Kevin Kroskey's Market Commentary

2013 Third Quarter Market Review

Daunting Headlines, Remarkable Returns

The threat of a government shutdown virtually guaranteed that the investment markets would close out the third quarter with a whimper rather than a bang. The S&P 500 index lost 1.1% of its value in the final week of the quarter as the U.S. Congress seemed to be lurching toward a political standstill that would shut down the U.S. government. All the uncertainty has tended to obscure the fact that most U.S. stock market investors have experienced significant gains so far this year. Despite the rocky final week, the Russell 3000 index gained 6.35% in the most recent three months, posting a 21.30% gain as we head into the final stretch of 2013.

Other U.S. market sectors experienced comparable gains.

· Large cap stocks, represented by the Russell 1000 large-cap index returned 6.02% for the quarter, up 20.76% for the year while the widely-quoted S&P 500 index of large company stocks gained 5.32% for the quarter and is up 18.62% since January 1.

· The Russell midcap index was up 7.70% for the third quarter, and now stands at a 24.34% gain so far this year.

· Small company stocks, as measured by the Russell 2000 small-cap index, are up 10.21% in the second three months of the year, posting a 27.69% gain in the year's first nine months.

In the first half of the year, any diversification into international stocks was dragging down returns. No longer.

· The broad-based EAFE index of larger foreign companies in developed economies rose 10.94% in dollar terms during the third quarter of the year, and is up 13.36% so far this year.

· The biggest surprise is Europe: a basket of European stocks rose 13.16% over the past three months, which accounts for virtually all of their returns this year; the index is now up 13.17% for the year.

· Emerging markets stocks are climbing out of a deep hole that they fell into earlier in the year, returning 5.01% in the past three months, even though the EAFE Emerging Markets index is still down 6.42% for the year.

Other investment categories are not faring so well.

· Real estate, as measured by the Wilshire REIT index, fell 1.98% for the quarter, though it is still standing at a 3.84% gain for the year.

· Commodities, as measured by the S&P GSCI index, reversed their recent slide and rose 5.44% this past quarter, taking them nearly even, just down 0.27% so far in 2013.

· Gold prices perked up on the uncertainty over the government shutdown, gaining 9.26% in the recent quarter, though gold investors have lost 20.48% on their holdings so far this year.

Bonds have continued to provide disappointing returns both in terms of yield and total return.

· The Barclay's Global Aggregate bond index is down 2.24% so far this year.

· The U.S. Aggregate index has lost 1.87% of its value in the same time period.

In the Treasury markets, the year has seen a bifurcated market; declining yields in bonds with 12 month or lower maturities, while longer-term bonds have experienced rising yields and a corresponding decline in the value of the bonds held by investors. In the past year, the yield on 10-year Treasuries have risen almost a percentage point, to 2.65%, and 30-year bonds are now yielding 3.73%, up 86 basis points over the past 12 months.

Municipal bonds have seen comparable rate rises; a basket of state and local bonds with 30-year maturities are now yielding 4.32% a year; 10-year munis are returning an average of 2.56% a year. The rises, of course, have caused losses in muni portfolios.

Going forward, this much we can predict: the recent uncertainties--the paralysis in Congress, worries about the direction of interest rates and whether the Fed is going to stop intervening in the markets--will give way to new worries, new uncertainties, which will make all of us feel in our guts like the world is going to hell in a hand basket. Meanwhile, disciplined investors can expect to reap the reward over time of accepting market risk and fund their retirement plans and other life goals. They too will focus on things that they can control and ignore the rest—recent uncertainties included.

To Your Prosperity,

Kevin Kroskey, CFP®, MBA

This article adapted with permission from Bob Veres.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Aggregate corporate bond rates: http://finance.yahoo.com/bonds/composite_bond_rates

Government shutdown impact: http://www.latimes.com/business/la-fi-shutdown-economy-20131001,0,155302.story

Budget surpluses: http://www.cnbc.com/id/100880536

http://www.cnbc.com/id/101030631

August Monthly Market Commentary

THE MONTH IN BRIEF
August threw all kinds of challenges at stocks, and stocks retreated from them. Lackluster economic indicators, resignation that the Federal Reserve might soon taper its stimulus, rising yields on the 10-year note, a bit of cooling in the red-hot housing market, and the threat of U.S. military involvement in Syria all combined to keep the S&P 500 in check. The index slipped 3.13% during the poorest month for U.S. equities since May 2012; gold, silver, oil and the dollar fared much better.¹

DOMESTIC ECONOMIC HEALTH
Most of August’s best economic indicators arrived in the first half of the month. The unemployment rate fell to 7.4% in July, with hiring at a decent pace (payrolls expanding by 162,000 new jobs). The Institute for Supply Management’s July manufacturing PMI showed a reading of 55.4, its service sector PMI a reading of 56.0. Retail sales were up 0.2% in July, with core retail sales (minus volatile car, gas and home improvement purchases) up 0.5%. Toward the end of the month, the Commerce Department revised Q2 GDP up to 2.5% from the initial estimate of 1.7%, a big change from 1.1% growth in Q1 and 0.1% growth in Q4 2012.^2,3,4,5

Consumer spending, however, had nudged up just 0.1% in July – economists polled by Reuters had expected a 0.3% rise. Consumer sentiment fell to 82.1 in the final August University of Michigan survey (though the August Conference Board poll showed a 1.4% gain to 81.5). Hard goods orders plunged 7.3% in July after a 3.9% setback in June.^1,6

Inflation pressure moderated, however – the overall Consumer Price Index rose 0.2% for July, and so did the core CPI. Year-over-year, the headline CPI advance was 2.0%. The Producer Price Index went flat for July with the core PPI up 0.1%; annualized wholesale inflation was running at 2.1%.^7,8

President Obama called for the phase-out of Fannie Mae and Freddie Mac in August, proposing their replacement in the coming years with a new system reliant on private sector purchases of mortgages from lenders, with private capital bearing the bulk of any losses. According to White House officials, new federal government guarantees would help to preserve the fixed-rate 30-year home loan under these circumstances. The Obama administration’s idea of giving private capital a greater role in mortgage lending has bipartisan support – legislation sponsored by Sen. Bob Corker (R-TN) and Sen. Mark Warner (D-VA) is already making its way through Congress – but no real timeline for change has emerged.⁹

The NASDAQ exchange suffered a “flash freeze” in late August, with a software malfunction interrupting all trades for three hours. NASDAQ took full blame for the snafu, which revived an old debate about the risks of computer-driven trading.¹⁰

GLOBAL ECONOMIC HEALTH
On August 26, Secretary of State John Kerry stated that Syria’s government had used chemical weapons against its own people. On August 27, the U.S. and other nations were publicly considering a military response and global markets were beset by volatility – on that day, NYMEX crude topped $109 a barrel, the Dow fell 170 points, the CBOE VIX rose 12%, gold went back into a bull market and emerging market stocks hit a 7-week low. Fears of $150 oil emerged. President Obama requested a vote in Congress authorizing an attack on Syria; House and Senate leaders intend to vote on the matter in the week of September 9-13.^11,12

August also saw the slide of India’s benchmark currency, the rupee. It had its worst month in 21 years, dropping 8.1% versus the dollar as a $2.2 billion exodus occurred from India’s stock and bond markets over fears of an economic slowdown. Worries about Syria and the related jump in oil prices simply made things worse. How much worse? The rupee’s August decline widened the Indian government’s account deficit so badly (to nearly $90 billion) that the Reserve Bank of India said it would supply dollars directly to local oil importers. Reuters reported that the RBI was seriously considering directing commercial banks to buy gold from private citizens. In better news from the Asia-Pacific region, the official China factory PMI rose to 51.0 in August, a 16-month peak.^13,14,15

WORLD MARKETS
There were a few notable August advances – TSX Composite, +1.34%; Shanghai Composite, +5.25%; Bovespa, +3.68%. Retreats were more numerous – Hang Seng, -0.70%; Nikkei 225, -2.04%; IPC All-Share, -3.29%; Sensex, -3.75%; DAX, -2.09%; CAC 40, -1.48%; FTSE 100, -3.14%. Multi-country indices also pulled back: the Global Dow lost 2.33% for August, the Asia Dow 1.87%, the MSCI World Index 2.33% and the MSCI Emerging Markets Index 1.90%.^16,17

COMMODITIES MARKETS

Investors certainly renewed their appetites for precious metals in August. When it was all said and done, the month saw major gains for silver (19.02%), platinum (6.85%) and gold (4.54%), with gold settling August 30 at $1,396.10 an ounce. Copper, too, gained 4.20% on the month. NYMEX crude finished August at $107.65 per barrel, a 2.32% monthly gain. Natural gas futures advanced 5.80%. In contrast, unleaded gasoline prices managed to fall 0.61%. Soybeans rose 3.97% in August, and cocoa 4.44%; their fortunes were not mirrored by corn (-1.95%), cotton (-2.37%) or wheat (-3.42%). The 7.12% single-month jump in the U.S. Dollar Index was hardly surprising; it finished August at 82.03.^18,19

REAL ESTATE
Home buying statistics seemed to show the influence of rising mortgage rates. The National Association of Realtors said existing home sales went +6.5% in July with the sales rate stronger than at any time since March 2007 – but the Census Bureau had new home sales down 13.4% in that month. New home buyers faced higher mortgage rates as they assumed loans for housing yet to be completed. For the record, NAR also noted a 1.3% drop in pending home sales in July.^6,20

June’s overall S&P/Case-Shiller Home Price Index had home values rising 12.1% in 12 months, as opposed to 12.2% in the May edition. The Census Bureau said both building permits (+2.7%) and housing starts (+5.9%) increased for July.^6,21

Where were mortgage rates at as August ended? Well, between August 1 and August 29, the average interest rate on the 30-year FRM went from 4.39% to 4.51%. As for other loan types across that interval, average rates on 15-year FRMs rose to 3.54% from 3.43%; 5/1-year ARMs saw average rates move from 3.18% to 3.24%. Average rates on the 1-year ARM were at 2.64% in both surveys.²²

LOOKING BACK…LOOKING FORWARD
The Dow also had its worst month since May 2012, ending August at 14,810.31. The NASDAQ concluded the month at 3,589.87, the S&P 500 at 1,632.97, and the Russell 2000 at 1,010.90 (going -3.29% in August). The CBOE VIX rose 26.10% to 16.96.¹

The Syria crisis has brought the potential for severe volatility back to Wall Street. Will its impact on stocks be brief and less significant than assumed? Will it prompt a short-term pause in the bull market? Or could things escalate, and rattle investor confidence to the point where YTD gains are severely threatened? This could be the biggest test of the year for equities, and yet stateside there is still a prevalent optimism that the economy is on the way back and that the recovery can continue with less help from the Fed. The current bull market has held up through four years of challenges; let’s hope that it can weather this one and celebrate a fifth anniversary next March.

UPCOMING ECONOMIC RELEASES: September’s roster of key economic announcements looks like this: the August ISM manufacturing index (9/3), a new Federal Reserve Beige Book (9/4), the August ISM non-manufacturing index, the August Challenger job-cut and ADP employment reports and July factory orders (9/5), the Labor Department’s August jobs report (9/6), July wholesale inventories (9/11), the University of Michigan’s initial September consumer sentiment index, August retail sales, July business inventories and the August PPI (9/13), August industrial output (9/16), the August CPI and the September NAHB housing market index (9/17), the September Fed policy announcement and August housing starts and building permits (9/18), August existing home sales and the Conference Board’s August index of leading indicators (9/19), July’s Case-Shiller home price index, the Conference Board’s September consumer confidence survey and the August FHFA housing price index (9/24), August new home sales and durable goods orders (9/25), August pending home sales and the federal government’s final take on Q2 GDP (9/26), and then the Commerce Department’s report on August consumer spending and the final September University of Michigan consumer sentiment index (9/27).

Best Regards,

Kevin Kroskey

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - tinyurl.com/p4put9e [8/30/13]
2 - ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [8/2/13]
3 - ism.ws/ISMReport/NonMfgROB.cfm [8/5/13]
4 - marketwatch.com/story/us-second-quarter-growth-boosted-to-25-2013-08-29 [8/29/13]
5 - nytimes.com/2013/08/14/business/economy/july-retail-sales-rose-0-2-despite-a-drop-in-auto-sales.html [8/14/13]
6 - marketwatch.com/Economy-Politics/Calendars/Economic [9/1/13]
7 - marketwatch.com/story/us-consumer-price-index-rises-02-in-july-2013-08-15-8913010 [8/15/13]
8 - nasdaq.com/article/us-ppi-flat-in-july-core-ppi-up-01-cm267531 [8/14/13]
9 - dailyfinance.com/2013/08/06/obama-shuttdown-freddie-mac-fannie-mae-mortgages/ [8/6/13]
10 - investorplace.com/2013/08/nasdaq-accepts-blame-for-flash-freeze/ [8/30/13]
11 - marketwatch.com/story/syria-intervention-fears-hit-global-markets-2013-08-27 [8/27/13]
12 - tinyurl.com/lexe8vw [9/1/13]
13 - bloomberg.com/news/2013-08-30/india-s-rupee-set-for-worst-month-since-1992-on-slowdown-concern.html [8/30/13]
14 - reuters.com/article/2013/08/29/us-india-economy-gold-idUSBRE97S0IW20130829 [9/1/13]
15 - reuters.com/article/2013/09/01/us-china-economy-pmi-idUSBRE98000H20130901 [9/1/13]
16 - online.wsj.com/mdc/public/page/2_3024-m_globalstockindexes.html [9/1/13]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [8/30/13]
18 - money.cnn.com/data/commodities/ [9/1/13]
19 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [9/1/13]
20 - blog.comerica.com/2013/08/23/july-new-and-existing-home-sales/ [8/23/13]
21 - census.gov/construction/nrc/pdf/newresconst.pdf [8/16/13]
22 - freddiemac.com/pmms [9/1/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F30%2F12&x=0&y=0 [8/30/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F30%2F12&x=0&y=0 [8/30/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F30%2F12&x=0&y=0 [8/30/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=8%2F29%2F03&x=0&y=0 [8/30/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=8%2F29%2F03&x=0&y=0 [8/30/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=8%2F29%2F03&x=0&y=0 [8/30/13]
24 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2013 [9/1/13]

July Monthly Market Commentary

VARIOUS INDEX PERFORMANCE
July was a positive month across all equity asset classes with International Developed, denoted by the MSCI EAFE Index, slightly outpacing the S&P 500 at 5.28% versus a 5.09% return. Emerging Markets came in at 1.09% with bonds at 0.14%, denoted by the Barclays US Aggregate Bond Index.

Year-to-date returns for the indices are listed below. Note that even though the S&P 500 is up 19.62% on the year, a diversified 60/40 stock/bond index -- Morningstar Moderate Growth -- is up a more modest 7.95%. The MSCI All Country World Index, which is the most typical institutional benchmark for a globally diversified equity portfolio, is up 11.13%.

The disciplined investor will recall the benefits of diversification and the amount of risk they are willing to accept in their investment portfolio rather than looking at the S&P 500 100% equity returns in hindsight and saying, "I want that." Recall the 'Lost Decade', which was really only 'lost' for the S&P 500 Index-centric investor who lost -29.48% (-3.43% average annualized return over ten years) of their money from 03/1999 through 02/2009 over the ten-year period. Conversely the Dimensional Fund Advisor Balanced Strategy Index -- a 60/40 stock/bond index -- would have cumulatively returned +44.41% (+3.74% annualized) over the same period.

Index Performance		Total
01/01/2013 - 07/31/2013		Return

S&P 500		19.62
MSCI EAFE (net div.)		9.60
MSCI Emerging Markets (net div.)		-8.62
Barclays US Aggregate Bond		-2.31
MSCI All Country World (net div.)		11.13

Morningstar Moderate Growth 60/40		7.95

DOMESTIC ECONOMIC HEALTH
July offered both encouraging and discouraging economic statistics. The Institute for Supply Management’s July PMIs seemed to show an economy gaining traction. ISM’s manufacturing PMI leapt to 55.4 compared to 50.9 in June, and its service sector PMI jumped to 56.0 from the previous 52.2. The Commerce Department said that consumer spending was up 0.5% in June, corresponding to the projections of economists surveyed by Reuters; consumer incomes rose another 0.3 on the heels of a 0.4% improvement in May. Unemployment declined to 7.4% in July, but the pace of hiring also declined. Non-farm payrolls expanded by 162,000 jobs (compared to 188,000 in June), with retail, bar and restaurant positions representing much of the additions. Durable goods orders had increased 4.2% in June, but they were flat with the volatile transportation category removed. As the quarter ended, the federal government issued its first estimate of Q2 GDP: 1.7%, indicative of the economy’s slow comeback.^2,3,4,5,6

July also offered a mixed picture of consumer confidence. The Conference Board’s July poll came in at 80.3, 1.8 points lower than June’s reading and below the expectations of analysts surveyed by MarketWatch. The reading on the University of Michigan’s final July consumer sentiment index was better – 85.1, up a full point from June to its highest level since July 2007.^6,7

Prices increased in June, but it seemed more an anomaly than a trend. The Consumer Price Index rose 0.5%, but a 6.3% leap in gas prices was a major factor; the core CPI was up just 0.2%, and annualized core inflation had increased just 1.6%, the smallest amount in two years. Wholesale prices jumped 0.8% in June, though the core Producer Price Index only advanced 0.2%. Retail sales were up 0.4% in June; there was a 1.8% gain in auto purchases and a 2.4% improvement in furniture sales.^8,9,10

In early July, the Obama administration decided to postpone the Affordable Care Act’s employer health insurance mandate for a year. Businesses with 50 or more full-time employees won’t have to provide health insurance to workers until 2015; retail franchises and restaurant owners welcomed that decision. The move raised big-picture questions about whether all aspects of the ACA (such as the coming online health insurance exchanges) could be implemented on schedule. In mid-July, Federal Reserve chairman Ben Bernanke cited the need for a “highly accommodative monetary policy for the foreseeable future,” buoying financial markets. The central bank’s July 31 policy statement offered no hint as to when it would start to reduce its asset purchases, and it termed the current economic expansion “modest”, which seemed slightly less enthusiastic than its “moderate” assessment from June.^11,12,13

GLOBAL ECONOMIC HEALTH
Two closely-watched China manufacturing PMIs offered different estimates of the performance of the world’s biggest economic engine. The HSBC PMI came in at just 47.7 for July. The “official” PMI from China’s National Bureau of Statistics (which, incidentally, surveys a greater percentage of state-owned enterprises) rose 0.2 for July, showing a bit of expansion at 50.3. Still, this was nothing special. Neither was India’s July Markit manufacturing PMI reading of 50.1; Markit manufacturing PMIs for South Korea, Vietnam, Australia and Taiwan were all under 50 last month, with Australia’s dropping 7.6 points. HSBC and Markit service sector PMIs tracking Asian economies also moved lower in July; India’s showed contraction for the first time in 21 months at 47.9, and those for Japan (50.6) and China (51.3) showed slower growth.^14,15

As mounting evidence of a slowdown came from Asia, another question emerged in Europe. Was the Eurozone recession coming to a close? The EU manufacturing sector grew in July for the first time since 2010 – the Markit PMI hit 50.5, up from 48.7 in June. Germany’s manufacturing PMI reached a 5-month peak of 52.1, France’s hit a 17-month high of 49.1, and Italy’s reached a 26-month high of 49.7. July also saw the fewest eurozone job losses in 16 months, and the German economy saw a net job gain.^14,15,16

WORLD MARKETS
Big gains were the order of the month, especially in Europe. The FTSE 100 climbed 6.53%, the DAX 3.98%, the CAC 40 6.79%, the RTSI 2.97% and the STOXX 600 5.11%. In the Asia Pacific region, some losses crept in among the gains: the Sensex slipped 0.26% and the Nikkei 225 0.07%, but that was overshadowed by advances for the KOSPI (2.72%), the KSE 100 (10.98%), the Hang Seng (5.19), the Shanghai Composite (0.74%) and the Asia Dow (1.17%). On our side of the pond, the TSX Composite rose 2.95%, the MERVAL 12.82% and the Bovespa 1.64%.The Global Dow advanced 5.87% in July, the MSCI World Index 5.19% and the MSCI Emerging Markets Index 0.77%.^1,17

COMMODITIES MARKETS
The price of NYMEX crude soared 9.15% in July. That put oil at $105.03 a barrel at the end of the month. Natural gas prices, on the other hand, descended 3.25%. Gold settled at $1,313.00 at month’s end, the culmination of a 7.46% monthly ascent. Silver went +1.45%, platinum +6.77% and copper +2.40%. As for crops, coffee lost 1.37%, but cocoa rose 4.74%, wheat 2.71% and sugar 2.48%. The U.S. Dollar Index lost 1.76% for the month.^18,19

REAL ESTATE
On August 1, Freddie Mac’s Primary Mortgage Market Survey had the average rate on a 30-year fixed home loan at 4.39%, up from 4.29% on July 3 and 3.81% on May 30.²⁰

Existing home sales fell 1.2% in June, with tightening inventory being a factor; still, the National Association of Realtors reported a 13.5% yearly improvement in the median sale price. The May S&P/Case-Shiller Home Price Index recorded a 12.2% overall yearly rise in home prices across 20 cities. New home sales were up 8.3% in June, with a 38.1% year-over-year increase in the sales pace (the best on record since 1992).^6,21

Not all the news was so impressive. Pending home sales dipped 0.4% for June, partly reflecting the shrinking inventory of existing properties on the market. As for building permits and housing starts, they both fell in June: building permits sagged 7.5% from May but were up 16.1% annually, while starts dipped 9.9% but were still up 10.4% in 12 months.^6,22

The 0.58% rise in conventional mortgage rates across two months was mirrored by other types of home loans. Average rates for 15-year FRMs went from 2.98% to 3.43%; average rates for 5/1-year ARMs and 1-year ARMs were but 2.66% and 2.54% on May 30, yet respectively 3.18% and 2.64% by August 1.²⁰

UPCOMING ECONOMIC RELEASES: For the rest of August, here is how the schedule of news items plays out: June wholesale inventories (8/10), July retail sales and June business inventories (8/13), July’s PPI (8/14), July’s CPI, July industrial output and the August NAHB housing market index (8/15), July’s housing starts and building permits plus the University of Michigan’s initial August consumer sentiment index (8/16), July existing home sales and the July 31 Fed policy meeting minutes (8/21), the Conference Board’s July index of leading indicators and the June FHFA housing price index (8/22), July new home sales (8/23), July hard goods orders (8/26), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence survey (8/27), July pending home sales (8/28), the second estimate of Q2 GDP (8/29), and the final August University of Michigan consumer sentiment index and the July consumer spending report (8/30). The Labor Department issues the July jobs report on September 6.

Best Regards,

Kevin Kroskey

This article adapted with permission from MarketingLibrary.net.

Citations.

1 - online.wsj.com/mdc/public/page/2_3024-m_globalstockindexes.html [7/31/13]
2 - ism.ws/ISMReport/NonMfgROB.cfm [8/5/13]
3 - tinyurl.com/lh438e5 [8/2/13]
4 - chron.com/news/us/article/US-employers-add-162K-jobs-rate-falls-to-7-4-pct-4702834.php [8/2/13]
5 - briefing.com/investor/calendars/economic/2013/07/22-26 [7/26/13]
6 - marketwatch.com/Economy-Politics/Calendars/Economic [8/1/13]
7 - tinyurl.com/ke8ykkl [7/26/13]
8 - forbes.com/sites/afontevecchia/2013/07/16/spiking-gasoline-prices-push-cpi-inflation-higher-but-weak-core-fuels-taper-uncertainty/ [7/16/13]
9 - briefing.com/investor/calendars/economic/2013/07/08-12 [7/12/13]
10 - usatoday.com/story/money/business/2013/07/15/retail-sales-rise-in-june-on-autos/2517443/ [7/15/13]
11 - kansascity.com/2013/07/03/4328512/qa-on-impact-of-health-law-delay.html [7/3/13]
12 - tinyurl.com/msb38q6 [7/10/13]
13 - nasdaq.com/article/closing-update-us-stocks-end-mixed-after-fomc-meeting-minutes-cm263222 [7/31/13]
14 - tinyurl.com/knwt8rt [8/1/13]
15 - telegraph.co.uk/finance/economics/10223494/Eurozone-recession-will-end-this-quarter-as-businesses-return-to-growth.html [8/5/13]
16 - tinyurl.com/mwakh4v [8/5/13]
17 - mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [7/31/13]
18 - money.cnn.com/data/commodities/ [7/31/13]
19 - online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [8/5/13]
20 - freddiemac.com/pmms/ [8/5/13]
21 - bloomberg.com/news/2013-07-24/new-home-sales-in-u-s-rise-more-than-forecast-to-five-year-high.html [7/24/13]
22 - census.gov/construction/nrc/pdf/newresconst.pdf [7/17/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F12&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
23 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=7%2F31%2F03&x=0&y=0 [7/31/13]
24 - treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [8/5/13]

First-Half Report Card: Net Gains and Diversification Blues

The recent turmoil in the investment markets might cause one to think that people have lost money this year in U.S. stocks. But in fact, most of the U.S. indices are sitting on double-digit gains, and the second quarter actually added to those gains. However, for the prudent, diversified investor actual portfolio results may at first seem puzzling when looking at your statements and reconciling against the nightly news.

Despite a rocky last month, the Wilshire 5000--the broadest measure of U.S. stocks and bonds--rose 2.77% for the second quarter--and now stands at a 13.97% gain for the first half of the year. The comparable Russell 3000 index gained 2.69% in the second three months of the year, posting a 14.06% gain in the first half of 2013.

The other U.S. market sectors experienced comparable gains. Large cap stocks, represented by the Wilshire U.S. Large Cap index, gained 2.74% in the second quarter, and is now up 13.68% so far for the year. The Russell 1000 large-cap index returned 2.65% for the quarter, up 13.91% for the year, while the widely-quoted S&P 500 index of large company stocks gained 2.36% for the quarter and is up 12.63% since January 1.

The Wilshire U.S. Mid-Cap index index rose 1.97% in the second three months of the year, and is up 15.75% at the year's midway point. The Russell midcap index was up 2.21% for the quarter, and now stands at a 15.45% gain so far this year.

Small company stocks, as measured by the Wilshire U.S. Small-Cap, gained 2.80% in the second quarter; with the first quarter gains, the index is up 16.28% so far this year. The comparable Russell 2000 small-cap index was up 3.08% in the second three months of the year, posting a 15.86% gain in the year's first half. The technology-heavy Nasdaq Composite Index was up 4.15% for the quarter, and has gained 12.71% for its investors so far this year.

The rest of the world is not doing as well. The broad-based EAFE index of larger foreign companies in developed economies fell 2.11% in dollar terms during the second quarter of the year, and is up just 2.18% so far this year. The stocks across the Eurozone economies fell 0.20%, and are now down 1.48% for the first half of the year.

The news was much worse for emerging markets stocks, which have been touted as the world's engine of growth. The EAFE Emerging Markets index of lesser-developed economies plunged 9.14% for the quarter, and are now down 10.89% for the year.

Looking over the other investment categories, real estate investments, as measured by the Wilshire REIT index, fell 1.39% for the quarter, though it is still standing at a 5.94% gain for the year. Commodities, as measured by the S&P GSCI index, fell 5.93% this past quarter, taking them down 5.41% for the year. Gold recently hit its lowest settlement price since August of 2010.

Bonds experienced a very difficult first half of the year, with much of the damage coming in the past 30 days. The Barclay's Global Aggregate bond index is down 4.83% so far this year, and the U.S. Aggregate index has lost 2.44% of its value in the same time period.

Many investors have lost money in seemingly-safe Treasury bonds in the past month, but the damage was limited to bonds with longer maturities. 30-year Treasuries have seen their yields rise .75% in the past 12 months, to 2.875%, and 10-year Treasuries have actually gained more yield, 0.84%, including .37% in the past month alone, to stand at 1.75%.

Higher yields, of course, means a decline in value for those holding the bonds; in aggregate, government bonds with maturities of 10 years or longer lost an average of 10.8% of their value since the beginning of May. This was a shock for investors who saw Treasury market gains of 32.9% in 2011 and 11.7% in 2010. The decline in bond values has caused investors to sell a record $76.5 billion worth of bond funds during the month of June.

Meanwhile, 3-month Treasuries have held their value, and have actually seen their yield go down, resting at 0.03%. But rates are still remarkably low. Lending the government a hundred dollars for a year (buying 12-month Treasuries) will now yield you a princely sum of 14 cents in returns.

Muni bonds are sporting aggregate yields of 0.19% (1-year), 0.50% (2-year), 1.40% (5-year) and 1.68% (10-year).

The economic news has been mixed; Europe, particularly Southern Europe, is still mired in recession, and there has been turmoil in China as the country's leaders try to rein in the so-called "shadow banking system"--meaning lenders who are not officially sanctioned banks. In the U.S., home prices experienced the largest price rise in the history of the S&P/Case-Shiller price index in April, and over the past year, the index tells us that home prices have risen 12.1%.

This is the kind of market environment that many professional advisors least enjoy--for a variety of reasons. First, the turmoil over the past month makes it clear that investors are making investment decisions--and moving market prices--based on emotions rather than logic. The initial panic following Fed Chairman Ben Bernanke's comments about ending its QE3 stimulus program seems to have subsided. But when market values drop precipitously based on a single speech about a hypothetical Fed action that would only be taken due to improved fundamentals, you know that investors are not thinking rationally.

The other reason professional advisors dislike the current state of the markets is the way diversification looks right now. Whenever U.S. stocks are delivering positive returns while everything else--international stocks, bonds, real estate, commodities and all the other pieces of a prudently constructed portfolio--are going in the tank, investors will ask questions like: "The S&P 500 is up 14% so far this year, but my portfolio is only up 6%. What are you doing wrong?"

The truth is, no professional can pick the one winning asset out of the myriad of options every year (or half year), and no prudent professional would ever try. There will always be one asset that returns more than the others, and that winning asset will always be different. Yet American investors hear about the S&P 500 (and the Dow, and other U.S. large stock indices) on the nightly news, so they are most likely to question the competence (or sanity) of their advisor when the U.S. stock markets are booming and everything else is lagging--exactly the situation we have today.

Eventually, some other investment will take the lead, diversified portfolios will look better relative to the U.S. stock indices, and professional advisors will look like geniuses. That, too, will be a naive view of the situation, but it will be a more pleasant one for those of us who believe in the long-term value of diversification.

To Your Prosperity,

Kevin Kroskey

Adapted with permission from Bob Veres’ Inside Information.

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