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Quarterly Summaries

2013 Quarterly Summaries

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Review of Securities Markets, Third Quarter, 2013

In a repeat of earlier time periods, investors focused on news from the Federal Reserve again in the third quarter. Since Chairman Bernanke’s announcement in May that the Fed was considering a reduction planned to reduce or “taper” its $85 billion monthly bond purchases as early as September, investors reacted by selling bonds and other interest‐rate sensitive investments, such as Real Estate Investments Trusts (REITs). This trend reversed in September when the Fed surprised investors by delaying its plans for tapering. After the announcement, interest rates declined and bonds regained some of the losses incurred earlier in the year. The ten‐year U.S. Treasury bond yield has increased from 1.78% at the end of 2012, to 2.61% at the end of the third quarter. Even with this increase, the interest rate on the ten‐year bond remains below its long‐term average.

Stocks continued their ascent in the third quarter. Corporate earnings have been healthy, despite only modest increases in revenue. The effects of less austerity in Europe and pro‐growth policies in Japan encouraged investors to pile into foreign stocks, hopeful that the worst is over for these economies. Stocks rallied in September when former Treasury Secretary Lawrence Summers withdrew from the running for Federal Reserve Chairman, leaving Janet Yellen as the front‐runner to replace Ben Bernanke when he retires early in 2014. Investors believe Ms. Yellen’s policies are most closely aligned with Bernanke and expect a continuation of the easy money stance implemented by the Fed since the financial crisis.

A Sure Thing

Federal Reserve Chairman Ben Bernanke has presided during an historic time for U.S. financial markets. While the Fed’s current easy money policy stance has been controversial and is likely to be debated for years to come, he is the first Fed Chairman to provide guidance to the public so openly, implementing the practice of regular press conferences and plain language. He has carefully signaled and outlined the Fed’s intent over these volatile years since the financial crisis.

Since September 2012, the Federal Reserve has been purchasing $85 billion of U.S. Treasuries and mortgage securities each month with no apparent concern for the price or fundamental valuation of these investments. In May, the Fed announced its intent to reduce these bond purchases later in the year, predicated on healthy trends in the economy and employment. Investors, already nervous about low interest rates, believed that this was the beginning of the end of quantitative easing. Further, investors began to speculate on when the Fed would begin to taper its purchases. With the Fed stepping back, a reduction in demand for these securities seemed inevitable. Seeming like a sure thing and expecting an announcement during the Fed’s September meeting, investors sold bonds, resulting in a decline in valuation (and increase in interest rates) before even a small reduction in quantitative easing was implemented by the Fed.

The Federal Reserve surprised investors in September when it announced a continuation of its $85 billion monthly purchases. Chairman Bernanke cited a few reasons for continuing with the program. First, trends in employment still show a labor market that is struggling. Second, higher interest rates could threaten the recovering housing market as potential buyers cannot afford the larger mortgage that comes with even marginally higher interest rates. Third, the threat (and now the reality) of a federal government shutdown or a breakdown in Congressional negotiations to raise the debt ceiling could reduce economic activity. Stocks rallied and interest rates declined on the news, a reminder that even a seemingly sure thing doesn’t always work out as planned.

It is important to note that the Federal Reserve did not change their guidance on their bond‐buying program. As they have signaled in the past, they intend to continue with quantitative easing (at some level), so long as unemployment is above 6.5% and inflation remains subdued. In other words, the Fed’s plan to taper has been delayed, not cancelled.

With the near‐term tapering potential out of the way, investors quickly turned their attention to the impending government shutdown that eventually occurred at the close of the quarter. The Economist magazine anticipates that the government shutdown could reduce fourth quarter gross domestic product by 0.1‐0.2%. While this decline is not disastrous, it is meaningful for an economy that has experienced only modest growth since the end of the recession in 2009. A quarter of below‐average economic activity could result in slower gains in employment, perhaps the Fed’s most important indicator.

As investors, we live in a world of uncertainty where even what seems to be a sure thing doesn’t always work out as anticipated. In fact, this uncertainty is the risk that produces returns. Your Bingham, Osborn & Scarborough advisory team is here to help you navigate this path to help you meet your long‐term financial goals.

Written by Colleen S. Supran, CFA, Principal; [email protected]

Quarterly Review of Securities Markets: Total Returns

IndexMarketLast 3 Months (07/01/2013 – 09/30/13)Year-to-Date as of 09/30/2013
Standard & Poor’s 500Large Co. U.S. Stocks5.25%19.81%
Russell 1000 ValueLarge Co. Value U.S. Stocks3.94%20.47%
Russell 2000Small Co. U.S. Stocks10.21%27.69%
Russell 2000 ValueSmall Co. Value U.S. Stocks7.59%23.07%
FTSE NAREIT Equity REITReal Estate Investment‐2.61%3.03%
NASDAQ 100Technology Stocks10.61%20.94%
MSCI EAFE1Foreign Stocks11.56%16.14%
Barclays Capital AggregateU.S. Dollar Bonds0.57%‐1.89%
Barclays Capital MunicipalMunicipal Bonds‐0.19%‐2.86%
Merrill Global Gov’t BondGlobal Bonds2.22%‐4.66%

Source: Thomson Financial’s Investment View;

Key Economic Indicators



  • There is no updated information available for Real Gross Domestic Product (real GDP) due to the shutdown of the U.S. government.
  • In its meeting in July, the Federal Reserve Open Market Committee agreed to continue holding the target range for the federal funds rate at 0% to 0.25%. The Committee anticipates that this range will be appropriate as long as the unemployment rate remains above 6.5%.
  • The U.S. unemployment rate was 7.3% in August, down a bit from 7.6% in June. Employment rose in retail and health care. The number of long‐term unemployed was little changed, accounting for 37.9% of the total unemployed.
  • Inflation (CPI‐U) increased by 0.1% in August. Increases in the cost of housing and medical care accounted for most of the rise.
  • Standard & Poor’s 500 Index operating earnings per share for the second quarter 2013 increased 2.3% over the first quarter. Earnings increased 3.66% from the same quarter last year.
  • U.S. non‐farm worker productivity increased at an annual rate of 2.3% during the second quarter of 2013.
  • The Comex spot rate for gold rose by 6.2% in the third quarter, closing at $1,330.50 an ounce. While gold has rallied recently with talks of Fed bond‐buying tapering and the fiscal gridlock in Washington, the general trend is negative. The metal is down 20.60% this year.
  • U.S. crude oil prices were up 5.2% in the third quarter, despite a drop in September. Oil supplies in the U.S. remain high, while demand is not expected to grow.

Key economic indicators compiled by Barbara A. Ziontz, CFP, Portfolio Manager; [email protected]

Timeline of Events: A Quarter in Review

Data Sources: The Wall Street Journal; US Dept. of Commerce ‐ Bureau of Economic Analysis; US Dept. of Labor;;;;;;; ; Dimensional Fund Advisors

Disclosures and Footnotes:

This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.

This information does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this information neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to the document by making an offer to enter into an investment agreement.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without Bingham, Osborn & Scarborough, LLC’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

(1) Source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties or originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

©2013 Bingham, Osborn & Scarborough, LLC


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