As U.S. equity markets reached recent & all-time highs during the second quarter, various concerns surfaced resulting in a pullback in not only equities, but bonds and precious metals as well. Despite the implementation of the stimulus package in China committed to infrastructure needs, the Chinese economy continues to soften causing a downturn in basic materials after a short-term spike in prices. With economic growth in question regarding China, all eyes have turned to the U.S. where we are experiencing positive signs in certain areas such as job creation and the housing industry. It is these same positive signs that prompted the Fed to initiate discussions as to how they will proceed with discontinuing the recent round of quantitative easing.

The Fed’s proposal certainly had an impact on bond prices where the 10 year Treasury rate jumped by approximately 0.8% during the last two months of the quarter. Our conservative portfolios were negatively impacted due to lower bond prices combined with our cautious allocation to equities, each having a role in contributing to overall portfolio performance relative to equity markets. Examining each component closely we note that the recent increase in interest rates is not being driven by inflationary pressures and that equity markets are trading closer to valuations supported by 2014 earnings estimates. Our conclusion is that bonds may be oversold on a short-term basis and equity markets are currently overvalued relative to 2013 earnings estimates.

We remain true to our balanced approach and see our year-end DJIA target of 13,800 as a support level based on company fundamentals. Our concern as we continue to track earnings adjustments is that less than one third of the companies we follow are reflecting positive trends. The remaining companies are either flat or negative when it comes to adjusting earnings estimates for both the current and following fiscal years. This raises the question as to the ability to sustain equity prices should fundamentals weaken based on projected economic growth. We would prefer to see a self-sustaining economy vs. one that is being supported by the Fed but we do question if such an economy can exist with a projected GDP growth rate of 2.8% for next year.

Two areas we would like to touch on are Emerging Markets and Gold. Emerging Markets have suffered a downturn due to fears associated with credit tightening and its impact on their local economies. We feel that current market levels in this area are extremely cheap relative to fundamentals and we shall maintain our current allocation to Emerging Markets. Gold has remained a mystery during the second quarter. After dropping to 3 year lows it did not exhibit any strength during the pullback in U.S. equities and the significant drop in Asian markets. What was even more puzzling was how bond prices didn’t even firm during the same scenario. What happened to “flight to safety?”

We would like to thank everyone who attended our Round Table Discussion event. The feedback from those in attendance was extremely positive and it was definitely a pleasure interacting with everyone discussing the issues that we typically cover at our Investment Committee Meetings. Please visit our website,, for more information on our newest team members.

Download Q2-13 Market Commentary

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