Third Quarter 2013: Reruns & Patience
The quarter ended with Congress locked in a stalemate as the House and the Senate could not reach a deal to avert the first government shutdown in 17 years. Even still, US equity markets finished up for the quarter as the Federal Reserve continued purchases of long-dated government securities after hinting throughout the summer that tapering could begin as early as September. The FOMC statement cited tightening credit markets, sluggish employment numbers, and fiscal uncertainty as reasons to delay the removal of stimulus. Chairman Bernanke was dismissive of questions about his succession plans and one potential replacement, former Treasury Secretary Lawrence H. Summers, withdrew from consideration in response to political opposition. All the focus on the Federal Reserve’s future plans contributed to interest rate volatility in the quarter, resulting in 10-year treasury yields rising to their highest level in two years before finishing the quarter only slightly higher than where they began the quarter, at 2.6%.
Internationally, developed markets were buoyed by Europe’s second-quarter exit from its longest recession in 40 years, and the reelection of German Chancellor Angela Merkel helped clarify the direction of the Eurozone. Manufacturing and business activity showed notable progress but uncertainty remains in the form of Greek debt and potential political woes in Italy. Emerging markets, sensitive to US interest rates, continued to be affected by taper talk and capital outflows. The Reserve Bank of India was forced to step into currency markets and raise interest rates in order to combat the inflation and currency depreciation that has hampered Asia’s third largest economy. Chinese manufacturing strengthened in the quarter as the country looks to rebound from a slow second quarter.
Looking ahead, markets will seek clarity to the Federal Reserve’s (and Chairman Bernanke’s) exit plans in the coming months.
This quarter marks the fifth anniversary of the Lehman Brothers collapse that ignited the 2008 global financial crisis. With the benefit of hindsight we can say that this uncertain period has not diminished investment returns – indeed, every major asset category in the world’s financial markets has experienced a positive return since that date. Patient investors have been rewarded. Opportunistic, valuation-sensitive investors have been even more richly rewarded.