Presentation Transcript

1. QuarterlyInvestment BriefingAugust 7, 2013 Clayton T. Bill, CFA Stephen J. Nilles, CFP
2. Capital Market Returns Period Ending June 30, 2013 Source: Russell
3. Tapering, Not Tightening Improvements in the economy’s health are leading the Fed to consider tapering Quantitative Easing, so long as “the outlook for the labor market has improved substantially in a context of price stability”. U.S. Equities, Housing and Employment (March 2009 – June 2013) QE2, Equities +13% Operation Twist, Equities +28% Operation Twist cont’d + QE3, Equities +14% QE1, Equities +53% Russell 3000® Index up 127% cumulatively since start of QE
4. Broad-Based Bond Sell-off During Second Quarter Interest rate-sensitive, investment-grade bonds suffered negative returns as rates rose during Q2, with long-duration sectors posting the worst losses– especially TIPS as real rates rose and inflation expectations fell. Emerging-market debt and other credit-sensitive categories also suffered from spread widening. Short-duration, floating-rate leveraged loans held steady. Source: Fidelity
5. When Stock Prices Fall, Bonds Stabilize Portfolio Returns Stock prices have fallen in 24 out of the past 86 calendar years. During these times of stock market weakness, investment-grade bonds performed much better, and in 22 of the 24 years the returns were outright positive. Investment-grade bonds’ low correlation with stocks provide important diversification benefits to a portfolio, especially when equities perform poorly. Source: Fidelity
6. Overreaction To Rising RatesHerd selling on high-yielding assets REITs, utilities and other historically high-yielding assets were relatively attractive in low rate environment As the yield increased on U.S. Treasury bonds, this stretch for yield left investors vulnerable to a pullback May 2 – June 25: Yield increased from 1.6% to 2.6% May 8 – June 24:Global REITs down 15% Source: Russell
7. Currency Volatility Spikes, U.S. Dollar Strengthens Global currency markets were tumultuous during Q2, with many major currencies bouncing abruptly from historically low levels of volatility. Many commodity-dependent currencies, including those of Australia, South Africa, and several Latin American countries, saw the steepest drops, while emerging-market currencies in general weakened. Source: Fidelity
8. Future Returns Depend On Starting Point PricesCurrent equity valuations suggest fair long-term equity results 17.8 P/E on 3/31/13 16.8 P/E on 3/31/13 Lower P/E – Higher Return Higher P/E – Lower Return Source: Russell
9. Consumer Deleveraging and Home Prices: From Headwind to Tailwind Source: Vanguard
10. The Housing and Autos Story is Far From Being Fully Played Out Source: Fidelity
11. The Fiscal Deficit as a Percent of GDP is Back to Pre-crisis Levels and Appears to be Stabilizing Source: Fidelity
12. Global Easy Money and Fed’s “Great Escape” Source: Vanguard
13. We Still Live in a Low Inflation World Source: Fidelity
14. Inflation Highly Correlated to Wages Source: Fidelity
15. Federal Reserve Keeping Short-Term Rates Low Until Unemployment Nears 6.5% Average Monthly Job Growth Needed to Achieve 6.5% Unemployment The economy would need to add 168,000 jobs/month through June 2015 to achieve 6.5% unemployment 170,000/monthRussell forecast Inflation outrunning cash as Federal Reserve keeps rates low: If so, negative real returns for cash are likely into 2015 Source: Russell
16. Impact of U.S. Demographics on Interest Rates Source: Fidelity
17. Immediate Concern About Rapidly Rising Rates is Overblown Source: Fidelity
18. Return to the OrdinaryLow single digit bond returns are normal Future bond returns have historically tracked closely to yield levels at time of purchase The June 30, 2013 market yield was ~2.5% suggesting modest single-digit returns for the 10-year horizon Source: Russell
19. Diversification: Slow and Steady to Your GoalDon’t let short-term returns potentially dictate long-term investment decisions Market Returns as of June 30, 2013 Short-term performance does not reflect long-term results 10-Year (Annualized) YTD