Market Data for the quarter ended March 31, 2014

• S&P 500:  1872, up 1.30%
• Ten-year Treasury note yield:  2.72%, down 32 basis points (hundredths of a percent)
• Gold:  $1,284 per ounce, up 6.82%
• Crude oil:  $101 per barrel, up 3.06%

Compared to the nearly effortless ascent of 2013, the stock market struggled in the first quarter of 2014, while the bond market firmed.  On a fundamental basis, US economic data, particularly on employment, weakened.  This was to some extent due to harsh winter weather in much of the continental United States.  However, there may be more to it than just cold and snow.  Technically, i.e. regarding investor psychology, both the stock and bond markets were overextended at the end of 2013 and needed to correct.  This is to say investors were overly excited by stocks and pessimistic about bonds at year end, and this condition needed to be unwound.

Going into the second quarter, we do not see a significant departure from the market action of the first.  We are skeptical that the US economy has broken out to a higher growth trend than we have seen since the end of the “Great Recession”.  Furthermore, the Fed’s ongoing reduction in its purchase of Treasury bonds and agency mortgaged backed securities (aka quantitative easing/QE) will continue to remove support from the stock market and relieve pressure on bonds, (which goes counter to conventional wisdom.  Most people think that QE has supported bond prices when the reality is that they have fallen since QE began.)  That having been said, we do not see deterioration in the economy either, and therefore do not expect a significantly weaker stock market/stronger bond market.

Paradoxically, we believe the greatest risk to the market is stronger economic data.  In the latest meeting of the Federal Open Market Committee, the Fed upgraded its economic forecast and moved forward the likely date that it would start increasing overnight interest rates.  As a tightening Federal Reserve is seen by many as the great slayer of bull markets, the market may react negatively to any economic data that would suggest sooner rather than later interest rate hikes.  Likely realizing this, newly appointed Fed chairwoman Janet Yellen backpedalled somewhat on the Fed’s hawkish position in a speech given in Chicago on March 31.  In the other direction, economic weakness in China and possible escalation in Ukraine bear watching.  Both could significantly impact the global economy, and US markets would not be unaffected.

For the remainder of the year, we see the stock market, as represented by the Standard & Poor’s Five-hundred stock index, to trade in a range of 1725 to 2000.  It ended the first quarter at 1872.  We forecast the yield on the benchmark Ten-year US Treasury note to trade from 2.5% to 3.5%.  It ended the quarter at 2.72%.