DWM 4Q13 & 2013 Market Commentary

Brett M. Detterbeck, CFA, CFP®Happy New Year! The story of 2013 was how US stocks blew away market expert predictions by registering its best year since 1995. It has now been over 825 days without a 10% or greater drop for the S&P500, the 5th longest stretch in the last fifty years. Fueled by easy money policy from the Fed and improving signs in the economy, it was basically “off to the races” for most stocks in both 4q13 and all of 2013. Unfortunately, for the diversified investor, most other investments lagged far behind the big figures posted by US stocks, yet still helped produce what overall will be considered by most to be a very good year for their portfolio.

Let’s celebrate the honorable return achievements of 2013 before looking ahead to 2014.

US Stocks finished the year up 30%+ as evidenced by the S&P500’s 32.4%. Domestic markets trumped overseas ones as the MSCI World Index (ex-US) was only up 21.0% and the MSCI Emerging Markets Index was actually negative 2.6%. This really showcases what’s going on in the world right now: the US recovery is making strides while the rest of the world is still trying to find its legs.

Unlike the fun times in equity-land, bonds had a bleak turnout in 2013, with the Barclays US Aggregate Bond Index down 2.0%, its first losing year since 1999. Per our recent seminars, we have been “pounding the table” on bonds urging others to follow our lead and change up or decrease their bond exposure given the new rising interest rate environment we’re in. The 10-Yr Treasury Note is now hovering around 3.00%, its highest level since July 2011, having climbed 1.61% since the start of May, which is a pretty monstrous move in bond land. Given the inverse relationship between rates and bond prices, this made for a tough year. Fortunately, there were places within fixed income to find some modest returns including high yields (up 7.4% per the Barclays US Corp High Yield Index) and floating rate funds (up over 4% as exhibited by the ETF many of our investors hold, PowerShares Senior Loan Portfolio (symbol: BKLN)).

Most alternatives did not come close to faring as well as equities. There are not many benchmarks in this category but we like to look at the DJ Credit Suisse Core Hedge Fund Net Index which posted a 2.92% return for 2013 and the CPI which was up 1.5%. Many of the liquid alternatives securities we follow posted modest, albeit positive single-digit returns. The fact is: if all alternatives were up 30% like equities, they wouldn’t be doing their primary job at being a diversifier and protector for the overall portfolio. With five straight years of positive stock market returns with no meaningful correction and an unattractive bond market, we think this asset category is of utmost importance.

We’re cautiously optimistic looking forward to 2014, however we’d be surprised to see equities continue their recent trajectory. Furthermore, we would not be surprised for fixed income to post much-lower-than-historical-average-like returns. And we would expect alternatives to remain that diversifier and protector with results in the mid- to high- single digits.

Of course, a lot depends on how the economy fares and how market participants react to it. The key factors to look for are the following:

1) Housing recovery snap – home prices are back to pre-Financial Crisis peaks in many areas. However, with interest/mortgage rates much higher than just several months ago and expected to go higher, affordability is not what is was and buyers may get spooked.

2) CAPEX anyone? – will businesses continue to be wary about spending, either by hiring, adding new equipment, or other measures?

3) Washington gridlock – with the Federal borrowing limit set to be hit soon and many other political wrestling issues ahead, we’re sure to get more fireworks here which could cause some negative ramifications.

4) Fiscal Stimuli no more – the Fed has laid out a timetable to slow and ultimately end its current humongous bond buying program. What happens if there’s a sharp economic downturn along the way and how might that affect markets?

5) ex-US – we didn’t get the confidence-shaking headline international news stories in 2013 that were overkill in 2009-2012, but severe vulnerabilities still exist across the pond. It’s important to investors everywhere, including us here, that this global economic recovery continues.

In conclusion, on the investment management side, DWM looks forward in 2014 in continuing to do what we do best: preserving and growing our clients’ capital. We do that by controlling what we can control within a low-cost, properly diversified investment portfolio, consistent with clients’ long-term goals, and regularly rebalancing it. On the financial planning side, DWM looks forward in 2014 to working with clients to firm up their financial plans using our state-of-the-art dynamic financial planning software.

For those of you currently not using a wealth manager, we urge you to make 2014 the year you help yourself by getting one. Here’s to a wonderful and prosperous 2014!

DWM 2Q13 Market Commentary

Brett DetterbeckI 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.