Key news stories
The beginning of the 1st quarter of 2013 focused on the sequestration battle between Congress and the White House. Although tax rates and spending cuts seem set as a result of the last minute deal, the White House has signaled openness to greater tax reform of corporate loopholes. House Republicans, amendable to some discussion of revenue generation, remain adamantly opposed to increased tax rates and now focus on curtailed spending to narrow the deficit. After the imposed spending cuts to discretionary spending, entitlement reform (Social Security, Medicaid and Medicare) may be revisited as a part of the next debt ceiling negotiations which should occur by May 2013.
Despite the arguments in Washington, fundamental data continues to be strong, if unspectacular. Consumer sentiment, sales, unemployment, and – perhaps most importantly – the housing sector each posted gains through the quarter. The removal of worst-case scenarios encourages more investors to enter the market, with positive mutual fund flows into US equities for the first time since 2005.
The news has been weakest from the beleaguered Eurozone, with Italian elections promising deadlock and tortured bailout negotiations in Cyprus dominating the conversation. Meanwhile, slowing GDP rates (although still quite positive) for the large emerging markets tempered market hopes for high growth, independent of global economic travails.
All index performance values (below) are for the 1st quarter of 2013.
- US Large Cap Growth - Russell 1000 Growth: 9.54 %
- US Large Cap Value - Russell 1000 Value: 12.31 %
- US Small Cap Growth - Russell 2000 Growth: 13.21 %
- US Small Cap Value - Russell 2000 Value: 11.63%
- Developed International Markets – MSCI EAFE: 5.13%
- Emerging Markets - MSCI EM: -1.62%
High Yield bonds, which tend to follow the equity markets and other risk assets, dominated the category. International bonds faced fundamental weakness and Euro vs. US Dollar pressure.
- Barclays Aggregate Bond: -0.12%
- Bank of America/Merrill Lynch High Yield: 2.85%
- Barclays Capital US Intermediate Credit: 0.47%
- Barclays Capital US Government: -0.16%
- Barclays Capital US Gov’t/Credit Long Duration: -1.98%
- Citi World Government Bond Index (non USD): -3.82%
Inflation hedging investments (real assets like commodities and explicit hedges like TIPS) struggled during the quarter as costs were largely contained. Commercial real estate – echoing the recovery in residential property – dominated for the quarter with investors attracted to higher yields (vs. bonds in this low rate environment), but with aggressive leveragers and high coupon/spread target seekers leading the rally.
- Real Estate - FTSE NAREIT All REIT: 9.11%
- Commodities - DJ UBS Commodities: -1.13%
- Inflation – Barclays US Treasury TIPS: -0.36%
- Hedge Funds – DJ Credit Suisse Hedge Fund: 2.31% (through 2/28)