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Roller-coaster quarter

U.S. equities ended the first quarter down after surging out of the gate in January. The S&P 500 gained 5.7% in January on a total return basis, before minutes from the Federal Reserve's late January meeting stoked volatility in the markets suggesting that its doors to its accommodative monetary policies would close faster than expected.

For the quarter, the S&P fell 0.8% on a total return basis, while the Russell 3000 index fell 0.6%. The 10-year Treasury yield closed the quarter at 2.74%, up from 2.41% at the end of 2017.

Further anxiety was added to the markets by the increasing threat of a trade war caused by tariffs on key materials and a major data breach at Facebook that could mean more regulation for the major tech firms that sit atop the economy. The Chicago Board Options Exchange SPX Volatility index rose 24 points in the first three days of February, closing Feb. 5 at 37.32 and remaining above 25 into Valentine's day. Five-day changes in the index were more dispersed in the quarter relative to the year and much more dramatic. Overall, the index increased 80% during the quarter after a 21% decline the year before.

Among the components of the S&P 500 index, 296 were down in the quarter, a reversal from the previous four quarters where at least two-thirds of the large-cap index was positive.

The median positive return of the index constituents was 6.3%, its lowest in the last five quarters, while the median negative return was -7.4%, nearly 2 percentage points lower than the fourth quarter and 1.7 percentage points lower than the next worse quarter.

Cross-sectional volatility – the volatility of index component returns over a given period – changed little quarter-over-quarter for the total index, but increased more significantly for larger stocks. Greater cross-sectional volatility means that stock picking becomes more of a factor when trying to outperform an index and is generally seen as a positive by active managers.