The U.S. economy's virtuous circle

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Published May 08, 2013

| Covestor

By Matthew Pierce

I was born in Boston, raised in its suburbs, and learned my craft downtown. I drive on Boylston Street, watch the Marathon and root for the Red Sox. The senseless murder and mayhem wrought on my hometown on Patriots Day makes me terribly angry and very sad. What possible political statement, religious cause or frustrated anger can justify such an act? These deeds can’t be explained, except by the understanding that evil exists. Evil is real, innocents are maimed, and lives are changed forever.

What is particularly awful about the bombing at the Boston Marathon is that the violence was random and the consequences to the afflicted were severe. We didn’t expect the bombs and we certainly don’t expect bombings to happen nearby. They were never part of our past experience and did not factor into our plans. But now it is different. It became personal, and possible, when it happened in our hometown.

So now we have a little more uncertainty in our lives, because a random terrible action happened nearby. Some of us will become paralyzed with fear. Some will change our lives in little ways to reduce the possibility that it will happen to us. Some of us will buy more life and disability insurance. Some will hug their loved ones a little tighter and will call old friends. Some will ignore, but none will forget.

Me? I’ll support my hometown, drive down Boylston Street, watch the Marathon and root for the Red Sox. I’ll try to help the victims and their families, and I won’t forgive the evil nor forget the wrong.

While there might be important investment lessons that we can glean from this tragedy, we think that those lessons are best left for another day.

Most equity and bond markets were higher in April, despite a short spike in volatility mid-month. International developed market equities, as measured by MSCI EAFE, did particularly well, returning 5.2% for April and 10.6% for the year, with Japan again leading the pack, up 8.7% in dollar terms in April and up 21.5% for 2013.

Emerging markets (MSCI EM) increased modestly (0.8%), but remain down 0.9% for the year to date.  The US equity markets continued its 2013 gains, with the S&P 500 returning 1.7% for the month and 12.5% for the year to date. The only negative equity performance was in the US small cap index, with the Russell 2000 Small Cap index down 0.4% for the month. European markets returned 4.3% for April.

US bond returns were positive in April and for the year, with the BarCap US Aggregate Bond Index up 1.0% in April and 0.9% in 2013.  Long US treasuries performed much better than expected, up 4.5% for the month as the yield on the 30 year treasury fell to 2.8%.

Corporate bonds also had positive returns for the month. The biggest disappointment in the month was the performance of gold and other commodities. Gold dropped 8.1% and was down 11.7% for the year. The DJ-UBS Commodity Index was down 2.8% for the month. Otherwise it was a surprisingly strong month.

It is hard to make any sense of April’s market returns and the strong performance of so many asset classes. The biggest bright spot, the modestly growing US economy, is tempered by weak European and below average emerging markets growth. I believe strong corporate earnings and extraordinarily accommodative monetary policy, in the absence of inflation expectations, provides a strong base for investable assets to grow.

There is a virtuous circle wealth effect stimulating consumer demand in the US and real estate growth is accelerating. And yet, a retraction from current levels remains a very real possibility and we don’t want to get too enthusiastic. We cannot rule out a correction in the US markets. We’ve seen this act before.

Monetary expansion cannot go on forever and when the stimulus is retracted, we expect inflation to grow, interest rates to respond negatively and the bond markets to decline. We won’t forecast when that will happen.

We’re pleased with our portfolio performance this year, as all of our strategies and portfolios were up in absolute terms for the month and for the year. We again performed in line with our mandate and expectations. Our portfolios are allocated with the objective of participating in up markets while remaining diversified in asset classes designed to reduce the impact of investment loss when equity markets decline.

Island Light’s investment concept embodies a process called Enlightened Investing. We believe this is a stable approach to portfolio management, emphasizing quantitative principles and proven investment practices, while accentuating asset allocation as the most important determinant of long term success in investment planning. This method is designed for the long term investor.

For more information about Island Light’s Enlightened Investing methodology and portfolios, please contact us at 508-687-0061 or email us at info@islandlightcapital.com.

If you want to stop by and talk, you know how to find us.  We’re still here, in Boston, Massachusetts.

The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. it includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values.  The Russell 1000 Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.

The Barclays Capital Long Government/Credit Index measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities longer than 10 years. The average maturity is approximately 20 years.

A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets.

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http://www.foxbusiness.com/investing/2013/05/08/us-economy-virtuous-circle/