Focus on Equities for March 2013
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.
An improving housing market, better employment picture, a decent earnings season, and accommodative monetary policy helped the U.S. equity market finish the first quarter of 2013 on a high note as the Dow Jones Industrial Average and Standard and Poor's (S&P) 500 Index both reached record highs in March. International equities, on the other-hand, continued to underperform relative to the U.S. as the underlying economic reality in Europe began to seep through into investor sentiment and market performance. For the month, the S&P 500, Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 3.75%, 3.86%, 4.62%, 0.88%, and -1.70%, respectively. Value stocks outperformed growth stocks for the fourth consecutive month. Within the Russell 1000 Index, Health Care, Utilities, and Consumer Staples were the top-performing sectors, while the Energy, Materials, and Information Technology sectors lagged.
U.S. Economic Data Continues to Improve as Fed Maintains Accommodative Monetary Policy
Economic conditions in the U.S. continued to gradually improve during the month with the recovering U.S. housing market now providing a positive impact on economic growth and consumer confidence as well as contributing to employment in housing-related sectors, as opposed to being a drag on the economy. Data released during the month indicated housing starts and building permits surged in February while sales of existing homes increased to the highest rate since November 2009. The inventory of homes for sale also continued to decline, which has been helping push up home values.
The ISM National Manufacturing PMI fell slightly in March but still showed an expansion in U.S manufacturing activity, while industrial production was up 2.5% on a year-over-year basis, driven by significant gains in automotive production.
The labor market continued to show signs of healing as continuing unemployment claims maintained their downward trend (though the March payroll report came in weaker than expected). Personal income and consumer spending data also rebounded. The unemployment rate declined to 7.6%, driven by a sharp drop in labor force participation.
Inflation remained tame as the Fed maintained its accommodative stance.
Recessionary Pressures Persist in Europe, Negatively Impacting Emerging Market Economies
At the same time, the underlying economic fundamentals, not only in peripheral Europe, but in core European economies continued to present a picture of significant recessionary pressures within European economies all the way to the core. Eurozone manufacturing PMI fell deeper into contraction territory in March with Germany also slipping back into contraction territory.
Political turmoil persisted in Italy with the country unable to form a government. Standard & Poor's rating agency warned during the month that Spain, Italy, Portugal, and France might have difficulty carrying through necessary reforms with their populations likely to oppose further austerity measures.
Economic and financial crisis was averted in Cyprus as the country's policymakers were able to reach a deal with eurozone finance ministers and international creditors for a €10 billion bailout. The deal required Cyprus to contribute to the rescue package through a levy on bank deposits greater than €100,000. While the last-minute deal prevented an imminent default of the country's major banks, it also renewed concerns about the region's ability to resolve its sovereign debt crisis.Â Â
Unfortunately, recessionary pressures in Europe are also likely to continue impacting emerging market economies. However, data continued pointing to signs of China's economy stabilizing. Foreign Direct Investment (FDI) increased for the first time in nine months and both measures of manufacturing PMI also increased in March. Despite these positive developments, a study published by the U.S. Federal Reserve during the month suggested China's economic growth could slow significantly over the coming years due to an aging population and declining productivity.
Equity markets started 2013 having gained a tremendous amount of ground since the depths of the financial crisis. A recovering U.S. housing market, a decline in unemployment, record-high exports, and encouraging year-end manufacturing data fueled by an attractive U.S. dollar exchange rate have all helped boost U.S. equity market sentiment. However, with the possibility of a less-than-stellar upcoming earnings season, and few positive catalysts on the near-term horizon, a short-term pull-back in equities remains a distinct possibility.
Though the U.S. economic recovery has remained tepid, the United States remains in the driver's seat of the global economy for the time being with many developed economies in the world still struggling. We believe the U.S. economy will be able to maintain some expansion despite the sequester. Despite having a short-term negative impact on economic growth, actions that reduce spending and improve budget strength for the U.S. over the long-term are necessary. We expect housing to continue as a major driver of the recovery through its multiplier effect on the economy as a whole and on consumer confidence.
We continue to believe that the consensus forecast from the past several months for a European recovery was a bit premature. Because the economic recessionary pressures in the region are so pronounced and so strong (especially in peripheral Europe)—with Cyprus one example, however small—over time the potential default issue may continue to resurface, and markets could be reawakened to that reality.
This commentary represents the opinions of the author as of 4/11/13 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.
Calvert Investment Management, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814