Summer 2013 Investment Letter {Part I}

Here is part I of our latest investment letter to clients.  We are running the letter in serial form this week and next.

2013 has so far been an investment year of the “haves” versus “have-nots”. The “haves” have been nearly anything connected with the US stock market.  US equities have mostly recorded double digit returns despite a mild correction that began in May and at one point knocked about six percent off of major indices such as the S&P 500.  The “have-nots” were nearly every other asset class as most experienced losses through June.  Bonds showed mostly negative returns resulting from rising interest rates.  Commodities were perhaps the worst performers averaging double-digit declines save for oil. Foreign markets either declined in value during the first half or basically went nowhere. A simple diversified ETF investment portfolio returned 7.68%.* Stocks have so far resumed their rally in July.  Foreign markets and gold may also be finding levels of support from which they can build bases for growth going forward.

The US economy once again proved to be the “best house in a bad neighborhood”.  Economic growth has remained tepid; yet so far tepid seems to have been good enough for most investors. The US is currently benefitting from a variety of economic factors that make stocks attractive.  We have pointed out in past letters that one of the most important factors helping drive this performance is that things are getting better here at home.  Now I understand that there are still plenty of structural headwinds to growth, which is why GDP has consistently grown at below trend rates through most of this recovery.  Yet the people who constantly remind us of all these negative almost never focus on what’s doing well.  Here culled from the Federal Reserve’s website are just a few examples of larger positive trends affecting the economy:  Unemployment continues to decline.  Home prices continue to increase.  Consumer sentiment has improved to levels not seen since the start of the last recession, as have total automobile and truck sales. The cost of energy continues to decline as technology continues to find more recoverable oil and natural gas. Finally the US posted a budget surplus in June, an additional indicator of a rapid improvement in public finances and more states will actually balance their budgets this year or post surpluses.  We expect these overall economic trends to continue, albeit in fits and starts over the next several years. 

*Hypothetical portfolio comprised of 10%-cash, 20%-Vanguard ETF Intermediate Term Government Bond Fund {VGIT}, 10% Vanguard FTSE All-World ex-US ETF  {VSS},  60% Vanguard US Total Stock Market ETF {VTI}.

**Long ETFs related to the S&P 500 in client and personal accounts.