Current Thinking

1st Quarter 2013 Economic & Market Review

Economy
The U.S. economy continued to grow modestly, a key to maintaining this growth is the rebuilding of inventories within domestic manufacturing – the service sector has been leading the recovery thus far. U.S. consumer consumption has made up for declines in government spending as of late while the housing market continues to trend favorably. Given a current domestic unemployment rate of 7.6% (through March), proponents of quantitative easing (“QE”) can rest assured that further easy credit will persist within the U.S. as the Fed has stated QE will remain robust until unemployment reaches 6.5%. Outside of the U.S., government subsidies in China and European austerity measures have bifurcated overseas markets.

Equity Markets
U.S. equity markets provided substantial gains for the first quarter of 2013 (“Q1”). The S&P 500 Index, primarily representative of domestic large-cap stocks, rose 10.6% in Q1 compared to 5.2% for MSCI EAFE (representing large-cap international stocks). Overall, mid-caps (+13.0%) and small-caps (+12.4%) outperformed large-caps domestically. In aggregate, value (statistical cheapness) was viewed favorably within the U.S. large- and mid-cap companies; whereas growth was seen as more favorable to U.S. small-caps. Emerging markets (MSCI EM Index – net) fell 1.6% in Q1, further compounding losses in a market where declines have outpaced advances for more than two years.

Fixed-Income Markets
Longer duration bonds suffered while riskier credits outperformed in Q1. The Barclays Capital (“BarCap”) U.S. Aggregate Bond Index (-0.1%) faired better than the BarCap Long Government/Credit Index (-2.0%), but trailed the BarCap “B” High Yield Index which produced a gain of 2.7% in Q1. Money market funds again produced returns near zero and continue to lose ground to inflation – annual core inflation (ex-food & energy) was 2.0% through February.