March Equity Market Commentary: Global Equity Markets Rebound Late in Month
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Asset Management Company, Inc.
Global equity markets saw an impressive rebound in the last two weeks of March from the recent slump triggered by events in the Middle East and the tragedy in Japan. March ended with U.S. equity markets in positive territory with the Standard & Poor’s 500 and Russell 1000 Indices returning 0.04% and 0.26%, respectively, for the month. Small-cap names significantly outperformed their large-cap counterparts with the Russell 2000 Index up 2.59%. The MSCI Emerging Markets Index bounced the most, returning 5.9%, while international developed markets, as measured by the MSCI EAFE Index, fell 2.2% during March.
Value stocks slightly outperformed growth stocks with the Russell 1000 Value Index returning 0.4% versus 0.12% for the Russell 1000 Growth Index for the month.
The top-performing sector for the month was Energy, largely due to the continued rise in oil prices spurred by the geopolitical instability in the oil-producing countries of the Middle East and North Africa. The Industrials sector was another top performer, while the Information Technology and Financials sectors were the worst laggards for the month.
This sector dynamic continues to dampen performance of portfolios that apply environmental, social, and governance (ESG) criteria, which are most restrictive in the Energy, Materials, and Industrials sectors. While sector leadership trends tend to be cyclical and revert in the medium- to long-term, some argue that we are in the midst of a mega-trend in commodities fueled by economic growth in emerging markets and an increase in world population. If this is true, and we believe this to be a very likely scenario—especially given the potential contributing impacts of climate change—this sector-driven headwind may continue to present an uphill battle for some time to come.
Rising Oil Prices Threaten Global Growth
The price of oil increased to 20-month highs during March, threatening global economic growth prospects. As we commented in the past, emerging markets are most vulnerable to sudden spikes in commodity prices while developed economies, especially the U.S., are somewhat more immune to them. Both Goldman Sachs Group and Bank of America Merrill Lynch raised their oil-price forecasts in March. Some market observers use a $130 to $140 oil price range as a threshold level that can substantially slow global economic growth.
U.S. and NATO bombing of Libyan military targets during the latter part of the month provided markets with greater confidence of a positive resolution to the political conflict in that country and its impact on the country’s ability to maintain oil production. It is unclear, however, how the multiple political conflicts in the region (now also including Syria) will impact oil production and supply over the next several months. With oil already trading above $108, it is not out of question that it could spike above its all-time highs, potentially crippling global economic growth.
Also during the month, Japan’s natural disaster—exacerbated by its impact on the country’s nuclear reactors—sent a ripple effect through global financial markets, with nuclear energy related names (Entergy, Exelon), Japanese insurance, luxury goods (Coach, Nike), and PC and communications equipment names suffering the most.
The insurance and reinsurance industries were facing record catastrophic losses from the immediate outcomes of the natural disaster in Japan. Other industries were impacted as well. Due to just-in-time manufacturing and low inventories in the PC supply chain and Japan’s significant role as a supplier into global manufacturing, disruptions in the country’s manufacturing production were negatively impacting PC and communication equipment companies around the globe.
On the other hand, clean-energy stocks attracted investors’ attention as a result of the nuclear crisis in Japan and the impending scrutiny and regulation for the nuclear energy industry. Names like Solarworld, Norway’s Renewable Energy, and Gamesa, Spain’s largest wind-turbine maker, rallied at the end of the month.
Inflation continued to be a concern. In March, the European Central Bank (ECB) announced that it might raise the benchmark rate from a record low of 1% as soon as in April to counteract inflationary pressures. The ECB did in fact raise the benchmark lending rate to 1.25% in early April.
Slower Growth in China
China is continuing to fight inflation with a series of measures including interest-rate increases, currency appreciation, and bank reserve requirement increases. The country has increased bank reserve requirements three times so far this year. The growth in China is slowing down with recent export numbers down considerably. A less orderly downturn in China’s economic growth will likely spell trouble for global economic growth. India is also battling inflation and raised its interest rates during the month, further tightening the country’s monetary policy.
The European sovereign debt crisis continues to be an issue with Portugal possibly needing a rescue later in the year. The Fitch ratings service cut the country’s credit rating during the month.
Equities continue to outperform Treasuries with the Bloomberg 7-10 Year Government Index down over 1% for the year through the end of March. This may continue to fuel asset flows out of fixed income and into equities. As we noted in the third quarter of last year, this reversal in flows could become substantial this year, especially as bond purchases by the U.S. Treasury may end abruptly in June.
U.S. home prices, having fallen 31% from their peak, are reaching pre-bubble levels owing to some degree to the glut of foreclosures being pushed back into this quarter by litigation and inquiries surrounding the mortgage documentation debacle. With consumer confidence rising and unemployment inching down, increases in mortgage rates from historical lows will likely make for a sharper bottom in housing prices that is likely to occur this year as home buyers look for attractive deals. The combination of historically low home prices and mortgage rates is already starting to impact home sales.
U.S.Markets Gain Strength
At the end of the month, the U.S. Federal Reserve allowed some of the 19 systemically important U.S. banks to increase dividends, buy back shares, or repay the government. Financial stocks rallied after the announcement as companies like JPMorgan Chase, Wells Fargo, and many other banks announced dividend increases and share repurchases, events that investors see as positive catalysts for stock prices.
Earnings reports continued to provide positive reinforcement to investor sentiment. At the end of the month, positive news came primarily from better-than-expected earnings reports and sales guidance from companies like Oracle and Accenture, as well as from this month’s report of fourth-quarter GDP growth numbers being revised upward from 2.8% to 3.1%.
The retail sector continues to benefit from improved consumer spending, which remains resilient despite low absolute levels of consumer confidence, high unemployment, and rising gasoline prices.
Hiring in the private sector continues to improve and jobless claims are showing declines. New regulations that extend the Bush-era tax breaks, reduce payroll taxes, and allow firms to depreciate all of their capital expenditures in 2011 may further boost spending and business investment throughout 2011.
U.S. manufacturing data showed better-than-expected expansion towards the end of the month. The ISM index rose to 69, the highest reading in seven years. This sustained expansion in the private sector, spurred partially by the availability of low-cost credit, is helping generate job growth. If we see further substantial improvements in the jobless rate in the next few months, the Fed is likely to abandon its low interest-rate policy earlier than the market-anticipated first half of 2012.
By some estimates, another 10% to 20% increase in the price of oil may start to impede U.S. and global GDP growth. High gasoline prices are already negatively impacting consumer confidence, but not enough to offset the improving employment picture and stock market. We continue to see the potential for further geopolitical crises and commodity and inflation spikes as negative catalysts for equity markets. However, consistent with our expectation for a slow, gradual economic recovery, we believe that equity markets and the global economy can successfully navigate through temporary setbacks.
As of 2/28/2011, accounts managed by Calvert Asset Management Company, Inc. held securities issued by the following companies: Goldman Sachs, Bank of America, Exelon, Nike, Gamesa, JPMorgan Chase, and Wells Fargo. Calvert may or may not still invest in, and is not recommending any action on, companies listed.
This commentary represents the opinions of its author as of 4/12/11 and may change based on market and other conditions. The author’s 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 Asset Management Company, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
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