Hillspring Financial, Inc.
Economic Update
Quarterly Economic Update
July 17, 2013
Dear Clients, Alliances and Friends,
It seems like hardly a quarter goes by without something exciting to talk about - and this is no exception. As expected, the markets have rallied nicely since the knee-jerk reaction by investors in May and June and your accounts have done well since then.
We need to keep in mind that since the Fed's quantitative easing began in earnest, the markets have responded so well we feel the stock market is currently at a fairly high valuation. We don't see it as over-valued as some have said, but we don't expect to see continued gains like we have. The long-term prognosis for the next five years or so is to expect a real (after inflation) return in the single digits.
There is really no way to predict how investors will react to further actions from the Fed. We do suspect they will consider tapering their "easing" toward the end of this year. However, we don't expect this tapering to be significant. If we see the markets over-reacting as they did in May and June, it could provide opportunities for our managers to take advantage of lower prices.
How our markets move over time is really dependent on how the economy goes - not how the public reacts to a news item or a comment by the Federal Reserve Board Chairman. And of course this is referring to the global economy, not just domestic. For instance, we see China's GDP, which is currently 7.5%, slowing which will affect some exporters who rely heavily on China. Our own GDP is a little under 2% and expected to pick up a little in the 4th quarter. According to IMF (International Monetary Fund) the global growth is 3.1% now and is expected to improve to 3.8% next year. Emerging market countries are seeing a little more slowdown than expected right now, but we expect that to turn the other way in the longer term.
One of the main issues we need to contend with going forward is interest rate risk. Fixed income prices are still very high and thus our managers are very active in moving away from core bonds in our portfolios. In doing so, they use more flexible and absolute-return oriented bond funds as well as utilizing alternative strategies to diversify away from the market where prudence suggests.
As good as they are, none of our managers profess to know when negative events will occur in the markets in the short term; however, our managers we use have excellent long-term track records and should serve us well.
As you can imagine, it does take constant vigilance on our part as well as our research teams to keep the best managers in place and, even more importantly, to allocate each manager in your accounts keeping the expected volatility and overall returns in line with your expectations.
As some of you are already aware, we now have the technology to allocate your portfolios in a much more precise methodology. This technology will allow us to zero in on your specific tolerance for average expected volatility, enabling us to monitor and manage your accounts more effectively going forward.
We appreciate very much the opportunity to work with you and look forward to any questions you may have.
Sincerely,
Max W. Smith, CFP®, CIMA®, Chairman
Kent Forsey, President
If you have questions, comments or would like additional information click here,