Q1 2012 Capital Markets Review

Risk was definitely rewarded in Q1 2012. Equities of all types posted robust returns and significantly outperformed their fixed income counterparts.  While much attention has been given to the strong returns of the equity markets, fixed income (high quality fixed income specifically) found it difficult to post positive returns in the first quarter of the year.                                                                                                                                                                                                                                                                                                                                      

The S&P 500® Index returned 12.59% in Q1 2012, closing just above 1,408, which was the best Q1 performance for the broad-based index since 1998. The S&P 500® has now more than doubled since its lowest performance in March 2009, albeit still well off its all-time high of 1,561 in late 2007.  The tech heavy NASDAQ faired even better returning 18.67% in Q1. 

Nearly all equities participated in the rally; in fact, 80% of the companies that comprise the S&P 500® Index appreciated in value during the quarter. Although the rally in equities was broad, the risk trade was definitely beneficial during the first quarter of 2012. Growth equities outperformed their value counterparts. The Utilities sector, traditionally defensive, was the worst performing sector during the quarter posting a -1.51% return. More aggressive sectors like financials and technology posted strong returns (22.29% and 21.69% respectively) over the same period.

In general, foreign equities had a strong Q1 as well. The MSCI EAFE Index returned 10.86% and its emerging market counterpart, the MSCI Emerging Market Index, returned 13.65% during the quarter. The German DAX was one of the strongest foreign markets, returning 17.78%, while the Chinese Shanghai Composite was one of the weakest posting just 2.88% during the quarter.

Although riskier assets also performed best in the fixed income market, the bull market was not nearly as broad or robust. The BarCap US Aggregate Bond Index, a broad based fixed income index, scratched out a meager gain of 0.30% during the first quarter of 2012. During the quarter, risk and riskless fixed income assets provided significantly different returns.

Interest rates on high yield fixed income assets dropped from 7.71% to 6.93% on average. The drop in interest rates helped propel the BofAML US HY Master II Tr Index to a gain of 5.15% during the quarter. Conversely, yields on the 10 Yr US Treasuries rose from 1.87% to 2.22%. This rise in interest rates led to the BarCap US Government Index posting a -1.12% return during Q1 2012.

Indices are unmanaged and cannot be invested into directly. Past performance is no indication of future results.

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