A Look Back At The First Quarter

Now that we’re officially in the second quarter of 2014, we can look back at Q1 to see what we’ve learned. The big winners were in the commodity space with the equal-weighted commodies index up over 10% for the first quarter. Coming in second were US Treasury Bonds up almost 8% for the quarter. On the equities side, the Dow Jones Industrial Average struggled losing 1.5% for Q1, the S&P500 closed up 50 basis points and the Small-cap Russell2000 was down 1%.

There were a lot of stock market bulls coming into the new year, but we couldn’t find many bond or commodities bulls. It’s fascinating to see sentiment play itself out. We’re starting to hear more chatter about commodities lately but still not many bond bulls. We’ll see what happens in the second quarter.

Individual sector-wise, I can’t say I’m surprised with the results. Back in February we noticed that the high yielding Utilities and REITs were leading the way for stocks. As interest rates have been falling (while most expected them to rise), fixed income managers need to find yield. They’re not getting it in bonds, so the flow goes into the sectors with the biggest dividends. I don’t think it’s a coincidence that the historically low yielding Cyclicals and Industrials were the worst performers.

4-1-14 sectors q1

In the metals space Palladium was the big winner finishing up the quarter up 8.5%. This was my favorite chart coming into the new year and the price action so far continues to prove why. Copper was a big time loser getting crushed along with emerging markets. Something else that sticks out is the underperformance of Silver in a positive precious metals environment. That calls me to question this quarter’s rally in that space. I would expect (and want) silver to outperform if this was a real bull market:

4-1-14 metals q1

The soft commodities were the big winners for sure. Coffee finished up the quarter up over 60%, after doubling from the Q4 lows. Corn, Wheat and beans all came in with double digit returns and Sugar, Cotton, and Cocoa all finished with solid gains:

4-1-14 softs q1

In Energy we had some mixed returns. West Texas Crude finished up close to 3% with Brent Crude down almost3%. Natural Gas finished up 3% and Heating Oil down 4.5%. Mixed signals out of this space:

4-1-14 energy q1

Going forward what should we expect? I’m not sure that I see anything different than what we saw coming into the new year. I think the price action so far has confirmed a lot of we expected. Rates continue to fall and I don’t see any evidence yet of a rally. Stocks keep struggling with most of the world down this year. The US has been one of the stronger areas within equities and still can’t seem to rally. I would expect more of nothing out them. And in commodities we can continue to pick and choose as the rotation there continues. But as an equal-weighted group, I would expect to keep seeing them outperform.

If the data changes, then we’ll reevaluate. We have our levels, and if any of those are broken, we’ll adjust. But for now, all systems go.

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