Third Quarter in Review

Markets

Despite volatility in late September, the US stock market had another solid quarter, with the S&P 500 gaining 5.24%, leaving the benchmark up 19.79% for the year. Small cap US stocks continued to shine, with the Russell 200 up 10.21% on the quarter and 27.69% on the year. International stocks were even better, with the MSCI EAFE posting a gain of 11.56% in the quarter and 16.14% year-to-date.  Much-maligned emerging markets stocks turned around this quarter and posted gains of 5.01%, although still down -6.42% this year.

The bond market was nearly flat, with 10-year Treasury yields rising from 2.55% to 2.61%. The Barclays Aggregate Bond index was up slightly, 0.57% for the quarter, but is down -1.89% for the year through 9/30/13.

Economy

Broad economic data continued to slowly improve during the third quarter. Revisions to second quarter Real GDP showed growth of 2.5%, a healthy but not overly exciting figure.

Initial jobless claims continue to fall, with the most recent four-week average falling to 308,000, the lowest level since June 2007. Unemployment currently sits at 7.3%, down slightly for the quarter.

Home prices continue to show tremendous year-over-year growth, with the Case-Shiller 20-City index growing 12.4% from July 2013 to July 2013, growth that still leaves national prices far below the previous peak.

However, the rate of increase in monthly prices appears to be slowing, a sign that the rampant increases in home values may begin to normalize. Long-term interest rates including mortgage rates have risen over 1% from earlier this year, possibly contributing to a calmer housing market.

Inflation continues to be very quiet as the annual rate through July was just 1.5%.  Gasoline prices have fallen, keeping broad consumer prices in check.

Globally, the Eurozone has finally emerged from recession, posting the first quarter of positive economic growth in 18 months. Spain and Italy have virtually eliminated trade deficits, and employment in Spain and the UK is showing signs of improvement. Borrowing costs in the EU have fallen considerably, a sign that markets are less concerned about possible defaults.

Washington

Once again we are currently watching the political brinkmanship of the debt ceiling and federal budget. At 12:00AM on October 1st, the Federal government shut down due to a lack of budget (continuing resolution). The House, Senate and the President must come to an agreement to fund the government in order for offices to reopen and public services to be restored. As of this writing on October 4th, we were no closer to ending the shutdown.

In addition to the pending shutdown, the most recent announcement from the Treasury department was the the United States would be unable to pay its bills as of October 17th unless congress passes legislation to raise the debt ceiling. Congress must act to raise the debt ceiling (essentially agreeing that the federal government will continue to pay its bills) or risk a public default.

While we may find these political squabbles entertaining, irritating, frustrating or all of the above, it is important to remember that we cannot gamble our investment portfolios on potential outcomes. Solutions will be worked out in the end, and those who try to outstmart the markets in the short-run will pay the price in the long run. The Federal government has shut down before, with little to no consequences on investment markets.

On October 1st, health insurance exchanges across the nation as a major part of the implementation of the Affordable Care Act (aka Obamacare). Colorado elected to establish its own exchange under the law and Colorado residents will not participate in the federally sponsored exchange. Under Colorado’s exchange, individuals, families and certain small businesses can shop for and compare insurance plans to be effective January 1st, 2014. Under the law, everyone must carry health insurance as of January 1st, 2014.  Certain exemptions have been made for religious reasons and for those who cannot afford insurance (although Medicaid has been expanded as well).  Please visit http://www.connectforhealthco.com to learn more about the ACA implementation and insurance in Colorado. Most likely, your health insurance access will be unchanged next year. Retirees on Medicare will see little changes, and most full-time employees who are provided coverage through their employer will not see changes. The self-employed and early retirees are most likely to be affected by the ACA.

As always, investors need to maintain a long-term perspective, filter out the short-term noise and recognize that time is our ally.