Market commentary

By Brian Jacobsen,
Ph.D., CFA, CFP^®,
Chief Portfolio Strategist

Now that we’re well into 2013, it’s tempting to generalize from the first three months of the year what the tone of the full year will be. But the most we can know is that there will continue to be changes.

In the U.S., we expect political skirmishes and the resulting uncertainty to persist throughout the year. We’ve seen this happen in the past and anticipate that political progress this year will play out according to the same patterns, though we cannot predict the time frame.

We expect to hear more political talk about the fiscal cliff and federal and defense spending cuts. We also anticipate more political conversation about the impact on the consumer from payroll taxes increasing.

The bright spot for investors is that U.S. businesses are proving that their profits are relatively shielded from these political changes, with corporate earnings recently surpassing their 2007 highs. Despite these high earnings, we think there is long-term value in equities and recommend that investors maintain meaningful exposure to equities around the world.

In the coming year, we expect U.S. interest rates to remain low, 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 to stabilize a portfolio. Investors with a longer time horizon may find higher yields by taking on more credit risk.

What can investors do?

• Invest more in stock funds and less in bond funds: We expect this to be a good year for equities and recommend a strategic tilt to equities relative to fixed income for investors with an investment horizon longer than three years. Within the equity portion of a portfolio, we think opportunities exist around the world, including European, Japanese, emerging markets, and U.S. companies. We continue to recommend that investors stay diversified across all areas of the market, leaning toward what we see as the most notable growth opportunities in health care and technology.
• Manage risk: While most investors find it necessary to take on risk to pursue returns, we suggest that you expose your portfolio only to risks you are comfortable with. In the coming year, global economic and political events may generate negative outcomes, which is one of the reasons we recommend casting a wide net for opportunities and staying well diversified.
• Stay focused on higher-yielding debt: Investors seeking current income may be better served by higher-yielding debt, such as corporate bonds, rather than lower creditrisk issues, such as U.S. Treasuries. We expect credit fundamentals to remain favorable in the months ahead, which is why we believe that taking on a moderate amount of credit risk is preferable to increasing duration risk this year.

Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.