Our Take on the First Quarter

Volatility returned in a big way in the first quarter of 2015 as the market focused on everything from central-bank actions to Greek elections, a strong dollar, and a steady beat of merger activity. Even with the bumps in the road, the broad-based Morningstar US Market Index squeaked out a 1.5% gain during the last 13 weeks and is now up an annualized 15% during the last five years.

Fed watching was a full-time job in the quarter. With the U.S. economy showing signs of improvement, the central bank started to send signals that it was ready to raise short-term interest rates and create a more normal monetary-policy environment after the extraordinary measures put in place during the financial crisis. The bank dropped references to it being "patient" in waiting to raise rates in its March statement, opening the door to an increase as early as its June meeting. But other language in the statement referring to moderating growth, a desire to see a rise in core inflation, some mixed economic data, and public comments from the Fed led some to believe that the increase may be put off until later in the year. And, of course, the Fed wasn't the only game in town. The European Central Bank, after dancing around the issue for years, finally launched a quantitative-easing program in an attempt to kick-start European growth.

The growth divide between the U.S. and much of the rest of the world remained in the quarter. Morningstar director of economic analysis Bob Johnson says that, despite bad weather and lower exports, the U.S. economy continued to muddle along and that full-year GDP is likely to end up in the 2.0% to 2.5% range. This may not be robust, but it is still better than European growth. However, there are signs that things are picking up in Europe as lower energy prices, extremely low interest rates, and a weak euro provide tailwinds. Chinese growth also showed signs of slowing down, with forecasts now pegging growth for the full year at around 7% compared with 7.4% last year and the 10% to 12% growth that was common a few years ago.

The combination of a stronger U.S. economy and the differing paths of monetary policy were responsible for a further strengthening of the U.S. dollar versus the euro, yen, and other major currencies during the quarter. The strength of the dollar has been a big story in corporate earnings and forecasts for the year as multinational firms deal with the stiff headwind.

Geopolitical concerns also moved the market during the last three months. Greek elections in January brought to power a new government that had promised to renegotiate the country's bailout agreement. Despite a few tense days, Greece and its creditors reached a temporary agreement to allow a tranche of funds to be distributed, thereby avoiding a default. Negotiations to reach a long-term deal are still ongoing. Continued conflict in the Middle East was also a concern.

In corporate news, merger-and-acquisition activity picked up. One high-profile deal was the merger of

Sector-by-Sector Performance Stock-sector performance was quite varied in the quarter. Driven by the continued M&A wave, health care was at the top of the heap, gaining 8% during the last 13 weeks. Consumer cyclical (up 5%) and real estate (up 4%) were the next-best performers. Utilities lost more than 6% in the period while financial services (down 3%) and energy (down 2%) were the only other sectors to lose ground.

Equity valuations were little changed in the quarter. At the start of the year, the median price/fair value ratio for firms covered by Morningstar analysts stood at 1.04 and ended the quarter at 1.03. Morningstar StockInvestor editor Matt Coffina, in his quarterly outlook, tells investors to be cautious in the market, given that values are few and far between. He flags energy as the cheapest sector, even if its discount to fair value is modest.

The small-growth category, with a 6% gain during the last 3 months, was the best-performing U.S. equity open-end fund category. Mid-cap growth (up 5%) and large growth (up 4%) were the next-best performers. Large value (down 0.1%) was the only category to decline in value. In sector equity open-end funds, health was far and away the best-performing category, gaining 12% during the last three months. Utilities brought up the rear with a more than 3% decline.

The Japan-stock international-equity funds category continued its winning streak, adding more than 11% in the last three months. Diversified Pacific/Asia (up 8%) and India equity (up 7%) were the next-best performers. Latin America stock (down 9%) was the only category to see a decline.

Fears that the Fed may raise rates this year haven't led to higher interest rates. In fact, the yield on the 10-year Treasury fell in the quarter from 2.12% to 1.94%. The decline in rates helped boost fixed-income funds. The long-government taxable-bond fund category gained 3.5% in the quarter. The only two categories to lose ground were world bond and emerging-markets bond, which were both down less than 1%.

All data as of 3/30/15