Events like the IRS scandal, Egyptian political problems, Obamacare missteps, NSA phone taps, China’s credit crunch, the Benghazi disaster, and Japan’s economic instability were not significant enough to disrupt the stability of the U.S. stock market in the quarter just ended.
On the other hand, most foreign stock markets were noticeably weak during the period, and the abrupt increase in interest rates caused a temporary 6% correction of stock prices and an even greater correction for stocks that pay above average dividends. This hurt prices for stocks like utilities, which declined 2.73% for the quarter. On the other end of the spectrum, financial stocks led the way with a 7.25% gain followed by consumer discretionary stocks at +6.81%.
Overall, the S&P 500 increased 2.91% for the quarter. Growth stocks outperformed in the small and mid-cap space, but it was value stocks that took first place in the Large Cap arena. The average U.S. domestic mutual fund increased 2.29%, the average Foreign Stock fund was off 2.2% and taxable bond funds declined 2.43%.
Our experience in the most recent quarter continues to bolster the opinion held by many fund managers that the market continues to be decoupled from the overall economy as a result of unprecedented intervention by Central Banks worldwide. This is evidenced by the spike in volatility we observed at the mere hint that the US Federal Reserve may begin tapering its current stimulus effort known as QE3. Moving forward, we expect Federal Reserve policy to remain accommodating as the fundamentals of the economy have leveled off and in some areas have even begun to deteriorate.
While these policies have been bullish for stocks to this point, the longer they continue without substantial improvement in the economy, the greater the risk of periods of higher volatility for which our newly revised hedge is well suited. Add to this the uncertainty over the continued implementation of Obamacare, the first major city bankruptcy in Detroit, the ongoing tax and budget battles in Washington DC, and you have an environment where unhedged portfolios could experience uncomfortable P/L swings.
Still, over the near term, we do not believe we are on the verge of a new recession and that equities, with proper protections in place will continue to be the place to be invested.