Market Insight - April 2013
2013 has been a good year for Bedminster Group clients. European crises, U.S. political squabbling and fears of the fiscal cliff did little to derail the market’s momentum; the Dow ended the first three months of the year at 14,578, adding more than 11%, and posting its best quarterly gain in 15 years. In the final day of the quarter the S&P 500 closed at 1,569, up 10% for the year to date, besting its pre-recession high, and rising 132% from 2009 lows. By most measurements this has been one of the five best bull markets since 1929. The tech heavy Nasdaq added 8.2%, and has fully recovered its recession losses (but remains more than 50% below its highs set in the year 2000.) Mid-sized company stocks rose 13.1%, while small company stocks, measured by the S&P Small-Cap 600, added 11.5%. Global markets lagged, as stronger economies in the EU still contend with stubborn recession and currency fears; the EAFE MSCI Developed Market index rose 3.7% while the Emerging Market index fell 3.6%.
Despite the backdrop of these extraordinary gains, confidence has been slow to return. Investors have been withdrawing money from stock mutual funds since March 2009; January was the first month in which investors shifted their flow of funds into stocks. While inflation is still a factor in the U.S. (the CPI is up 13% since 2007) it remains at an acceptable level, according to the Fed’s calculation. Central banks all over the world have injected more than $11.6 trillion of liquidity into the global economy over the past 6 years. This has provided a fertile field for growth and recovery of the equity and bond markets, but at a cost; massive leveraging, and near zero returns for savers and short-term investors.
Keeping in mind that a 5-10% correction is very likely, probably desirable at this point to consolidate the markets for further sustainable advances, here are some of the factors which support our optimism for the next 18-24 months, and give support to the thesis that this market has a good deal further to go.
First, the transparency of Federal Reserve policy. The Fed has provided us with trail markers for the eventual tightening of short term rates and unwinding the third round of quantitative easing; a jobless rate closing on 6.5%, or an inflation rate reaching beyond 2%. This approach gives both clarity (and some predictability) to the span of this exceptional environment for growth.
Second, funds have begun to flow (although tentatively) out of bank instruments and into equity markets, (although investors’ appetite for bonds continues unabated.) This increased demand can help to support higher stock prices. The S&P 500 dividend yield stands at about 2.1%, higher than the ten year US Treasury bond; investors are beginning to respond and recognize future value here.
Third, while the media has made much of the indexes reaching new highs, this hardly qualifies as an overpriced market. The PE ratio of the S&P is approximately 18.3 times trailing earnings and 14.1 times projected earnings, far from the levels at which we would be concerned about overvaluation. Although economic growth seems to have stalled slightly in the 4th quarter, the gathering strength and momentum of the real estate markets may turn this important sector, which has held back the recovery thus far, into a net positive. April has been historically one of the best the best months for stocks, posting an average monthly gain of 2.7 percent over the last 20 years.
We continue to implement our global balanced strategy, with cash, stock, real estate and bond allocations unique to each client. On the U.S equity side we seek company size diversification, using low cost index funds of large, medium and small company stocks, while global assets are divided between developed and developing markets. Fixed income assets are allocated among funds and individual bonds with intermediate maturities and low durations, to balance current income, safety, and some protection against rising interest rates in the future.
We would like to recognize the Animal Legal Defense Fund, the Hilton Head Humane Society, and Cat Lovers United of Sun City as organizations that really make a difference; we are proud to have been able to lend our support to them this year.
The Bedminster Group