Current Thinking

2nd Quarter 2013 Economic & Market Review

Economy
U.S. corporations continued to improve their balance sheets albeit at a slower pace this past quarter than in recent months. In contrast, countries of the euro-zone have been slow to adopt austerity measures, and remain in recession. Federal Reserve Chairman Bernanke drew ire, and some would say an overreaction, from the markets in mid-June by suggesting a reduction in the quantitative easing that has at least partially fueled the recovery. Outside of the U.S., global investors have yet to see the full impact of recent regime changes in China and Japan.

Equity Markets
U.S. equity markets shrugged off the June correction and posted moderately positive returns for the quarter. Small-caps (+3.1 Russell 2000 Index) slightly outpaced large-caps (+2.9% S&P 500 Index) while midcaps (+2.2% Russell Midcap Index) posted the smallest gains for the quarter. Growth stocks performed best among small- and mid-sized companies for the quarter. Value stocks, however, have performed best among large- and midcaps for the year-to-date and most recent 12-months through June 30, 2013. International developed markets erased April gains and ended the quarter down (-0.9% MSCI EAFE Index). Emerging markets, represented by the MSCI EM Index, reflected their high volatility once again this past quarter and lost 8.1%.

Fixed-Income Markets
With the rapid rise in interest rates during the quarter, it’s not surprising that bonds across most sectors suffered. The broad U.S. investment grade fixed-income market, measured by the Barclays Capital U.S. Aggregate Bond Index, dipped 2.3% for the quarter. Given the heightened duration exposure, the long-end of the curve was hardest hit; as both government and corporate issues fell, witnessed by the losses posted by the Barclays U.S. Aggregate Long Government and the U.S. Aggregate Long Credit indices, down 5.6% and 6.3%, respectively.