NEWS

2013-08-28 :: 2nd Quarter Commentary, 2013

Looking Back

The 2nd quarter of 2013 was another good one for the U.S. Equity markets with almost all market cap sectors moving up over 2%. The non-us markets did not fare so well as both the developed markets and the Emerging markets losing. Emerging was much worse with a 9=% loss.

Fixed income: Had one of the worst quarters we have seen in a while with the ten year treasury yield moving up relatively quickly due to the expectation of the fed tapering its QE program. This hit every sector of the bond market and the longer your portfolio duration the worse it was.

Absolute return hedge funds out performed fixed income as we had predicted in our previous commentary. This has not happened for many years. Fixed income is near generational lows.

Real Estate: Housing, as well as general real estate, has improved but is it still down a good roughly 26% from the highs of 2006. This has been one of the few bright spots in the markets however we still have a long way to go.

Commodities: Gold, metals and other commodities were generally weak so far this year; The US dollar continued to rally and this hurt all commodities especially gold. Oil prices are still trading at the higher end of its range and with the middle east having some issues as well as the economy improving we could see a move higher..

2013 YTD (Total Return)

Russell 1000 13.91%
Mid-cap 15.45% Russell 2000 15.86%
Russell 1000 Value 15.90% Mid-cap Value 16.10% Russell 2000 Value 14.39%
Russell 1000 Growth 11.8% Mid-cap Growth 14.70% Russell 2000 Growth 17.44%
MSCI EAFE 2.18% MSCI Emer Mkt -10.89% S&P 500 13.171%

Looking Forward

Equities: We are now at the point in the year where we have had a pullback and the market will be higher by year end, however there are still a lot of headwinds and things could get bumpy as we head into the summer and early fall. With the Fed planning on tapering as early as September as well as general uncertainty volatility is here for a while. Even though we believe growth will be hampered by US government debt and other headwinds, we should see a pickup in the back half of the year. This pickup will not bring our GDP up to a 3% number but it will be a bit better than what we have seen. No market goes straight up, and technically we were due for a pullback, but fundamentally the markets are now again not expensive but also not cheap. Eventually, the US debt concerns will come home to roost but this will take some time to play out over the next few years.

Fixed income markets: As we mentioned in last quarter’s commentary, the days of outsized fixed income returns are over.. We continue to see fixed income as a place for safety, however the market has priced in some movement back to fundamentals. Short duration as we had previously commented was mu and a place to park assets when the risk of trade comes into vogue. However, yields are historically low and a dislocation on the fixed income markets could prove to be a low point on the 10 year bond yield. We feel it is prudent to keep bond portfolios with shorter durations to protect against the future upward movement in the bond yield. We believe treasuries and high yield are more at risk than investment grade corporate debt. We also believe that bond investments need to be diversified with investment grade emerging market bonds, among other sectors, that would help balance out the risk.

Commercial & Residential Real Estate: The housing data continues to improve but we are not that excited about this space. There are still many problems and as we have stated in the past the real estate issues are not over just yet. Additionally, although prices have come up from depressed levels we are still about 28% below 2006 highs. The presence of speculation in the space is showing itself again especially in the states where markets collapsed. We still see brick and mortar retail having a tough time and multiple unit rental properties being the better place to invest.

Absolute return hedge funds will continue to outperform fixed income for the foreseeable future. For many years this has not been the case but as we had commented at year end that the tides have turned once again.

Commodities: Will continue to struggle and mostly trade in ranges. With the second quarter came a slowing in economic activity as well as a strengthened U.S. dollar which are both bad for this sector.. We do think that this will change later this year and commodities will begin to rise again.

Have a wonderful Summer!!!!