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
