I lead this quarter’s market commentary with a discussion on fixed income as, contrary to CNBC jabber, there are a lot of investors with a considerable amount of exposure to fixed income, an asset class that historically has been viewed as a safe haven. For many older investors, it has been the asset class that meant a modest return with little risk (at least relative to equities). But that paradigm has shifted with interest rates finally bouncing off historic low levels.
Here’s what you need to know: bond prices and yields move in inverse directions. A bond typically will lose 1% in price for every year of duration that it has left for every percentage point rise in interest rates. Which is what makes this latest quarter so painful for bond investors – rates jumped on Fed Head Bernanke’s talks about possibly winding down the central bank’s easy money bond-buying policy. The 10yr US Treasury note rose from 1.84% at the beginning of the quarter to 2.49% at the end of the quarter. To prove the point above, a fund utilizing 10 year Treasuries like the Vanguard Intermediate Term Treasuries Fund had a negative 2.75% return for the second quarter. Corporate bonds fared even worse, down a staggering 3.3% as represented by the Barclays Investment Grade Corporate Bond Index. 3.3% may not sound much in stock terms but that’s a big move in bond land for one quarter. The Fed is walking a tight rope trying to communicate the right message to the market players while at the same time trying to nurse this economy back to health not only in the short term, but also the long term. A tough job indeed.
So, now to stocks – if all one watched was CNBC, you’d believe that everything is great. That is, domestic stocks (represented by the S&P500) had another positive quarter, up 2.4% and up over 12% year-to-date. But, domestic stocks were frankly the island in the 2q13 storm. A run down of the list of major benchmarks reveals a lot of negatives:
- MSCI All Cap World Index ex USA: -3.12%
- MSCI EAFE Index: -0.98%
- MSCI Emerging Markets Index: -8.08%
- SPDR Global Real Estate Index: -5.03%
- DJ UBS Commodities Index: -9.45%
- Barclays Capital US TIPS: -7.05%
- JPMorgan Emerging Markets Bond: -6.03%
To reiterate, there was a lot of correlation amongst markets, with most of it being down. Moreover, many liquid alts traded down albeit not as much as the uglier ones above. So, for most diversified investors with a balanced portfolio designed for the long-term, it was a negative return quarter.
We’ve seen rough quarters before. Indeed the second quarter was a challenging one, but a prudent investor does not fixate on the short-term. Markets like to overshoot and most likely many of these negatives above will turn into positives in the near future. As much as CNBC and other headline news may make you think about plowing everything into large cap domestic stocks, empirical studies prove that that doesn’t work in the long-run. One needs a diversified portfolio made up of multiple asset classes and investment styles. As always, our focus remains long-term. With kudos to the Chicago Blackhawks winning the 2013 Stanley Cup, I bid you adieu with the following hockey analogy: It’s not about where the puck is now, but where it is going to be.