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Q1 2013 Wealth Market Commentary

The “Box of Chocolates” Capital Market Environment

Eric Freedman
CAPTRUST Chief Investment Officer

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This year begins with a positive note for some riskier asset classes, but divergences within and between asset classes bear watching as 2013 unfolds.

With a hat tip to Forrest Gump in the eponymous 1994 film, the year started with asset prices providing investors with a sampling of unexpected developments. First, U.S. bonds, as measured by the Barclays U.S. Aggregate Bond Index, fell on a quarterly basis for the first time since 2010’s fourth quarter. U.S. equities were strong with the S&P 500 rising 10.6% while international developed equities closed up 5.3%. Commodities continued to underwhelm with a -1.1% return for the Dow Jones UBS Commodity Index and the NAREIT Equity REIT Index, a proxy for public real estate, posted an 8.1% gain.

Variety was certainly the case within asset classes. While U.S. stocks posted a strong gain, interestingly, more historically defensive sectors like healthcare and consumer staples led the way. International equities also registered good returns but emerging market equities were negative in the first quarter. Within fixed income, inflation-protected and emerging market debt were negative after four straight annual gains, but high yield fixed income, which had traded in lock-step with emerging market debt since 2008, was up almost 3% in the first quarter.

The year began with investors taking their cue from policymakers with the fiscal cliff debate coming to a temporary conclusion and politicians kicking the proverbial taxing and spending gap to a future date. Broad economic statistics ranging from U.S. employment to Chinese manufacturing to consumer sentiment were on balance positive in the first quarter while corporate earnings continued to deliver. Coupled with highly accommodative central bank policy, this backdrop provided investors with a reason to add net new money to equity funds for the first time since 2010, according to Investment Company Institute data. Bond flows remained positive through February.

The rest of the year will provide several milestones, some of which are period certain while others remain more uncertain. Germany hosts new elections in the fall and Japan’s new central bank leadership embarks on a new campaign to stimulate stagnant price levels in an attempt to combat deflation. All eyes remain affixed on the U.S. Federal Reserve as its ongoing bond purchase program has provided liquidity in its own attempt to stimulate economic activity. With Fed economists and market pundits debating the stimulus plan’s longevity, markets will weigh how the economy and financial markets would react to any decrease or outright cessation of Fed action.

While all of these events bear watching, as Mama Gump said, you never know what you are going to get. With that sagacious advice in mind, investors should emphasize diversification and a quality bias to their portfolios as 2013’s capital market developments continue to unfold. While we see the glass as half full, dispersion across and within asset classes suggests that the path forward may be uneven.

For more expanded commentary, please download the full version below.

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