By Brian Jacobsen,
Ph.D., CFA, CFP®,
Chief Portfolio Strategist
Perhaps the biggest surprise in the second half of 2013 is how little the markets have changed from the first half of the year. The forces that drove stocks higher in the first half are still with us today, and valuations remain reasonable. There are still no clear economic signals: growth, consumer spending, and wages remain weak, while employment, automobile sales, and housing have been improving.
Housing has been a key source of growth this year, keeping the U.S. Federal Reserve (Fed) keenly aware of the importance of low interest rates to the housing recovery. Mortgage rates have risen recently, but the Fed remains intent on stimulating the economy. As we have said before, don’t fear the Fed—it seems to have investors’ backs.
Looking overseas, we sense that Europe may be reaching the end of a long, dark tunnel and suspect that the markets there are changing for the better. An improvement in Europe would be beneficial to the U.S., as well, and even more so to emerging markets, such as China and India.
As we’ve warned all year, we expect U.S. interest rates to remain low throughout 2013, which may be a particular challenge for investors approaching or in retirement. Fixed-income investments may not represent as good an opportunity as equities, but we believe they continue to provide diversification benefits. Investors with a longer time horizon may find higher income potential by taking on more credit risk in higher-yielding fixed-income securities.
The possibility of disappointing economic growth in the second half of 2013 could create more market volatility, but we believe the Fed’s actions should help cushion potential losses. The market corrections of May and June, followed by the recovery of July, were vivid reminders of why investors should stay focused on their longer-term goals.
What can investors do?