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