Market review – end of second quarter 2013

As the second quarter of 2013 comes to an end, investors experienced a few bumps in the road.  The tectonic plates of the world economy are shifting.  The yield on the 10-year Treasury note rose as the Federal Reserve laid out a plan for the eventual reduction and end to QE3.  Though the Fed specifically pointed out that their timetable for reducing their purchases would be dependent on favorable economic data, both the stock and bond markets reacted with a great deal of hysteria.

These sudden market gyrations lead us to believe that perhaps many people were basing their assumptions of the global markets recovery on a Fed that would keep printing money endlessly, unabated growth in China, and Japan remaining mired in its decades-long slump.

The prospect of slower growth in China is pulling commodity prices down. Japan’s stock and bond markets have been riding a roller coaster as attitudes shift almost daily about the new government’s economic policy.  Emerging market currencies are also in decline, as evidenced by India, Poland, South Africa and Brazil now trying to prop up their currencies.  Europe, meanwhile, remains mired in its recession.

So what’s ahead for the rest of the year?

Economists at J.P. Morgan Chase have turned mildly hopeful that the U.S., Europe and much of the rest of world economy will shift into a higher gear later this year, which would provide a pleasant contrast to the midyear slumps seen in recent years.

Personally, we feel that the recent U.S. market actions are mostly overblown.  The Fed has said they will keep interest rates low for as long as possible, and will only pull back on their bond purchases when the U.S. economy shows that it’s healthy enough to stand on its own.  While economic growth coming out of the most recent recession has certainly been at a slower rate than normal recoveries, it is still growth.  We think that the Fed being able to remove itself from the equation of the U.S. recovery is a net positive, not a net negative.

Whatever comes our way, we are, as always, positioning our portfolios to participate in further market gains and to cushion any market declines.  Over the long term the trend is up.

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