NEWS

2012-10-10 :: 3rd Quarter 2012 Commentary

Looking Back

The 3rd quarter of 2012 was one of the best quarters in our recent history for equities.  Almost every sector, capital structure, value or growth as well as developed and emerging non U.S. has moved up over 5%.  Emerging Markets put in the best quarter, up roughly 7%, but other sectors were not far behind.  With everyone expecting monetary easing and then getting it there was little doubt that the Fed -induced uptrend would come.  

Fixed income sold off a bit during the quarter as equities moved higher, but after the Fed announced QE3, fixed income came roaring back to lower yields. We ended the quarter with longer term treasury yields at roughly 1.6% which is exactly where we ended the second quarter.

Absolute return hedge funds underperformed this quarter as equity markets moved up dramatically. 
Real Estate:  Showed some signs of improvement but as far as we are concerned that movement was very moderate and cyclical rather than a full move towards longer term growth.  Rentals continued to shine but the retail sector is still not making any major headway.  Low interest rates should be helping much more than they have and that is not a great sign for the short term future.   
Commodities Gold, metals and energy started the quarter with a downdraft but as the economy slowed and the almost guarantee of QE3 got priced in, they moved back up to highs for the year.

2012 YTD   (Total Return)
Russell 1000  16.28%                 Mid-cap 14.00%             Russell 2000 14.23%
Russell 1000 Value 15.75%       Mid-cap Value 14.03%       Russell 2000 Value 14.37%
Russell 1000 Growth16.80%      Mid-cap Growth 13.88%      Russell 2000 Growth 14.08%
MSCI EAFE  6.95%                     MSCI Emerg Mkts 9.41%    S&P 500   16.44%

 

Looking Forward    

Equities: Our moderate long term view on the equity markets continues:  slow growth and moderate returns for the foreseeable future.  For the upcoming quarter we expect to see an increase in volatility.  From our perspective, the markets are fairly priced, and although not historically expensive, an economy with sub 2% GDP growth would put this market slightly ahead of itself.  Additionally, pre-announced warnings on corporate earnings for the 3rd quarter have increased at the highest rate since 2008.  There is an old adage “don’t fight the Fed,” hence equities have been moving up with the monetary easing.  This will probably end with equities moving back down if the central bank does not get its desired outcome.  At some point, the overhang of US and European debt will come to haunt all of us, potentially raising inflation to 1970’s levels. The Eurozone, while making some progress, will continue to be a long term problem. We have been preaching dividends, dividends, dividends for the last two years and will continue to do so until we see a real positive change in the direction of our economy.  We still like Emerging Market equities due to the demographics and low debt ratios, but it will be very volatile with the highest opportunity to outperform.  Oil prices have come down a bit but not dramatically enough to move the needle, which impacts consumers’ disposable income.

Fixed income markets We continue to believe yields will continue to trade within a range, thanks to the Fed keeping yields low to help the economy.  This will end eventually -- it is just a matter of time. We feel it is prudent to keep bond portfolios with shorter durations to protect against the future upward movement. We continue to favor corporates over sovereign debt, as corporations are in better shape than government paper. We also believe that bond investments need to be diversified with inflation protected and emerging markets bonds, among other sectors, that would help balance out the risk.

Commercial & Residential Real Estate There continues to be no change to our forecast in real estate: Housing has improved a bit but there is a still a long way to go.  Some of the improvement has been done by speculators and continued distressed sales.  We changed our opinion on housing a year and a half ago from negative to neutral, but don’t see a significant housing price appreciation for roughly 5 yrs.  Please refer to our previous commentaries starting from Q3 2005. We think multiple unit rental properties are one of the few places to be in real estate, however even that area is getting overcrowded.  As for commercial real estate, we continue to be flat on office space and negative on the retail sector.

Absolute return hedge funds have had a tough couple of years where performance is concerned.  They have removed volatility but have not gathered enough of the upside.  Our perspective is that this is cyclical and will eventually go the other way.  Our perspective is that when the tides turn this investment will help protect from the eventuality of higher bond yields and equity drops. 

Commodities:  The US dollar has begun to weaken again and that should help commodities Now that QE3 is in full swing this should be good for most commodities. Certain metals that are more industrial and depend on economic growth will probably not participate in the upside of money printing.  Gold should do very well here as developed countries continue to debase their currencies.

Have a great Holiday season!