In the first quarter, U.S. equity markets continued the momentum from the close of 2016. Economic data remained steady, providing a foundation for greater asset gains even without progress on stimulative fiscal policy. Large cap stocks, as represented by the S&P 500 Index, outperformed small and mid cap counterparts in the quarter, perhaps a result of modest profit taking in the smaller end of the capitalization range following a strong end to 2016. Growth stocks, too, remain leaders over value stocks, as technology, consumer discretionary, and health care sectors all outperformed, while energy and telecommunications stocks posted negative returns for the quarter. Financial stocks also underperformed in the quarter after a strong surge to close out the year.
International developed stocks outperformed the U.S. in the quarter, with growth names leading the charge; the MSCI EAFE Index returned +7.3% versus +6.1% for the S&P 500 Index. Small cap equities, too, performed nicely, bouncing back from a disappointing back half of 2016. Regionally, the best performers were Asia outside of Japan and Europe outside of the U.K. Emerging market investors continue to benefit from the move to risk in the current environment, as these equities posted the best return of any major asset in the first quarter. A range-bound U.S. dollar has helped, as have expectations for accelerating global growth. The gains have been fairly widespread, save in Russia, where stocks declined in the first quarter.
Within fixed income, investors earned positive returns in almost all segments of the market, albeit with gains that paled in comparison to the equity markets. Treasury yields have settled into a new range, with the 10-year Treasury closing the quarter at 2.40%, down from 2.45% at year end, but up from 1.78% a year ago. In the quarter, credit outperformed government bonds modestly, with U.S. corporate high yield bonds besting investment grade issues. Municipals, after a spate of softness in the fourth quarter around the potential for tax reform, rebounded nicely and outperformed taxable U.S. issues across the quality spectrum in the period. Bonds outside of the U.S. posted modestly higher returns in the quarter over their U.S. counterparts, and emerging market debt was particularly strong as investors sought higher yields.
Commodities were the only major asset class to post a negative return for the quarter, as crude oil, natural gas, and gasoline all traded off year-end levels. Both industrial and precious metals were higher, as was corn, but not enough to offset the softness in energy. REITs underperformed the broader equity market in the U.S., as the reality of higher interest rates creates investor concern around the mid-term prospects for these highly levered firms.
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