In The Markets:
Volatility returned this summer in both the global stock and bond markets, surprising many investors. Despite a very turbulent few weeks in June, US stock markets edged higher for the quarter, with the S&P 500 up 2.9%. International stocks struggled, led down by emerging markets. Measured by the MSCI Emerging Market index, these stocks are off -9.4% in 2013, while developed international stocks are down -0.7% (as measured by the MSCI EAFE index).
Perhaps the most surprising event for investors was a rapid rise in interest rates beginning in May. During the second quarter, the rate on the benchmark 10 Year Treasury bond rose from 1.67% to 2.52%, sending bond prices falling; returns for the 10 Year Treasury for the quarter were -4.57%. In mid June the market interpreted Federal Reserve Chairman Bernanke’s statements as an indication that the Fed’s bond-buying program would soon wind down, and investors fled bonds.
Of course this is no reason to panic. Pundits and professionals alike have been (prematurely) warning about rising interest rates for years, only to see yields fall farther. Investors taking the most risk with bond portfolios by buying longer-term bonds and high-yield bonds are finding themselves the most exposed.
In The Economy:
Economic activity continues to muddle along. Unemployment still slowly improves, now down to 7.6%.
Inflation remains at historically low levels, the last reading of 1.4% being well below the Federal Reserve Bank’s public target of 2.0%.
We should note that while economic growth has been slow, households and businesses alike have taken dramatic steps over the past several years to reduce debt, increase cash and generally repair balance sheets that were over-indebted during the real estate boom of the 2000’s.
Residential real estate leads the positive news, as the most recent annual growth in home prices through April was 12.1% nationally and 9.9% in the Denver metro area. Home buying activity has also increased 2% annually.
Out of Washington:
There was little news out of Congress and the White House this quarter, but the US Supreme Court handed down a couple of decisions that will have significant planning implications for couples in same-sex marriages. By ruling the Defense of Marriage Act was unconstitutional, the court provided to same-sex married couples the same rights and privileges held by heterosexual couples. These benefits include spousal retirement account transfers, unlimited spousal transfers exempted from the Federal estate tax, Social Security benefits, Veteran’s benefits and many others.
In other political news, significant pieces of the Affordable Care Act (aka Obamacare) will take effect in October of this year, including state run health exchanges, where individuals can compare and purchase private health insurance policies. By January 2014, every individual must have a qualifying health insurance policy (through their employer, the private market or Medicare) or face tax penalties that increase over the coming years. This October, health insurance exchanges will be open for individuals who need private insurance policies to shop for and compare coverage. New taxes will be levied on investment income for earners in the highest brackets beginning this year, making it especially important that investment portfolios do not unnecessarily generate taxable income.
UPDATE: The Treasury department announced last night (7/2/13) that the employer mandate (for companies with over 50 full-time-equivalent workers) will be delayed from 2014 to 2015.
As always, I encourage you to stay focused on a long term financial plan and the factors you can control and be less concerned with the day-to-day and month-to-month movements in the financial markets.
Bason Asset Management 