The Markets

The first quarter of 2014 offered up all the excitement and chills of a thriller. First, stock markets careened like runaway mining cars during January. Next, in her first press conference as new Federal Reserve Chairwoman, Janet Yellen implied the Fed might tighten monetary policy sooner than anyone expected which unsettled markets. Finally, Russia annexed Ukraine’s CrimeanPeninsula, incurring sanctions from other countries, and tipping its economy further toward recession. As in many thrillers, after some devastation (Russia’s stock market lost billions as capital fled the country), the quarter ended on a more encouraging note with many of the world’s stock markets in positive territory.

Last year was a very, very good year for stock markets in general, thanks to a brightening economic outlook in many parts of the world and the stimulative monetary policies implemented by many countries’ central banks. By December 31, the FTSE All-Share Index had gained about 16 percent for the year, American Standard & Poors 500 Index had gained an impressive 29 percent, Japan’s Nikkei was up more than 56 percent, and shares in Emerging Markets rose by about 1 percent.

January 2014 was breathtaking too, but for an entirely different reason. Concerns about global economic growth, company earnings, and the resilience of emerging countries caused stock markets around the world to give back some of the previous year’s gains. The FTSE All-Share lost about 3.1 percent, America’s S&P 500 lost about 3.6 percent, the MSCI Emerging Markets Index lost 4.5 percent.

Fortified by a largely positive budget statement from the Chancellor, U.K. stock markets recovered from mid-March. Regardless, it looked like some major indices were going to finish March in negative territory until the Fed Chairwoman stepped up to a microphone on March 31, and told a community development conference in Chicago:

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed. In this context, recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labour market means our aid for the recovery need not grow as quickly. Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.”

U.S. investors celebrated the idea the Fed would not begin to tighten monetary policy sooner than expected which pushed stocks higher. The S&P 500 finished the quarter with modest gains.

Outside the United States, markets delivered mixed performance during the first quarter. Portugal, Italy, Ireland, Greece, and Spain – labelled the PIIGS of Europe because of their economic woes following the financial crisis – delivered strong performance for the quarter.

The Shanghai Composite fell during the first quarter as investors worried China would not hit its growth targets for 2014. The State Council tried to assuage worries about the slowing pace of economic growth by pledging to move forward with approved infrastructure projects.

India was a top performer among emerging markets during the quarter. Stocks rallied as inflation eased, the rupee stabilised, and the country’s current account deficit was brought under better control. Markets also were boosted when foreign investment increased in anticipation of a pro-business government being elected.

As the new quarter began, the European Central Bank flirted with the idea of quantitative easing. Its overtures pleased investors who began to invest in some of Europe’s most indebted nations – countries that had been shunned during the debt crisis. The rally caused yields on Spain’s five-year notes to fall below those of five-year U.S. Treasuries for the first time since 2007, and rates on Italy’s five and ten-year notes fell to the lowest levels they have reached since Bloomberg began tracking the data in 1993.