Market Summary
July-September 2013
The Guessing Game
The major story of the third quarter was further improvement in U.S. employment and the continuation of the Fed guessing game. Investors are speculating on when the Fed will begin tapering its stimulus, and what that might look like. Despite higher volatility, U.S. stock markets posted strong returns in the third quarter. The S&P 500 index of large cap stocks gained 5.2% in the last three months ending September, and is up 19.8% so far this year. Smaller capitalization stocks in the S&P Small Cap 600 index had a very strong quarter, gaining 10.7%. So far this year, smaller U.S. stocks are up an impressive 28.7%.
Overseas, equities did even better. After a lackluster 2nd quarter, improving global conditions led the MSCI Europe, Australasia, and Far East (EAFE) index to gain 11.6% in the third quarter. For the year, foreign stocks are now up 16.1%, though emerging markets are still negative.
Interest rates in the U.S. increased slightly during the quarter with continuing improvements in U.S. employment. However, interest rates remain quite low by historical standards. The Barclays Capital U.S. Aggregate Bond index gained 0.6% in the third quarter. For the year, bonds are down 1.9%.
The Financial Engines perspective
The U.S. economy continues to show modest strength, with higher employment growth and housing prices driving improved consumer confidence. The government shutdown and how the possibility of a protracted debt ceiling debate might impact investor and consumer confidence are the biggest concerns. The shutdown will have only a modest economic impact in the short run, but the threat of Congress not raising the U.S. debt limit is a greater concern. Given the uncertainties, we can expect higher volatility in both bond and stock markets. The best strategy in such times is to maintain a diversified portfolio and not let short term movements dominate your outlook.
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