Market Summary – Q1 2013

Posted by on Apr 29, 2013 in MFA Quarterly Commentaries

The year got off to a great start for equity investors with the US Stock Market at all time highs at quarter end.  What’s not to like?  The three legged stool of investor well being is on firm ground once again:  housing appears to be recovering faster than expected;  unemployment has continued to fall, and, as the US Stock market hits new all time highs, it finally feels safe for millions of workers to open their 401k statements again.

As always, opinions differ.  Ask a bull and he’ll tell you the market is cheap, citing rising corporate profits, below average price earnings ratios and hoards of cash earning next to nothing seeking a more productive place to be deployed.  Ask a bearish pundit her opinion, and you’re likely to hear warnings of unsustainable debt levels, above trend price earnings ratios (there are other ways to “see” P/E ratios) and of cheap loans creating new stock market bubbles.

 The beauty of subscribing to an efficient market theory is that it’s not up to us to fix prices or drive them to their “correct” levels.  Our view is that the markets do a very good job of factoring in the collective perception of value and sets prices accordingly.  The returns of the market are available to us through very low cost index-type funds that don’t require a lot of expensive maintenance.  Our job then becomes to maintain an allocation that provides broad diversification not only across asset classes but across our globe as well.

Now about that global diversification:  We took a look at global markets over the ten year period ending March 31, 2013*.  The three lines represent Emerging Markets (red), the non US Developed Markets (green) and the US S&P 500 (blue).   Impressively, but also intuitively, the most volatile Emerging Markets saw the steepest decline during the financial crisis of 2008, but the largest overall return during the past ten years.  The index returns* grew a dollar to $4.98 in the Emerging Markets, to $2.64 in the non US Developed Markets and just $2.27 in the US Stock Market.  Given those returns, it is easier to withstand the increased volatility.

There are other times when global diversification doesn’t seem to be working and we might be in one of them.  Under the category of “but what have you done for us lately” recent experience (ending March 31st) seems to show a reversal of the trend.  Below is a chart of the same returns* for the three major indices for the past two years:

The purpose of rebalancing investment mixes between asset classes that have varying returns is to help us “Buy Low, Sell High” in a disciplined way.  If you found yourself questioning why we sold a bit of what has been doing very well in 2010 and 2011 (Emerging Markets for example) and purchased funds that were lagging (US funds for example), the chart to the right shows why we maintain this discipline. 

In addition to being disciplined about our investing approach, we are also very interested in refining our service to you.  We have recently sent you a request to complete a survey.  This is your chance to weigh in on our services and we hope you will fill it out so that we can continue to improve.

We look forward to hearing from you to review your investments or other matters. 


*Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results.  The S&P data are provided by Standard & Poor’s Index Services Group. MSCI data copyright MSCI 2013, all rights reserved.