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3Q/2013: The Quarter in Review

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In the third quarter of 2013, risk was nicely rewarded for all classes of equities except REITs, and fixed income staged a small comeback from a difficult second quarter. Once again, there was a lot of discussion surrounding future Fed policy, particularly as it relates to the eventual tapering down of the Fed’s program of bond buying known as Quantitative Easing. Perhaps the biggest market-related story was the budget showdown between the House Republicans and President Obama, backed by the Senate Democrats. Neither side blinked, so the government was forced into shutdown mode on midnight of September 30th, but the market appeared to shrug it off, as the S&P 500 was up 0.80% on October 1st, with no resolution in sight. A little investigation reveals that we are no strangers to government shutdowns. According to this Wikipedia article, there have been 18 shutdowns since 1976 (including this one). Regarding the prospect of a potential failure to raise the debt ceiling October 17th, it appears unlikely that it would automatically trigger a default on U.S. government debt because the Treasury is still collecting substantial tax revenues which could be applied towards interest payments on current debt. Current Treasury bond yields (as of 10/3/2013) are lower than they were a few weeks ago, suggesting that the market is not assessing an increased probability of default.

The other large story of the third quarter was a threatened attack on Syria by President Obama that was defused by Russia’s Vladimir Putin and the United Nations. A related story is the beginning of a possible rapprochement between the U.S. and Iran. All of these stories will continue to play out in the remainder of 2013 and probably well into 2014.

Domestic Equities

Once again, the news for U.S. equities is good. As the two tables below show, it was a good quarter and continues to be a good year, particularly for small cap and value equities.

 

The table below shows how the IFA weightings of the domestic asset classes in its portfolios have compared to the overall U.S. market for the quarter and year-to-date.

 

International (Developed) Equities

Despite all the continuing tension on the international scene, particularly as it relates to Syria and the rest of the Middle East, the third quarter was especially strong for international developed equities, particularly small cap and value.

 

The table below shows the overall returns for the international blends used in the IFA portfolios:

 

Emerging Markets Equities

Although they did not do nearly as well as international developed, emerging markets equities gave a good accounting of themselves in the third quarter, but they remain negative on a year-to-date basis.

Source: dfaus.com and ifaindexes.com

For the mixture of emerging markets indexes used in the majority of IFA's Index Portfolios, the 3Q/2013 return was 5.29% and the year-to-date 9/30/2013 return was -4.06%.

Real Estate

For 3Q/2013, the IFA real estate index was down 0.11%, and on a year-to-date 9/30/2013 basis, it was up 2.66%. This index is a blend of domestic and international real estate investment trusts (REITs). Domestic REITs were down 3.31% for the quarter, while international REITs were up 4.93%. On a year-to-date basis, domestic REITs were up 2.45% while international REITs were up 2.90%.

 

Fixed Income

You may recall that in the second quarter fixed income turned in negative returns as interest rates rose in response to fears of future tapering down of quantitative easing. While it is still negative on a year-to-date basis (especially at the higher durations), the bond market rebounded somewhat after reassuring statements by outgoing Fed Chairman, Ben Bernanke.

Once again, we will mention that interest rates are still at very low levels relative to their historical averages, so it is possible that we will see more quarters like the second quarter. For the mixture of fixed income indexes used in the majority of IFA's Index Portfolios, the 3Q/2013 return was 0.46% and the year-to-date 9/30/2013 return was -0.03%.

 

IFA Index Portfolios

Putting it all together, the returns for the IFA Index Portfolios are shown below, net of IFA’s 0.90% annual advisory fee.