Current Thinking

3rd Quarter 2013 Economic & Market Review

Economy
Although domestic interest rates fluctuated throughout the quarter, they remained low historically. This continued to be a boon for equity investors who can invest borrowed monies in hope of garnering a higher rate of return. Housing data (higher prices and lower inventories) remained positive. That, along with low inflation (under 2.0%), are making for a stabilizing economy in the U.S. In contrast, in the near-term, the Government shutdown and the uncertainty around the debt ceiling have created a temporary roadblock to economic growth.

Equity Markets
As a result, the U.S. equity market gave back some of its gains as the quarter came to a close, but each of the major market indices provided strong gains. Small-capitalization stocks (+10.2%; Russell 2000 Index) outpaced large-caps (+5.2%; S&P 500 Index) and midcaps (+7.7%; Russell Midcap Index). Growth stocks outperformed value stocks across the capitalization spectrum for the quarter. International developed markets rebounded in the third quarter (11.6%; MSCI EAFE Index) from losses earlier in the year as did emerging markets, represented by the MSCI EM Index, which posted a strong, but more muted return of 5.8%.

Fixed-Income Markets
The broad U.S. investment grade fixed-income market, measured by the Barclays Capital U.S. Aggregate Bond Index, eked out a positive gain of 0.6% for the quarter, but has declined 1.9% for the year-to-date (“YTD”). The net impact of interest rate volatility experienced during the quarter was that longer duration bonds (measured by the Barclays U.S. Long Gov’t/Credit Index) declined further – in posting a 0.8% drop in the third quarter, they have declined 8.7% for the YTD. For the quarter, intermediate high yield (+2.4%) outperformed U.S. intermediate credits (+1.0%) and intermediate U.S. Governments (+0.4%) per the Barclays indices. Cash and cash equivalents continued to return close to 0.0%.