The first quarter of 2014 introduced us again to volatility, something we did not hear much about during the run in 2013. Stocks and bonds were mostly positive across the board albeit with a modest pull back during the period. The S&P 500 finished the quarter up 1.97% while the Barclays US Aggregate Bond index produced results of 1.84%. Global markets were mixed as seen below.
The Equity Markets
2013 was a very strong year for the US Equity Markets and the outsized returns came as a surprise to even the most seasoned investment pundits. The US broad market had advanced 16.44% during 2012. Going into 2013, market consensus was for a tempered 8% gain, most citing GDP drag as a result of sequestration, government shutdown and tax increases. However the US economy muddled through and the US broad market surprised wildly to the upside delivering final quarter returns of over 10%.
The DJIA which has advanced for its fifth straight year had its biggest yearly gain since 1995 and returned 26.50% and the S&P 500 advanced 29.57% logging its best year since 1997. Not to be outdone, the Russell 2000 returned 37.03% in 2013, its biggest rally since 2003. Sector leaders included consumer discretionary and health care.
As published in the Winter 2014 Edition of NJ Lifestyle
Top Business Story for 2013: Great Year in the Stock Market. All of the major U.S. Stock Indices finished with gains above 26%. The markets logged the best year since 1996 and volatility disappeared as the largest decline of the year was only 5% in the period May 21st to June 24th.
- Washington Gridlock: Congress did their best to derail the economy and the bull market. Lawmakers began the year by ending the social security tax holiday, which shrank all U.S. paychecks. Then, at the end of the first quarter, with Congress unable to reach an agreement on a budget, the across the board sequester cuts went into effect. In October, Congress was unable to pass a 2014 budget and the Federal Government was partially shut down for sixteen days. Congress finally got its act together and passed a two-year budget deal. Although this was not any grand bargain that so many were hoping for (as the two year budget does nothing in regards to entitlement or tax reform), it did give the markets and the economy some certainty from Washington.
The 3rd quarter market chatter primarily revolved around the anticipation of the Federal Reserve’s resolve to finally begin to reduce its bond buying, which commenced a year ago as part of QE3. The conventional wisdom was that there was going to be a slight pull back of the targeted bond buying or “Taper” meaning a reduction by 10% or so of the monthly $85 billion bond buying program. The Fed ultimately surprised the markets at the conclusion of the two day meeting on Sept 18th with no tapering announcement at this time. In its statement, the FED said that, “tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.” So the Fed decided to wait for “more evidence that progress will be sustained before adjusting the pace of its purchases”. Was this meant to be code for, “Mortgage rates jumped too much and we are worried about stopping an already slow recovery”?
Markets at first rejoiced and then promptly sold the following day, now turning its attention to Washington gridlock related to the debt ceiling and now government shut down. The DJIA closed down 7 of the final 8 trading days to end the quarter.
As Published in the Fall 2013 Edition of NJ Lifestyle
In 1981, the yield on a 10 year U.S. Treasury peaked at over 15%. Over the last 30 years, fixed income investors have largely experienced a “bull market” for bonds as yields have consistently fallen, bottoming out in July 2012 at 1.53%. With the Federal Reserve taking unprecedented monetary policy action through the setting of the federal funds target rate between 0% and 0.25%, coupled with their bond purchases of $85 billion monthly, rates don’t have much room to fall further. As the Fed “tapers” their bond buying, and eventually raises the fed funds rate, what effect will investors see on their portfolios? It is widely known that as bond yields rise, bond prices will fall. An investor who purchases a hypothetical bond today yielding 2% will earn $20 of interest annually per $1,000 par value bond. If yields were to rise to 3%, an investor can now earn $30 of interest per $1,000 par value, therefore making the 2% bond less valuable, resulting in a reduction in price. Investors today face heightened interest rate risk, the risk that rising yields will make their fixed interest rate bonds less valuable, as it is inevitable rates will rise in the future.
As Published in the Shore 2013 Edition of NJ Lifestyle
We are currently in a near zero interest rate environment and the Federal Reserve seems intent on keeping rates right there for the foreseeable future. This has caused investors to diversify the income portion of their investment portfolios and re-think ways to generate income outside of traditional savings and interest bearing accounts. Accordingly, investors have been bidding up dividend paying stocks. high yield bonds, MLP’s and real estate investment trusts, in part to replace the lost income that in the past had been previously so highly predictable and easily obtainable. Now the Federal Government wants its share too. Let us explain.
The big news event of the second quarter revolved around the sudden rise in US interest rates based upon the possible conclusion of the FOMC’s latest stimulus program. Consequently, the US stock market posted its first monthly decline since October 2012 as the second quarter came to a close. The DJIA declined by 659 points alone in a 4 day trading period between June 19th and June 24th. In addition, gold, precious metals, REIT’S, developed international and emerging markets all traded lower based upon that assumption as well as the prospect of a China slowdown, including its own looming credit crisis. Consequently, during the latter half of the second quarter volatility returned to the capital markets in full force.
As Published in the Spring 2013 Edition of NJ Lifestyle
With all of the current discussion about the U.S. Government struggling to get its fiscal house in order (debt ceiling, deficits, sequester, etc.), we thought it was the ideal time to discuss household fiscal responsibility and provide readers with some tips for getting their fiscal house in order. As financial planners and practicing CPA’s, we interact with people from all across the financial spectrum. Our experience has taught us that whether a household is in good financial condition or not has less to do with household income, and more to do with household spending. (Sound familiar … can you say federal government?)
As Published in the Winter 2013 Edition of NJ Lifestyle
Stocks shrug off concerns and climb wall of worry in 2012 to double-digit gains
Europe —The year 2012 began much as the year 2011 ended, with much of the news revolving around the fiscal crisis in Europe. Would Greece default and leave the Eurozone? Would the Eurozone break up or kick some of the smaller financially weaker nations out? It seemed again that Europe might drag the rest of the developed world back into the recession it had just left several years before. That is, until the European Central Bank’s (ECB) President Mario Draghi announced in August that the ECB would use the roughly $500 billion Euros ($620 billion dollars) of the ECB’s lending capacity to purchase bonds of struggling countries in an attempt to keep yields from rising sharply on these cash strapped countries. It was a brilliant move for two reasons. First, the ECB did not have enough money to bail out all of the countries in need, but by preventing escalating borrowing costs for these countries, he bought them the much-needed time to get their fiscal houses in order. Secondly, it restored confidence in Europe, at least for the time being. In financial markets, as we saw in 2008, confidence, or lack of confidence, can mean life or death.
As Published in the Holiday 2012 Edition of NJ Lifestyle
This past week, while attending a national investment advisor conference Schwab Impact 2012 in Chicago, we had the privilege of hearing a speech from former Senator Alan Simpson (Republican) and former Chief of Staff for President Clinton Erskine Bowles (Democrat) on the fast approaching fiscal cliff our nation faces (See Spring 2012 Issue for our analysis of the fiscal cliff) and the need for comprehensive federal budget reform.
In 2010, President Obama created the National Commission on Fiscal Responsibility and Reform to identify policies to improve the fiscal situation in the medium term, and to achieve fiscal responsibility over the long run. The bi-partisan commission included nineteen appointees, including six Senators and six members of the House of Representatives. They came up with a report, which is commonly referred to as the “Simpson-Bowles Plan” that included comprehensive budgetary reforms that would cut our federal debt by $4 trillion over a ten year period.