Key news stories
The 3rd quarter of 2013 saw another strong buildup due to improving economic fundamentals, with only the end the quarter culminating in a long slide primarily due to political dysfunction in Washington DC. Jobless claims declined to the lowest levels since 2007 and unemployment fell. Stable unemployment rates owe as much to cyclical job creation as long-term structural changes in employment demographics (i.e. –baby boomer retirees are leaving the job market and won’t be coming back).
US corporations are healthy and flush with cash; M&A and stock buyback activity is way up, with highlights including Dell buyback program and Verizon’s issue of the largest bond issue ever (to finance a joint business from Vodaphone). In international news, the re-election of Angela Merkel in Germany affirms Eurozone austerity policy. Short term jolts in Italian politics didn’t derail the slow stabilization of Eurozone economy. In terms of style, there was significant reversion to the mean for large caps; growth sectors caught up to their value counterparts, like financials, that led 2Q performance.
All index performance values are for the 3rd quarter of 2013.
- US Large Cap Growth - Russell 1000 Growth: 8.11%
- US Large Cap Value - Russell 1000 Value: 3.94%
- US Small Cap Growth - Russell 2000 Growth: 12.80%
- US Small Cap Value - Russell 2000 Value: 7.59%
- Developed International Markets – MSCI EAFE: 11.56%
- Emerging Markets - MSCI EM: 5.77%
Intra-quarter trades had treasuries lag behind Mortgage Backed Securities amid concerns that the Federal Reserve would trim QE purchases for US Treasuries first. As it turned out, Bernanke held the line and pushed the scheduled “taper” back another few months, partially owing to well-placed worries of a debt ceiling showdown and government shutdown. Credit risk driven bonds, which more closely tracks equity, dominated government debt. Continuing the trend, the most interest rate sensitive paper (i.e. high duration) was the clear loser.
Again, all index performance values are for the 3rd quarter of 2013.
- Barclays Aggregate Bond: 0.57%
- Bank of America/Merrill Lynch High Yield Master II: 2.29%
- Barclays Capital US Intermediate Credit: 1.01%
- Barclays Capital US Government: 0.12%
- Barclays Capital US Gov’t/Credit Long Duration: -0.83%
- Citi World Government Bond Index (non USD): 2.88%
After the second quarter stumble, real assets mostly stabilized at lower levels. Overall demand for key commodities, like gold, have fallen over a stronger dollar, but emerging markets investors piled in, looking for a safe haven after currency volatility in key Asian markets. Energy prices experienced a 2 year high due to high stakes negotiation over Syrian chemical weapons. REITs historically depend on short term borrowing, so the markets viewed the potential of rising rates poorly.
- Real Estate - FTSE NAREIT All REIT: -2.61%
- Commodities - DJ UBS Commodities: 2.13%
- Inflation – Barclays US Treasury TIPS: 0.70 %
- Hedge Funds – DJ Credit Suisse Hedge Fund: 0.33% (through 8/31)