In the first week of the quarter, the U.S. Employment Report surprised on the downside; along with other softer Purchasing Managers' Indices, this report caused equities to fall and government bond prices to rise for the week. Credit spreads widened, particularly on the lower rated securities. Oil and metals prices provided no shelter; natural gas prices, though, did rise on the week. The U.S. dollar declined against the Euro and Pound, but the Yen fell against the Greenback as the BOJ presented its plan to raise the target inflation rate to 2% over the next two years.

Perspective:

This week should have been educational to all of us about bonds. Some have argued that they do not hold bonds because 1) coupon payments are less than the dividend rate on many stocks, 2) interest rates are going to rise and the value of bonds will go down, and 3) bonds have had their run and in the first quarter investment grade bonds generated negative returns. While all of those statements are at least partially true, they ignore the primary reason to hold bonds in your portfolio.

The economic environment certainly has an impact on stocks and bonds, but the sensitivity and direction may be different. Take this past week as an example: The disappointment in the U.S. Employment Report along with other softer economic releases called into question the prospects for U.S. growth. This caused stocks (S&P 500) to go down about 1% in the first week of the new quarter. At the same time, the 10-year Treasury bond yield dropped 14 basis points; assuming an 8.9-year duration (measure of interest rate sensitivity) the rough price change of the Treasury was an increase of 1.25%. Many of the factors that cause stocks to go down, like the slowing of the economy, cause interest rates to fall and bond prices to rise. The primary reason to hold bonds in your portfolio is that the lack of positive correlation with stocks reduces the volatility of the combined portfolio. Bonds are by no means a perfect hedge against declines in the stock market, but this past week shows how beneficial having bonds in your portfolio can be. As a caveat, I should mention that this week's one data point is merely anecdotal evidence, not sufficient or compelling for changing investment strategies.

Economic Releases:

The March U.S. Employment report was a clear disappointment after a string of positive news on jobs. Only 88,000 non-farm jobs (blue in the chart) were created; those were well below the range of expectations even if you add the upward revisions totaling 61,000 in the previous two months. Private Payrolls (red in the chart) were below the range of expectations and totaled 95,000 so that government jobs declined in March. Manufacturing Payrolls (green in the chart) fell -3,000 after several months of increases. The Unemployment Rate slipped a tick to 7.6% due to the decline in the labor force, not a positive factor. Average Hourly Earnings was unchanged, but the Average Workweek increased a tick to 34.6 hours. For the week of March 30, Initial Jobless Claims rose to 385,000, an increase of 28,000.

The Purchasing Managers Indices for March declined, but remained in the expansion zone, above 50. The ISM Manufacturing (blue in the chart) Index fell 3 points to 51.3; the ISM Services Index (red in the chart) fell over a point to 54.4. In addition to the widely followed ISM, Markit also produces a Purchasing Manager Index; its index increased 3 ticks in March to 54.6, showing that two companies using similar processes and measuring the same activity can come up with different results.

Other Economic Releases

The European Union's PMI Manufacturing Index fell a point to 46.8. Germany's PMI Manufacturing Index crossed the demarcation into the contraction zone to 49.0. The Swiss PMI dropped into the contraction zone to 48.3. UK's Manufacturing PMI rose a half point to 48.3, but remained in the contraction zone; UK's Services PMI rose a half point to 52.4. Also on the positive side, seasonal factors caused to the Canadian Ivey PMI to vault 13 points to 64.4, the highest reading since September of 2012.

The Bank of England met and made no changes in interest rates or the asset purchases. The Bank of Japan met and announced a plan to target inflation at 2% within two years, following its QE Central Bank sisters, the BOJ voted to double its monetary base, increase its JGB holdings, and double the average maturity of the remaining JGBs. The Bank of Australia left interest rates unchanged at 3.0%.

The EU reported that their fourth quarter GDP remained unrevised at -0.6%. EU Retail Sales declined -0.3% in February.

Equities Markets:

With the exception of the Nikkei, stocks fell dramatically across the globe in response to softer economic data.

Bond Markets:

Government bond yields fell across the globe and credit spreads rose, especially for the riskiest securities.

Currencies & Commodities:

The U.S. dollar fell against the pound and Euro, but the Yen fell against the Greenback in response to the BOJ announcements. Oil and metals prices declined in response to prospects of slower economic activity. Natural Gas prices rose.

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Who is John Davidson?

John W. Davidson, CFA, started writing these Comments over a decade ago as a personal discipline when he was promoted to chief investment officer from portfolio manager.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts, and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income, and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he has appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services often quote his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and courses at the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a Naval Officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserves, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is treasurer of the Maine Conference of the United Church of Christ, serving on the executive committee and the coordinating council, the governing board of the conference. He is also on the investment committee of the Pen Bay Health Foundation.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.