From June 1 to September 30, the S&P 500 rose 12.7% (excluding dividends). This rise occurred despite continued evidence of a weakening global economy. One thing that is helping to drive stock prices higher in the short-term is aggressive monetary policy on both sides of the Atlantic. Central banks are trying to keep interest rates low in order to stimulate the economy and give banks a little more time to shore up their balance sheets.
Food and commodity prices have continued to rise, but core inflation pressures (namely wages) remain muted. U.S. government bond yields are still near record lows and the Fed’s open-ended announcement to buy mortgage securities has led to yet another refinancing boom. The housing picture in the U.S. continues to improve in most markets. According to the National Association of Home Builders, confidence among builders has reached a new 6-year high.
Year-to-date, the U.S. stock market has returned 16.1%, as measured by the Russell 3000 Index. Large U.S. stocks are up 16.3% (Russell 1000) and small U.S. stocks are doing their best to keep pace, up 14.2% (Russell 2000). Large international stocks are up 10.1% (MSCI EAFE), and small international stocks are up 13.2% (MSCI EAFE Small). Emerging markets are up 12.0% (MSCI Emerging). Short-term, high-quality corporate bonds have returned 3.3% (Barclays 1-3 Year Credit) this year, while the broader bond universe has returned 4.0% (Barclays Aggregate Bond).
Since December 2007, investors have poured more than $1.1 trillion into bond funds, but on a net basis have added almost nothing to stock funds. For many investors, the return of principal is still trumping the need for a return on principal. We like the fact that there is still a large amount of money on the sidelines waiting to “get comfortable”.
On the flip side, the U.S. economy is no longer in the early recovery stage of the current economic cycle. Our best guess is that we are somewhere near the beginning of the expansion stage. This stage can last several years before the economy eventually contracts again, but it can also end abruptly due to a shock. Prudent investors will not try to time these cycles, but will remain invested in a diversified portfolio and rebalance on a regular basis in order to keep expected risk and return in line with their long-term objectives.
This is a good time of year to talk with your advisor about taxes and to make sure that you are doing all that is prudent to minimize your 2012 liability. If you intend to make a charitable gift this year, consider using appreciated stock instead of cash. For some, it may also make sense to lump 2012 and 2013 giving into one year and make the gift in 2013, since tax rates will probably be higher. Keep us informed and allow us to help you make the most of your charitable dollars.