Remember how ‘scary’ the Fiscal Cliff ordeal was just a few months ago?! Well, not only did stock markets shrug that off, but they also shrugged off a spending-cuts-sequester, higher tax rates, and further turmoil in Europe to soar to all-time record highs. Amazing really. “How is this happening?” one might ask. The simple reason is: Federal stimulus. The Fed Quantitative Easing bond-buying program continues to keep interest rates low, thus reducing the attractiveness of ‘safer’ investments such as Treasuries, and hence propelling ‘riskier’ assets such as stocks.
And did they ever propel! The S&P500 was up over 10% for the first quarter. Small Cap and Mid Cap fared even better, up 11.8% and 13.5%, respectively. Domestic certainly outperformed international markets as Eurozone worries continued. (For example, you may have heard about the tiny island in the Mediterranean called Cyprus who has a big banking presence. Unfortunately, both its banks and its government are a mess. To fix it, depositors with over $100K will have to give up some of their hard-earned money. This is the first time that depositors have had to share the pain in the modern era so it’s a big deal. The fear is that if they can put this in place within Cyprus that it could happen anywhere else in Europe, creating tremendous anxiety.) The MSCI ex-US was “only” up 4.7% and emerging markets were actually down 3.5%.
Fixed income on the other hand did not do much, with the well-known Barclays US Aggregate Bond Index about flat (-0.1%). Investment models that employed more than just the basic “Agg” type of exposure – like high yield (up 2.9%) and currencies (up 4.2%) – were able to produce small albeit positive fixed income results.
We urge clients to have a minority stake in alternatives, typically 10-30% depending upon their profile. Many investors may be familiar with the famous “alts” like commodities (essentially flat for 1q13) and real estate (up over 7% as represented by the SPDR Dow Jones Global Real Estate ETF ). But many aren’t familiar with the majority of alternative vehicles and strategies out there. For some quick education, here’s an example of an alternative publically traded mutual fund we utilize: Pioneer Floating Rate (symbol: FLARX), a fund which holds bank loans. What makes this fund so attractive is that unlike traditional fixed income funds where there is an inverse relationship between interest rates and price, this fund actually benefits when rates go up. Why? Bank loans are tied to interest rates in that they can go up when rates go up. Thus, this fund offers not only a decent current yield but is poised for appreciation when rates do in fact start marching higher.
1Q13 is a good reason why we don’t try to “time” the market. Many going into this New Year said that equities after a strong 2012 were poised for a correction particularly given all the global economic headwinds. Yet, here we are in April with a strong first quarter stock market showing and a good start to 2Q13. By not avoiding any one particular asset class and having at least a portion of your portfolio within all of the three major asset classes (equities, fixed income, and alternatives), an investor employing relatively little risk should benefit with stable, steady returns. This is the benefit of having a diversified, multi-asset class portfolio, with 1Q13 being a perfect example.
As we prepare for Spring – I know both our Charleston and Chicagoland clients are waiting patiently (Will it ever get here?) – we also look forward to what the markets will bring us in 2Q13. Will the US continue to show healthy signs of improvement like we’ve been seeing in the housing market? Will the sequester slow the US down? Will there be an equity correction of some sort after this tremendous rally? Will Europe ever recover? How much will Europe woes affect us here in the US? And the questions go on and on, but ultimately lead to “How does this affect me?” As our client’s wealth manager, we know that’s the most important question and one of the reasons why we are here: to filter out the noise and make the correct portfolio management moves to ultimately enhance your personal and family’s wealth and well-being. Protecting and growing these portfolios and helping clients attain their long-term financial goals are what we take pride in.