Brian Gibbs
RFC, BSFP
2013 1st Quarter Economic Update
The first quarter of 2013 was one for the history
books—many stock indexes finally returned to the
levels they reached 5 ½ years ago at the start of the
great recession! Let’s look at the numbers:
 The Dow Jones Industrial Average
finally managed to get past its
previous closing high of October
2007 and jumped 11.9% (including
dividends) for the quarter, its best
first-quarter showing in 15 years.
That gain accounted for almost all
the blue chips’ 13.4% total return
for the past 12 months.
stock market lower.” (Wall Street Journal, March 5,
2013)
 Concerns about the health of the U.S. economy are
fading. While growth is far from vibrant,
unemployment is falling, and in many
places, home values have started to
rise. Corporate profits are at record
levels and confidence is rising among
consumers and businesses.
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
The S&P 500, made up of largecap stocks, was up 10.6%, bringing
its 12-month return to 14%. It last
hit a record high in October 2007,
then shed more than half its value
during the financial crisis. The
S&P is now up 132% from its
March 2009 bear-market low,
making this the fifth-best “bull
market” for the index since 1929,
according to Bank of America Merrill Lynch.
(Source: WSJ March 29, 2013 )
 The Nasdaq Composite Index, dominated by
technology stocks, increased 8.2%. It has recovered
all of its losses from the financial crisis, but still
remains more than 50% below its record high in
2000 during the tech-stock bubble. (Source: WSJ,
March 29, 2013)
The Recovery
There are many reasons for this short, dramatic
recovery, including:
 Easy money at the world’s central banks, including
the Federal Reserve. Many investors believe that
unless the Fed changes its strategy, “it will take a
serious shock from somewhere else to send the U.S.

Dividends for the S&P 500
index are now at an all-time high and
many corporations have announced
that they intend to increase them this
year.

Share
repurchases
have
surged,
with
U.S.
companies
announcing plans to buy back $117.8
billion of their own shares in
February—the highest monthly total
since at least 1985, according to
Birinyi Associates. (Source: Dow
Theory Forecast, March 18, 2013)
 Many investors—both individual and corporate—
who hoarded record amounts of cash during the last
four years are finally deploying that cash. This is a
bullish move that is triggering steep rises in many of
the more popular stocks due to its demand.
 Industrial production has increased since 2009, but
output is still not even back to pre-financial-crisis
levels, meaning businesses can keep growing without
big capital expenses.
 The real estate market has finally begun to stabilize.
Last year the number of new homes constructed in
the U.S. rose sharply, but annual housing starts were
still only about half the long-term average.
 The American Taxpayer Relief Act (ATRA) of 2012
removed some of the uncertainty and avoided the
massive tax increases of the fiscal cliff. ATRA raises
tax rates sharply—but only on the top 1%.
 Investors don’t want to be left on the sidelines and
miss out on the stock market’s record-breaking run.
Some of the concerns over interest rate increases
(which would devalue bonds) currently outweigh
stock market worries.
 Fiscal woes. As our deeply divided government
lurches from one crisis to another, confidence in
the U.S. economy could continue to drop and
America’s debt rating could again be
downgraded.
With all of these record increases, even optimists
wonder if this rally is due for a correction. Some
investors worry that the stock recovery will dry up
once the Fed stops pumping money into financial
markets. Others are still shell-shocked from the
recession, and therefore aren’t fully appreciative of the
fact that the period since March 6, 2009 has been one
of the best ever to own stocks. Obviously, the kinds of
returns we can expect ahead are uncertain.
Unfortunately, many investors who decided to sell
their stock positions after the market declined missed
out on this remarkable recovery—one of the best bull
markets of our lifetime. Thanks to many individual
investors’ aversion to equities, companies in the S&P
500 are cheaper than at any record high since 1980. As
the old saying goes, “The stock market is one of the
few things that people don’t buy when it goes on sale!”
Moving forward, there are strong arguments for
believing that “the bull market may still have room to
run,” according to Jeff Sommer in the New York Times.
Quantitative Easing
(Source: Money, March 2013)
In September 2012, the Fed announced another round
of temporary unconventional monetary policies known
as Quantitative Easing 3 and vowed to keep buying
mortgage-backed securities until the unemployment
rate declined to 6.5%. This is an unprecedented openended commitment to print massive quantities of
money at a time when the economy is actually growing
(even though it is currently at a very low rate). The Fed
is purchasing $85 billion per month and is reducing
short-term interest rates to an artificially low return,
with a near-zero interest rate. For now, Quantitative
Easing has created returns that are far above most
investors’ estimates
Is this recovery for real? While caution should still be a
priority, according to many economists, the answer is
yes. A steady stream of positive economic and market
news could be interpreted as a sign that happy days are
here again! Consider the signs of progress—a new
stock market high, a reduction in unemployment, and
according to a recent Federal Reserve report, U.S.
consumers have spent the last four years reducing debt
and repairing their household balance sheets. The data
confirms what we already know about the economy—
slow, positive growth, coupled with very mild
inflation. The global macroeconomic environment,
although improving, remains shaky and fragile.
However, for some, this just makes the record highs
appear even more impressive.
Interest Rate Increases
The Bear Market Attitude
Opportunities in bonds appear to be far less than they
have been in recent years. The search for income the
last few years eliminated much of the margin of safety
in traditional income investments such as Treasury
Bonds and investment grade corporate bonds. (Source:
Unfortunately, there are a number of things that can
cause the market to drop significantly at any time:
Bob Carlson’s Retirement Watch, April, 2013)
 Irrational exuberance. Given the stock market’s
sharp advance over the last six months, a pullback
of 5% to 10% could occur at any time. But if stocks
keep rising too far too fast, another bubble might
emerge.
US Treasury bonds hit their highest levels this year,
with yield on the 10-year note falling to 1.8%, due to
the Japanese moves and the rising Korean tensions.
Unfortunately, as the economy starts to show signs of
life, the interest rates on long-term Treasuries could
easily rise to the 5% or 6% range, slashing the value of
current holdings. In addition to this, with interest rates
already near zero, there is only one direction for bonds
to go: down. (Source: Leebs Market Forecast, April 1, 2013)
 Global uncertainty. Crisis fatigue and austerity
backlash in the Euro-zone could undermine aid for
struggling countries (such as Greece) and reignite
Europe’s financial crisis. In addition, if China’s
annual growth rate drops far below its expected 8%,
it could put a serious dent in the global economy.
Even though bonds could face difficult times ahead,
bailing out may lead to more problems than just
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staying put. One of the best courses of action is to
determine how much of your total portfolio should be
in bonds and stick to that percentage regardless of
interest rate predictions. But if you want shelter from
rising interest rates, you can ladder short-term bonds
and reinvest the maturing bonds into higher-yielding
bonds, or invest in dividend-paying equities.
International
Unfortunately, investing abroad didn’t work in the first
quarter. Instead, the U.S. proved a haven in a world of
woe. In U.S. dollars, the MSCI EAFE Index, which
tracks developed markets outside the U.S., returned
only 5.2% for the quarter. Emerging markets actually
dropped 2.1%. With risks abroad and interest rates near
zero, many investors have referred to this as a TINA
market—as in “There is no alternative to U.S. stocks
for storing your money.” (Source: Barron’s April 1, 2013)
Inflation
So far, annual inflation has been low enough that many
policy makers have largely ignored it. However, most
U.S. consumer prices are up 13% since 2007. Current
inflation is about 1.7% annually. Although historically
low, it can still have a corrosive effect on retirement
savings. For example, a 5-year, $10,000 CD paying the
current average interest rate of 1.0% will be worth
about $9,655 in present dollar terms at the end of its
maturity, assuming the inflation rate stays at its current
level. If inflation increases, the present value gets
worse, too.
While many investors believe that a meltdown in
Europe is out of the picture for now, remember that
Europe is still in a deep hole and will take a long time
to climb out. Meanwhile, the global economy is still
trying to find itself. China’s economy is slowing but
will likely avoid the hard landing many investors
feared would occur in late 2012. For many reasons
beyond the economic, North Korea is a key concern.
They are preparing for a fourth nuclear test and have
explicit government authorization to strike U.S. targets
with nuclear weapons. The US hasn’t begun preparing
for war. In fact, many believe that Korea’s actions are
just a bluff. In response to these threats, the U.S. has
prudently deployed extra forces as a sign of deterrence,
including B-2 bombers, F-22 fighters and AEGIS
destroyers.
Rebalancing Your Portfolio
While the stock market rally has likely buoyed your
portfolio, it may have also shaken up your investment
mix, your overall portfolio risk and possibly your
emotions. To keep risk in check and your plans on
target, you need to reassess your asset allocation and
rebalance your portfolio, making sure you have enough
cushion to protect yourself from market downturns.
However, resist the temptation to change your
allocations just to chase returns. This will almost
always hurt you in the long run. Have your investment
goals and risk tolerance really changed? If not, your
target investment mix shouldn’t change.
Volatility
Wild price gyrations are one of the hallmarks of a
financial crisis. This is typically caused by frantic
selling during times of uncertainty, then bursts of
buying when authorities step in to head off disaster. In
recent months, volatility has dropped off noticeably as
investors see less need to run to the exits at the first
hint of bad news. During the recent banking crisis in
the island nation of Cyprus, for example, most stock
markets saw only a brief setback. It was a similar story
here in the U.S. when the so-called sequester
(mandatory government spending cuts) caused barely a
ripple. This shift underscores a belief that the global
economic recovery from the financial crisis is on a
more sustainable track.
Unemployment
Total unemployment peaked in late 2009 and has
dropped relatively steadily since then to 7.6%, a fouryear low. The long-term unemployed (those out of
work over six months) made up 39.1% of all job
seekers in December 2012, according to the Labor
Department, which is a three-year low. While we like
to see this epidemic finally easing, the problem is far
from solved. However, top Fed officials have made it
clear that the labor market’s health is their primary
worry right now. (Source: WSJ March 9, 2013)
Conclusion
Bull markets usually begin in moments of maximum
fear, when it is the best possible time to invest. Bear
markets often begin when earnings and dividends are
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at all-time highs. Right now, a market pullback would
not be surprising. Still, with stock valuations
reasonable and the primary trend still bullish, many
investors are keeping a significant portion of their
investment portfolio in the stock market.
Declining energy prices have a positive effect on
another sector of the economy that is already coming
back: manufacturing. More than half a million
industrial jobs have been created since 2010 and
PricewaterhouseCoopers estimates that employment in
manufacturing will rise by another million over the
next dozen years or so. (Source: Money, January/February
Many economists are predicting that 2013 is the year
that the U.S. economy could pick up steam on the way
back to broad-based prosperity. Some believe that we
could be at the beginning of a run rivaling the
manufacturing boom of the 50s and 60s that built the
middle class, or the tech boom of the 90s that built the
investor class. In fact, we may see an energy boom as
improved technology has led to remarkable growth in
natural gas extraction, which has in turn pushed down
prices dramatically. Oil production is also ramping up.
According to the International Energy Agency, the US
is projected to become the world’s biggest oil producer
by 2020 and could be entirely energy independent 15
years after.
2013)
The remainder of this year could be very confusing
and we are constantly monitoring the economic
environment. If you have any immediate concerns
about your specific investments or portfolio, please
contact our office.
P.S. It is important to remember that “Bull
Markets are born on pessimism, grow on
skepticism, mature on optimism and die on
euphoria” – Sir John Templeton, Templeton Funds
Founder and Former Chairman.
Complimentary Financial Check-up
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you a complimentary, one-hour, private consultation with one of our professionals at
absolutely no cost or obligation to you. To schedule your financial check-up, please call
Raylene at Heritage Retirement Advisors, Inc. at (858) 487-1111.
About Brian Gibbs:
Brian D. Gibbs, RFC, BSFP, is President of Heritage Retirement Advisors, Inc. and has over 30 years of
experience helping business owners and executives, retirees, and those about to retire. Brian can be reached at
(858) 487-1111.
The views expressed are not necessarily the opinion of Heritage Retirement Advisors, Inc. and should not be construed, directly or indirectly, as an offer to buy or sell
anything mentioned herein. This article is for informational purposes only. This information is not intended to be a substitute for specific individualized tax, legal or
financial planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional.
Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their
accuracy or completeness cannot be guaranteed. Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses. No
investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. In general, the bond market is volatile, bond
prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to
maturity may be subject to a substantial gain or loss. The investor should note that investments in lower-rated debt securities (commonly referred to as junk bonds)
involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and
increased risk of default. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. International
investing involves special risks including greater economic and political instability, as well as currency fluctuation risks, which may be even greater in emerging
markets.
Sources: Wall Street Journal (2/11/13, 3/9/13, 3/11/13, 3/25/13, 3/29/13, 4/1/13), Retirement Watch (April 2013), Barron’s (4/1/13), Dow Theory Forecast (3/18/13),
Kiplinger Retirement Report (April 2013), The Week (3/22/13), Leeb’s Market Forecast (4/1/13), Steve Leimberg Report (3/5/13), Money Adviser (December 2012),
Money Magazine (January/February 2013) Contents Provided by MDP, Inc. Copyright 2013 MDP Inc.
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