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.
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://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg--usd----sp------
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
Bond rate data: http://www.nytimes.com/2013/06/29/your-money/before-dumping-bonds-consider-why-you-have-them.html?pagewanted=all&_r=0
http://www.marketwatch.com/story/treasurys-hold-losses-after-mixed-data-2013-06-28
http://www.miamiherald.com/2013/06/27/3473722/mid-year-mutual-fund-review-bond.html#storylink=cpy
