The S&P 500 fell 0.10% in March as investors assessed the implications of turmoil in North Africa and the Middle East as well as the devastating earthquake and nuclear crisis in Japan.
After several months of low volatility and steady gains, the S&P 500 tumbled 6.4% from its two-year high set on February 18. The VIX Index, a common measure of volatility, leapt 46.4% in the three trading days following Japan’s earthquake and tsunami. However, investors eventually regained their appetite for risk as the S&P 500 rallied 5.49% in the second half of the month. In addition, the S&P 400 Mid Cap and S&P 600 Small Cap advanced 2.32% and 2.87%, respectively, to reach new all-time highs.
The Telecommunications sector significantly outperformed all other sectors in March as AT&T (NYSE:T) announced it will buy T-Mobile USA for $39 billion to become the largest wireless carrier in the U.S. AT&T makes up roughly 48% of the S&P 500 Telecom sector.
The Financial (-2.68%) and Technology (-2.66%) sectors were the laggards in March. The Technology sector was hurt by concerns about the impact from rising energy prices – if businesses spend more on the transportation of goods, they might have less capital for technology spending. The Financial sector trailed as investors worried about the still morbid housing market as mounting foreclosures could saddle banks’ balance sheets with assets needing to be marked down.
The MSCI EAFE Index of international equities lost 2.66%, largely a result of the sell-off in Japanese stocks following the devastating earthquake. Japan, which makes up over 20% of the MSCI EAFE Index, was down 8.18% in March. Concerns about the Euro-region’s sovereign debt problems as well as the possibility of the European Central Bank (ECB) raising interest rates also weighed on the index’s performance.
Emerging Markets soared 5.70% in March, led by South Korea whose auto and steel industries may benefit from the drop in Japanese production. India, this year’s second-worst performing Asian market after Japan, posted solid gains despite increasing interest rates and higher oil prices – the country imports 75% of its crude.
Treasurys declined in March, but traded in a wide range with yields as low as 3.17% at the height of panic in Japan to as high as 3.56% when investors worried the Fed might tighten policy sooner than expected. Treasury Inflation Protected Securities (OTC:TIPS) provided the best returns among domestic fixed income asset classes. The 10-year breakeven rate – the difference between Treasury and TIP yields – on March 31 was 2.49%. This means that investors expect inflation to average 2.49% a year over the next ten years.
Economic data releases in March showed that higher fuel and food costs are suppressing consumer confidence. The Consumer Price Index (NYSEARCA:CPI) – the broadest of three monthly prices gauges from the Labor Department – rose 2.1% in February, led by the highest food prices since 2008 and rising fuel costs. And while a Commerce Department report showed that Americans increased spending by more than expected in February, more than have the gain was due to higher prices, which suggests that consumer spending will contribute less to the economy in the first quarter of 2011 than in the fourth quarter 2010 when it made up a historically outsized portion of GDP growth.
The market has shown an incredible amount of resiliency, but expecting the market to continue climbing at its current pace – which would equate to a 26.27% annual return for the S&P 500 – is a tall order. Last month I said to expect pullbacks, but to not overreact to likely near-term volatility. The sharp fall and then quick rise in the stock market this month serves as a perfect example of why it is crucial to stick to your long-term investment plan through thick and thin.