Spring 2013 Market Commentary

For the quarter, which ended March 31, 2013, the S&P 500 rose 10.6%.  International stocks also advanced with the MSCI EAFE increasing 5.2%. Bond returns were negative for the quarter with the Barclay’s Aggregate Bond Index falling –0.1%.

The U.S. equity markets began the year with a bang, with the S&P 500 providing double-digit first quarter returns for the second consecutive year.  Historically, this bodes well for equity markets as sizable first quarter returns have been a harbinger of further gains.  Since 1990, the S&P 500 has risen by over eight percent in the first quarter of any given year only four times—the average calendar year gain that followed was 28.2%.  Although history is no guarantee for future results, we are encouraged by the market performance thus far in 2013.

Returns in the bond market were not as good, with the Barclay’s Aggregate Bond Index losing ground for the quarter.  This was the first quarterly loss for the bond index in over two years and caps off a six month span in which the bond index returned a mere 0.1%.

Risky assets performed well in the first quarter despite numerous concerns.  The most obvious worry was the ongoing squabble between our leaders in Washington regarding taxes and spending.  Recall the yearend furor over the “Fiscal Cliff” which threatened to suddenly raise taxes and cut spending.  Crisis was averted with a last-minute tax deal that raised taxes, but delayed spending cuts.  Then, at the end of February, our leaders failed to reach a compromise on the mandatory spending cuts, better known as the “Sequester.” With the tax hikes and sequester cuts in place, we did in fact sail over the “Fiscal Cliff.”  The difference being that it happened over the course of two months rather than all at once.  The stock market largely ignored these concerns and responded by closing out the quarter with a 3.8% rise in March.

However, it is far too early to dismiss the potential negative economic impacts of these fiscal changes.  The first quarter saw slower growth in consumer spending, which is thought to be a consequence of the payroll tax increase.  More recently, a weaker than expected rise in employment in March is blamed by many on the “Sequester” cuts.  Government finances aside, the momentum of the U.S. economy remains positive with housing and manufacturing registering notable gains.

Despite lingering concerns, we remain fairly optimistic for the year ahead, and more importantly, the longer term.  Sir John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.” Investors were extremely pessimistic when stocks bottomed four years ago and have remained skeptical at best ever since.  Although the S&P 500 has gained nearly 150% since bottoming in ‘09, investors are far from optimistic, much less euphoric, which suggests this current bull market may still have room to continue.

Thank you very much for your continued confidence in our service and advice.  If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.

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