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Q3 2013 Capital Market Update
Last Updated: October 09, 2013
Stock and bond markets were volatile during the third quarter of 2013, as central banks continued with easy monetary policies to stimulate growth. Unfortunately, the growth did not materialize as expected and signs that the Fed would slow its asset purchases spooked both stock and bond investors toward the end of the quarter. Investors took on more risk in search of higher returns. Both domestic and international equity markets managed to finish in positive territory. Bond markets (with the exception of high yield or “junk” bonds) ended in negative territory over concerns that interest rates are headed higher from current levels.
For the third quarter ending September 30, 2013, the Dow Jones Industrial Average finished up 18.13% year-to-date and 15.40% versus the year ago period. The broader S&P 500 Index posted gains of 20.76% year-to-date and 19.98% compared to a year ago. International stock markets posted gains reflecting investors’ willingness to take on more risk with the hopes of higher returns from developing and emerging markets. The MSCI EAFE (Europe, Australasia, Far-East) Index posted a 16.66% return year-to-date and 23.17% for the year.
Fixed income markets pulled back due to concerns that a tightening of central bank policy would lead to higher interest rates. The broad-based Barclays U.S. Aggregate Bond Index returned -1.99% year-to-date and -1.85% compared to a year ago. Bond investors took on more risk fueling growth in non-investment grade bonds, as measured by the ML US High Yield Master II Index, with returns of 3.87% year-to-date and 7.04% compared to a year ago. Meanwhile the more conservative US 10-year Treasury Bill index posted negative returns: -5.92% year-to-date and -6.64% compared to a year ago.
We expect stock and bond markets to remain volatile in the near-term as investors digest uncertainties regarding the U.S. government shutdown impact on growth, the debt ceiling limit, third quarter corporate earnings results/outlook, and how Fed policy might affect interest rates. Investors may take advantage of recent gains in riskier investments to re-balance portfolios for the possibility of slower growth.
It is critical to have the appropriate mix of stock, bond, and cash investments based on time to retirement, risk tolerance, and return expectations. Investors should conduct regular reviews of portfolios to make sure allocations have not gotten out of balance as a result of recent market movements. By diversifying across asset classes, investors have exposure to investments that provide growth, income and preservation of capital (liquidity) through various economic cycles.
Please contact a Pension Consultants Investment Consultant at 800-234-9584 for additional information.
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