First Quarter 2013: Strong Markets in a Mixed Economy

Markets:

Continuing a pattern for the last few years, the US stock market had another spectacular quarter to start the year, with the S&P 500 gaining 10.6% through March 31^st. This puts the benchmark at a 153% gain from the market bottom in March 2009 in just four years when dividends are accounted for.

International markets were mixed with the MSCI EAFE benchmark gaining 5.3% but emerging markets falling -1.8%. The much-anticipated rise in interest rates began slowly in the first quarter, with the 10-year Treasury yield rising to 1.85%, up from 1.76% at the end of 2012. This translated into a slight decline in the Barclay’s Aggregate Bond index return of -0.12% for the quarter.

Economy:

The most recent revision of Gross Domestic Product in the United States showed a very modest gain of 0.4% for the fourth quarter of 2012. This unusually small figure can largely be attributed to a decline in government spending departments of the Federal government braced for the impending sequester.

New home construction, while still below average, continues to tick upwards, as do home prices, while residential inventories (homes available for sale) have plunged since the recession.

While the national debt still looms large, the trend of the US government deficit has improved of late, with growing revenues and falling spending as a percentage of GDP in the last few quarters.

Washington:

In January of 2013, politicians in DC reached an agreement on income tax rates to avoid what could have been a very significant increase (and resulted in a more modest increase in payroll and income taxes). However, they did not address the across-the-board spending cuts known as the sequester. These cuts totaled $85 billion and were designed to be a painful deterrent in hopes that Congress would find more palatable ways to reduce the budget deficit. Instead, the cuts took place March 1^st and Democrats and Republicans in D.C. have yet to come to an agreement on a long-term solution to the deficit.

As always, we encourage investors to maintain a long-term perspective and recognize that time is our ally as investors.  Panic, euphoria, high fees and taxes are our enemies.