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.

Political headlines added to much of the confusion during the quarter as trouble in Syria, and most recently, terrorist action in Kenya has further muddled the geo-political investment landscape. Domestically, the debt ceiling debate has once again risen to highlight a basically inept national government, including executive and legislative branches.

The Equity Markets

US equity markets performed very well during quarterly bookend months of July and September, and actually reached a new high on September 18th, with culmination of the extension of the bond buying program coupled with the news that Wall Street’s choice of Janet Yellin now clearly appears to be the firm front runner to fill Chairman Bernanke’s position (with Lawrence Summers’ announcement excusing himself from consideration). August was a dismal month as the DJIA dropped 848 points over a 4 week period (5.4%) — not quite large enough a slide to be labeled a correction, but certainly large enough to notice.

2013-3rd-1During the 3rd quarter, as one can clearly see from the adjacent chart, the Nasdaq distanced itself from the other two major US equity indexes by returning nearly 11%.

International developed markets also outperformed the US Broad market during Third Quarter 2013. This may be partially attributable to a weakening US dollar and may also aid non- dollar denominated emerging market securities including bonds and equities.
Over the last four weeks, after trailing developed markets for the better part of the year, left-for-dead emerging market exchange traded funds are beginning to outpace the S&P 500 on the Fed’s more dovish stance. The Federal Reserve’s stance of maintaining current accommodative policies is a positive for emerging markets. International Developed and Emerging Markets staged 3rd quarter advances of 7.12% and 6.23% respectively.
New Dow Components
Goldman Sachs Group Inc., (GS), Visa (V) Inc., and Nike Inc. (NKE) were added to the Dow Jones Industrial Average (INDU), on September 20 2013, replacing Bank of America Corp. (BAC), Hewlett-Packard Co. (HPQ), and Alcoa Inc. (AA) in the biggest reshuffling since April 2004. Since Dow proportions are determined by stock price rather than market value, shares of Visa and Goldman Sachs, which trade above $159 a piece, will have about seven times the weighting as the constituents they replace.
The Bond and Credit Markets

2013-3rd-2The 10 Year Treasury began the quarter with a 2.52% yield shot up to 2.98% by September 5th and ultimately closed the quarter at 2.61%. The 30 Year Treasury bond began the quarter yielding 3.52% and ended the quarter at 3.61%. Municipal bond markets gained negative attention and even more scrutiny with the city of Detroit bankruptcy as well as rumblings of a possible crisis related to Puerto Rico’s debt. During July and August 2013 the index declined by 3.19% but rallied back by 2.15% in September.

Precious metals stabilize; Oil remains elevated Gold began the quarter at $1,230 and moved higher to $1,326, which is still down sharply from the beginning year price of $1,674. However, a favorable seasonality pattern is now coming into play for gold. Heightened tensions in the Middle East kept oil prices mostly elevated even though Syria accounts for less than 1% of the global oil supply. The possibility of escalation to a regional conflict is cited as the main catalyst for elevated prices. West Texas Crude closed the quarter at $102.23 per barrel, measurably lower than the Sept 6th price of $110.53.

According to Bespoke Investment Group, going back to 1927, when the S&P heads into the 4th Quarter with a gain of more than 10%, the index tacks on an average gain of 3.27%, with positive returns 78.1% of the time. Here’s to playing the averages!

Very Truly Yours,

CRA Financial LLC