Rallying Stocks Generate Best Return of Quarter, Beating Bonds

Global stocks beat all other investments for a second quarter, the first back-to-back outperformance since 2009, as accelerating economic growth pushed equities past commodities, bonds and the dollar.

The MSCI All-Country World Index of equities in 45 markets climbed 6.6 percent including dividends in the first three months of 2013, as the Nikkei 225 Stock Average surged 20 percent and U.S. shares reached records. The Standard & Poor’s GSCI Total Return Index of 24 raw materials added 0.6 percent, while the Dollar Index climbed 4 percent and bonds of all types returned 0.6 percent as of March 31, according to Bank of America Merrill Lynch’s Global Broad Market Index.

Global equity values rose by $2.6 trillion as data from retail sales to employment and housing showed the U.S. economy gaining momentum and the Bank of Japan doubled its inflation target. Federal Reserve Chairman Ben S. Bernanke said he will continue to provide monetary stimulus. Slowing growth in China damped demand for commodities, while the Dollar Index strengthened as a bailout for Cyprus reignited concern that Europe’s debt crisis isn’t over.

“There seems to be a consensus building that economic growth is stabilizing, while inflation is not much of a concern,” Wasif Latif, the San Antonio-based vice president of equity investments at USAA Investments, said by telephone. His firm oversees $54 billion. “Central banks with their easy money policies have in effect been able to take the worst case scenarios off the table. In that type of environment, stocks should be the better asset class.”

Dow Record

The MSCI All-Country equity gauge slid 0.4 percent to 358.49 in New York today. The S&P 500 surpassed its 2007 all-time highs last month, bringing its return this year to 11 percent. Investors poured $51.9 billion into stock mutual funds in January and February, the most to start a year since 2007, according to data from Washington-based Investment Company Institute. Bond funds received $52.9 billion.

The U.S. unemployment rate unexpectedly declined to 7.7 percent, the lowest since December 2008, from 7.9 percent, the Labor Department said last month. It’s still above the Fed’s target of less than 6.5 percent. Bernanke said on March 20 that the U.S. central bank will alter its monthly bond buying in response to gains in the job market, underscoring a need for flexibility as he expands Fed assets beyond a record $3 trillion.

Equity Strategists

Among Wall Street strategists tracked by Bloomberg, last year’s two biggest bears lifted S&P 500 estimates for 2013 to at least 1,600. Goldman Sachs Group Inc.’s chief U.S. equity strategist, David Kostin, raised his forecast to 1,625 from 1,575. Adam Parker of Morgan Stanley boosted his to 1,600 from 1,434. The average estimate by 17 strategists surveyed by Bloomberg projects the S&P 500 will climb 0.9 percent to 1,583 at the end of 2013.

Stocks with the 10 biggest first-quarter gains in the MSCI All-Country index were from the U.S. and Japan. Netflix Inc., the Los Gatos, California-based online video service, surged 104 percent. Electronics retailer Best Buy Co. in Richfield, Minnesota, and Sony Corp., Japan’s largest consumer electronics exporter, rallied at least 70 percent.

Japan’s Nikkei 225 has risen the most this year among 45 equity indexes in emerging and developed markets tracked by Bloomberg. Prime Minister Shinzo Abe’s government unveiled a 10.3 trillion yen ($109.3 billion) spending plan in January and the premier convinced the Bank of Japan to double its inflation target to 2 percent.

China Slowdown

The S&P GSCI gauge of 24 raw materials gained 1.1 percent in March, led by natural gas, as investors weighed faster U.S. growth against concern China’s economy will slow and signs of surplus in commodities. Zinc declined for a second month, while lead, coffee and aluminum prices fell in March.

“I’m expecting things will be slow in the commodity world until at least early next year,” said John Stephenson, a senior vice president and portfolio manager who helps oversee C$2.8 billion ($2.75 billion) at First Asset Investment Management Inc. in Toronto. “You need China to be firing on all cylinders. And you need Europe at least not to act as a drag and to show positive growth, which it won’t this year.”

European governments and the International Monetary Fund agreed last month to lend Cyprus 10 billion euros ($13 billion) as long as the Mediterranean island liquidated its second-largest bank and forced losses on bank bondholders and deposits of more than 100,000 euros. The bailout of the euro-area’s third-smallest economy spurred concern that bank deposits in other member nations may be subject to levies for rescues.

Gold Slumps

Manufacturing in China, the top consumer of cotton, copper and soybeans, expanded at the weakest pace in five months in February, the government said March 1. China’s economy is projected to grow 8.1 percent this year, the second-slowest pace in the last decade.

Gold futures on the Comex in New York fell 4.8 percent to post a second straight quarter of losses, the longest streak since 2001. The metal climbed 1.1 percent in March.

“Gold bugs have had to run for cover,” said Brian Jacobsen, who helps oversee about $217 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “Tighter monetary policy in China, coupled with lower growth targets in China has taken support out of the gold market.”

The slump in raw materials is “overdone” and prices will rebound in the next three months as China’s economy accelerates, Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in New York, said in a March 7 report.

Oil Markets

Brent crude dropped 1.2 percent in March and 1 percent this year, amid a recovery in production from the North Sea and concern that Europe’s debt crisis may worsen. West Texas Intermediate crude advanced 5.6 percent this month and 5.9 percent this year on speculation that expanded pipeline capacity will help clear an inventory surplus in the U.S. Midwest.

The U.S. Dollar Index rallied 1.3 percent in March. The gauge is forecast to weaken to 81.6 by the end of 2013 from 82.9, according to the median estimate of 15 economists surveyed by Bloomberg.

The euro slipped 1.8 percent last month and traded at less than $1.28 for the first time since November. The common European currency has depreciated 2.8 percent versus its U.S. counterpart this year.

Dollar Flows

“The re-emergence of risks in Europe are driving some flows to the greenback,” Eric Lascelles, chief economist in Toronto for RBC Global Asset Management, which oversees $270 billion, said in a telephone interview.

The yen weakened against all but one of its 16 most-traded peers tracked by Bloomberg in the past three months as Bank of Japan Governor Haruhiko Kuroda, who assumed his post last month, seeks to add to stimulus measures. Investors also sought the yen as a haven in March amid Cyprus’s bank bailout. The currency fell 1.8 percent to the dollar and was about unchanged against the euro last month as of March 29.

Bank of America Merrill Lynch’s Global Broad Market Index, tracking debt securities with a market value of about $45 trillion, has returned 0.6 percent in 2013, its eighth-straight quarterly gain. Average yields fell one basis point, or 0.01 percentage point, last month to 1.68 percent on March 27.

A gauge of high-yield bonds returned 0.8 percent last month, the 10th month of the rally and the longest stretch since 2009. Speculative-grade debt, rated below Baa3 by Moody’s Investors Service and BBB- by S&P, gained 2.6 percent last quarter.

Treasury Yields

U.S. Treasuries returned 0.1 percent last month after climbing 0.6 percent in February. American federal government debt fell 0.3 percent last quarter. Yields on 10-year U.S. government debt may climb to 2.25 percent by the end of the year, from 1.85 percent, according to the median estimate of 74 economists surveyed by Bloomberg News.

South Africa’s bonds were the best performers in March among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 0.02 percent. Hungary’s were second with the same gain. Denmark debt lost the most with an 0.2 percent decline and Ireland’s fell 0.1 percent.

For the quarter, Ireland’s securities gained the most, rallying 4.3 percent. The 0.2 percent decline for Denmark debt was the biggest drop.

“When I think of the special factors that have supported the stock market and the bond market, if you think of it from a price perspective, it’s not economic growth -- that’s been fairly lean -- it’s really in the context of ongoing monetary support,” Lascelles said March 27. “It’s the idea that policy makers are willing to do whatever it takes in the European context or willing to deliver a whole big chunk of stimulus in the U.S.”