Download Domestic equity performance was surprisingly strong in the first

The Stevens Advisor
Stevens, Foster Financial Services, Inc.
Securities offered through LPL Financial, Member FINRA/SIPC
7901 Xerxes Avenue South, Suite 325
Bloomington, Minnesota 55431
www.stevensfoster.com
[email protected]
Ph: 952.843.4200
April 19, 2013
Volume 10, Issue 9
Toll Free: 877.270.4200
FIRST QUARTER 2013 MARKET PERFORMANCE
Domestic equity performance was surprisingly strong in the first quarter of 2013 as the bull
market celebrated its 4th birthday. The Dow Jones Industrial Average rose 11.9% to set an
all-time high in mid March. The S&P 500 index gained 10.6% in 1Q13 and also achieved an
all-time high on the last day of the quarter. These levels surpassed the previous records set
in October 2007. The S&P 400 mid cap index rose 13.5%, and the Russell 2000 small cap
index gained 12.4% in the first quarter. Health care was the strongest sector with a 15.5%
gain for the Lipper healthcare index. Financial services were the second strongest sector
with a gain of 11.6%. Lipper’s precious metals sector was the weakest sector with a decline
of -16.9%.
The U.S. economy was part of the reason for the strong domestic stock market. U.S.
economic growth continues to be resilient and to grow slowly but steadily. Housing is
expected to contribute 0.7% to 2013 GDP growth, and housing starts are expected to
increase to over a 1 million annualized rate by year-end. Manufacturing is holding up well,
and record cash on corporate balance sheets is expected to cause greater corporate capital
spending. The high cash levels also support increased mergers and acquisitions, increased
dividends and increased share repurchases. It is important to note that since we emerged
from the Great Recession four years ago, corporate profits have more than doubled from
the bottom. Real consumption, real business fixed investment in equipment and software,
and leading economic indicators are all at all-time highs.
The reduction in political brinksmanship also contributed to market strength. The year-end
fiscal cliff threatened to reduce U.S. GDP by 4 to 5% and cause another recession, but this
was temporarily resolved in early January. The fiscal cliff turned into a fiscal slope as most
of the spending cuts and tax increases were deferred to the future. Ultimately, the only
changes that occurred were the expiration of the payroll-tax holiday and the elimination of
part of the Bush era tax cuts for wealthy individuals. In late January Congress passed a bill
that suspended the debt ceiling until May 19. The U.S. Treasury has the flexibility to fund
government operations for another six to eight weeks, so the real debt ceiling potentially
becomes problematic sometime in July.
More recently, the Republican-controlled House passed a plan to balance the budget within
10 years by cutting federal spending by over $4 trillion and lowering tax rates and reducing
some entitlements. The Senate-passed plan provides $975 billion spending cuts and $975
billion in tax increases. At this point, lawmakers are far apart on agreement for a 2014
fiscal budget. As a result, there is no “Grand Bargain” and the political factor has been
merely pushed out to later in the year.
Foreign equity markets were generally weaker than U.S. markets. The MSCI-EAFE foreign
developed market index gained 5.1% during the quarter. The Lipper Japanese index was up
12.8%, but the European region was only up 2.9% and China was down -1.8%. Europe fell
back into a double-dip recession in 4Q11 and GDP has fallen every quarter since. GDP is
now 3.0% below its 2008 peak and 1.2% below its 3Q11 level. Europe was also weak due
to inconclusive Italian elections in February. Italian voters split their votes amongst a
protest party led by a comedian, a party headed by former prime minister Silvio Berlusconi,
and the center-left party. Italy is currently stalled in a political deadlock, and if attempts to
form a government are not successful, then the country will hold another election. The
Cyprus banking crisis was another shock that resulted in uninsured depositors and senior
bondholders sharing losses. This kindled fears that the bailout would serve as a template
for future bailouts. Finally, North Korea and the bird flu scare raised the risk profile for
foreign markets.
The Barclays Aggregate Bond Index declined -0.12% during the first quarter. In a recurring
theme, lower-rated bonds such as high-yield bonds and bank loans led bond sector
performance during the first quarter of 2013. The Lipper High yield bond index moved up
2.75% while the U.S. Treasury debt declined -0.80%. Longer maturity bonds bore the
brunt of the weakness.
We are currently monitoring the first quarter 2013 corporate earnings reports. Earnings
expectations for the S&P 500 index as reported by Thomson Reuters are for earnings gains
of 1.5%. This is a relatively small gain and offers the possibility of upside. Valuation levels
are near historical levels. The S&P 500 index forward Price to Earnings ratio is currently at
14 times compared to an historical average of 15 times. The FTSE Emerging Markets index
currently trades at a Forward PE of 11 times compared to a 12.5 historical average. We
continue to see slow but positive global growth and mild inflation for the year. We expect
equity markets to generate positive high single-digit returns for the rest of the year, and to
beat bonds.
We will continue to track the overall economic and investment landscape. We will also
continue to monitor your portfolios and to work with your Client Account Manager to help
ensure appropriate diversification of investment assets to provide a good risk/return
structure to help you pursue your long-term objectives.
— Jeff Johnson, CFA, Vice President Investments April 9, 2013
Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. For example,
international investing involves special risks such as currency fluctuation and political instability and may not be suitable for all
investors. High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the
diversified portfolio of sophisticated investors. The prices of small company stocks are generally more volatile than those of
large company stocks. Total return includes all dividends reinvested.
“The Stevens Advisor” is a market update from sources deemed reliable, but Stevens, Foster Financial Services, Inc. does not make
any warranties of its accuracy. The opinions and forecasts are those of the author and may not actually come to pass. The
opinions voiced herein are for general information only and are not intended to provide specific advice or recommendations for any
individual. Past performance is no guarantee of future results.