Economic Outlook

U.S. Making Progress On Debt Addiction

As we expected, the political balance of power has evened out from late 2012, when negotiations about the fiscal cliff saw the White House play a strong hand. As a result, sequestration and the end of government spending authority have come and gone with hardly a ripple. Although we’re still seeing fiscal policy (i.e., government spending) act as a small anchor in the water, the economy’s sails seem to be getting fuller.

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Equity Portfolios

Now Comes The Hard Part

The market’s trials and tribulations of the last four years have been gut-wrenching. Collapsing European economies, Japanese earthquakes and tsunamis, and tectonic shifts in Washington on fiscal issues all were enough to make a grown investor cry. But, through it all, we held a trump card – our research indicated that the prices of assets like selected U.S. stocks were below where they should have been given high-and-rising earnings. In other words, they were cheap, and many disagreed with us. That, by and large, is coming to an end, as prices rise convincingly. Future returns for equity assets may remain robust, and could easily beat other asset classes, but will now be more closely linked with future growth in earnings, which will be harder to discern over the horizon.

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Fixed Income Portfolios

Risk Biased Toward Higher Yields

Whether we’re in a “bond bubble” or not, as the U.S. economy continues to recover, bond markets will face the risk of higher interest rates. Since bonds currently offer such low yields, the risk is biased more toward rising yields (and lower prices). For those investors who aspire for more income, high-yield bonds could be a preferred choice, but careful attention to valuation and fundamentals is required.

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