Third Quarter 2013 Market Review

After suffering through a plethora of negative events for more than three years, almost nothing appears to meaningfully raise the anxiety level of investors these days. We commented early in the year that a better housing market, permanent changes to our tax code, and fixes made to the European banking system should substantially lessen the market’s volatility and risk exposure.

The virtually crisis-free environment over much of the past twelve months has resulted in good stocks going up and problem stocks going down. This more normal investment environment is expected to continue the majority of time over the next several years. The good news is that our company-specific, fundamental type selection process tends to perform well during periods like these.

Growth stocks significantly outperformed at all market capitalization levels and for the second quarter in a row, while the higher dividend paying utility, telecommunication and consumer staples stocks collectively lost money. Small Capitalization stocks outperformed both mid-cap and large-cap stocks. The S&P 500 Indexes rose 6.02% and 5.24%, respectively.

Interest rates rose slightly during the period, resulting in a modest 0.62% gain for Barclay’s Intermediate Government/Credit Index and a 0.72% gain for the S&P 2018 Municipal Bond Index. Looking into the fourth quarter; U.S. economic growth is slower but not negative; Europe seems to be gaining some traction for the first time since 2007; the political wrangling has been put on hold for 90 days; the sequester is reducing Government debt; and the appointment of Janet Yellon to head up the Fed may provide even more stimulus to the economy and markets than “helicopter Ben” bestowed upon us.

Short term, the market is overbought and investor sentiment is a bit complacent. While these last two factors have typically resulted in a temporary market consolidation, we haven’t had a meaningful correction since the market began its turnaround in 2009, and this pattern might just remain the same this time around.