Quarterly Market Updates
MARKET UPDATE AND OUTLOOK : April 2013
What’s new at J.P. King Advisors, Inc.?
This quarter was a busy one as we welcomed ten new clients to the firm. Thank you to our existing clients and our fellow professionals, (CPAs, Attorneys, and Advisors), who continue to send us exceptional referrals. We are grateful for your support, trust, and confidence.
In February we hosted our latest Market Update and Outlook event at Round Hill Country Club. It was wonderful to have over 65 clients and guests attend. The feedback was very positive; it seems people really enjoyed the presentation we gave, and found it worthwhile. For anyone who wasn’t able to attend, if you’d like a copy of the presentation emailed to you, please let us know and we’d be happy to send it.
Stocks worldwide did well for the quarter, gaining 6.12% (VT). Within stocks however, there was a reversal from the previous quarter. Last quarter, Foreign stocks led the way with strong gains, while U.S. stocks had a small decline. This quarter the opposite was true.
U.S. Stocks rebounded from the previous quarter’s small loss with a gain of 10.6% (S&P 500 Index). Conversely, Foreign Stocks slowed after their gains the quarter before. Developed nations had a modest increase of 1.63% (VEU). Emerging Market Stocks (VWO) did not fare as well, actually declining -3.54% for the quarter. Fortunately we hold the Matthews Asia Dividend fund as part of our emerging market exposure, and it bucked the trend, returning 7.41% for the quarter.
These past two quarters serve as a reminder of how proper diversification keeps overall returns more smooth and consistent; something we put great value on.
Overall, Bonds had their second consecutive quarter of very low returns, gaining just 0.1%, after gaining only 0.2% the quarter before. As we pointed out in our last newsletter, when bond yields are at generational lows, there is simply less return that can possibly be generated. It’s the reality of the low interest rate world we live in. This is a big reason why we prefer active management over indexing in the world of bonds. We believe we’ve identified bond managers who can produce better returns than bond index funds can provide. This quarter that proved to be the case with each of the bond funds we hold (DoubleLine, Pimco, Osterweis, and Templeton Global) outperforming the Barclays Bond Composite Index. It’s important to realize and understand that we are unlikely to see the same high returns from bonds over the next five years that we have the previous five. Despite the challenging outlook for bonds, they still, and always will, remain a critical risk-management tool in well diversified portfolios.
In the Alternatives space, Gold (GLD) declined -4.66% for the quarter, marking the second negative quarter in a row. Gold is off about 15% since its peak last October, meaning it is in a correction off of its recent highs. With central banks worldwide still expanding their balance sheets, and events such as the confiscation of bank depositor assets in Cyprus, we think Gold still has an important place (as a 4-6% allocation), in all portfolios.
Other funds in the Alternative space performed well, with the Marketfield Fund gaining 5.18%, TFS Market Neutral Fund gaining 3.07%, and Center Coast Capital MLP Focus the biggest gainer, returning 13.56% for the quarter. We are especially pleased to see the results from Center Coast as it is a relatively newer fund, one we just added last year to all five risk models.
In the world of Multi-Asset class funds there was solid performance with First Eagle Global gaining 5.06%, IVA Worldwide gaining 6.16%, and AQR Risk Parity gaining 4.70%
Overall, portfolios had positive gains across the board for the quarter, right in line with their corresponding risk exposures. It’s important to note that although the U.S. stock market gets all the headlines, within individual asset classes there was a divergent mix of returns. They ranged from Gold losing almost 5%, to little return from Bonds, only minor gains from Foreign stocks, and large gains for U.S. Stocks. This quarter exemplifies why we put such a focus on diversification. Our approach seeks to smooth out the peaks and troughs of individual asset classes and deliver consistent returns quarter by quarter, year by year.
After another beginning of the year with sizable U.S. Stock gains, we cannot help but feel a sense of déjà vu. We’ve seen a similar pattern before in 2010, 2011, and 2012. In all three years the market jumped out to first quarter gains of 5% or higher, to then be followed by declines of 16%, 20%, and 10% respectively. In all three cases however, the market was able to end each year without a loss. If history does indeed “rhyme”, then it should be no surprise to see increased volatility, and possibly stock market declines, in the months ahead. If so, we counsel you to remember that none of our portfolios are fully exposed to stocks, and that in all three previous years the declines proved to be only temporary.
With the U.S. Stock market approaching and surpassing all time highs, we recently took the action of rebalancing accounts. This is one technique we use to help actively manage risk. At the same time, we also implemented a few internal portfolio changes, which were outlined in our recent Investment Bulletin. At these price levels, it begs the question if we are in for a traumatic repeat of 2000-2002, and 2007-2009, the last times the market was at these same levels. One thing we do know is that the valuation on stocks, their relative price to underlying company earnings, is comparatively in line with longer term averages. This is a big difference from those previous years where P/E ratios were much more elevated. In short, we think stocks are fairly valued at these levels, and not really “expensive”, nor really “cheap”.
As we discussed at our client event, another question to consider is if stocks might be ready to break out of the secular bear market they have been in for the past 13 years, and start a powerful new secular bull market. Our instincts suggest we’re not quite there yet. It’s certainly possible, and not a lot of people expect it (a good thing), but given a global economic outlook we would best describe as “just o.k.”, we’re of the belief that stocks are more likely to trundle along in a trading range rather than really take off. Nobody knows for sure. What we do know for sure is that our portfolios are strongly diversified, and thus well positioned for whatever surprises may come our way.
James P. King, CFP®, Scott Horton, CFP®, Justin Dodson