The first quarter started with the one of the most hyped economic/political events in recent memory, the Fiscal Cliff, and we ended the quarter with a near banking collapse in Cyprus. Sandwiched in between these events the U.S. Congress debated sequestration and raised taxes. Despite all of the distractions, corporations continue to grow earnings to record levels and the consumer is healthier and spending more. Behind the scenes, some major U.S. stock markets indices quietly surpassed their historic high water marks.
If you stayed invested and ignored the financial news networks, internet, newspapers and pundits your investment portfolio likely grew in the first quarter and over the past year. In our chart below we recap the numbers. Risk was rewarded again in March and for the trailing twelve months. Large capitalization U.S. stocks were the best performing group while international stocks lagged. Emerging markets had a difficult month and are lagging over the past year, but we see opportunity there in the quarters ahead. Remember, fundamentals drive stock price over time. Corporate earnings continue to grow, housing is rising from the ashes, employment slowly improves and PE ratios are beginning to expand all providing for positive price momentum in equities.
The investment grade bond market is beginning to slow down its pace of appreciation after an amazing 32-year run. This is reflected in the returns of the Aggregate Bond Index and the Municipal Bond Index. It is not the end of the world for bonds, but investors need to lower their future return expectations. Bonds have consistently returned five to six percent over the past ten years and at these interest rate levels expect a one to three percent annual return as we move forward. High yield bonds have enjoyed equity like returns over the past year and this too will slow down in the coming quarters.
Our best advice to clients is to stay invested at a risk tolerance designed for your specific financial situation. The market rewards patient long-term investors. It has over the past five years and it will over the next five years. Find the right combination of investments strategies and you too will enjoy the financial success of being a long-term investor.