of 3.2%; this was roughly in line with economists’ expectations. Markit’s purchasing manager index (PMI) for the U.S. service sector noted a slowdown in February due to the negative impact of adverse weather, with readings falling to 52.7 from 56.7 in January. The manufacturing sector, however, appears to have bounced back from a difficult winter much quicker with the manufacturing PMI rising sharply to a level not seen since 2010. The National Association of Home Builders’ Housing Market Index plummeted in February from recent highs, as respondents reported a notable drop in current sales. Most weakness was centered in the Northeast, so weather may have been a culprit. Private sector payrolls grew by 175,000 in January, according to ADP; however, this number was adjusted to 127,000 in early March. The unemployment rate is down to 6.6%. Inflation remains tame at 1.6% for January.

In the U.K., fourth-quarter economic growth expanded at a pace of 0.7%, driving year-over-year growth to its highest level in six years at 2.7%. Trade, investments and consumer spending combined to balance the expansion. The U.K. Labour Market Report for February indicated a decrease in the unemployment rate to 7.2%. While average earnings are up year over year, inflation continues to outpace incomes.

Economic activity in the eurozone economy grew at a rate of 0.3% in the fourth quarter. Improvements continue with the initial February PMI signaling an expansion with new orders particularly encouraging, rising by the most in two -and-a-half years. Despite slightly falling in the month to 52.7, the reading has signaled a recovery (above 50.0) for eight consecutive months. Optimism continues to grow as the European Union Commission’s economic sentiment index rose for the tenth consecutive month in February, reaching levels last seen in 2011. Inflation, however, remains muted with the annualized rate registering at 0.8% in January, slightly higher than an initial estimate of 0.7%. Price inflation continues to remain tame in Europe. The unemployment rate was steady at 12%, in line with expectations.

Market Impact

Global bond yields were generally steady in the month following a resetting of levels in January on heightened U.S. tapering and China growth concerns. Most major markets—U.S., U.K. and Japan—saw little movement in rates, while European bonds yields widened (increased) modestly on the lower end of the yield curve. Investment-grade corporate bonds outpaced government debt with lower quality investment-grade debt performing best. Beyond traditional investment-grade exposures, emerging-market debt reversed its struggles and outperformed most areas. For the asset class, year-to-date results are now positive. Additionally, high-yield bonds posted strong results as asset-class fundamentals remain favorable—low default rates and less supply.

Global equity markets strongly rebounded in the month as investor optimism was particularly strong across European markets. Overall, developed stocks again outpaced emerging markets with each broad segment generating positive results. Performance was positive across all equity sectors of the MSCI AC World Index. Regionally, Europe led developed markets on improved optimism for economic growth, while muted returns in Japan weighed on Asian stocks. In emerging markets, Eastern European markets were the clear leaders, while the larger markets of Russia and Brazil struggled.

Index Data

  • The Dow Jones Industrial Average Index returned 4.34%.
  • The S&P 500 Index increased 4.57%.
  • The NASDAQ Composite Index gained 5.15%.
  • The MSCI AC World Index, used to gauge global equity performance, returned 4.83%.
  • The Barclays Global Aggregate Index, which represents global bond markets, returned 1.40%.
  • 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 18.41 to 14.00.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $97.49 a barrel at the end of January to $102.59 on the last day in February.
  • 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 $1.38 against the euro, $1.68 versus sterling and at 102.07 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.