Last Quarter Round-Up   

Last quarter I expressed concern about Q1 2013 based mostly on political concerns here in the U.S. That concern turned out to be unnecessary. In fact, the S&P 500 Index posted a respectable 10% increase in the first quarter. Bonds didn't do as well with the Barclay's Aggregate Index down -0.13%. On the political front, we had the debt-ceiling limit reached on December 31, 2012 that had to be addressed in February. With little political noise, the debt-ceiling was raised and extended until May 2013. Then we had the budget "continuing resolution" (a budget extension mechanism) which had been in place since September 2011 and set to expire on March 1st. It too was quietly extended until September 30, 2013. Finally, we had the Sequestration budget cuts which were also scheduled to go into effect on March 1st and another political battle I expected. Evidently, politicians decided it wasn't worth the effort and the Sequester deadline came and went into effect. Thus, the three major political issues I expected to drive market volatility did not materialize. Economically, the U.S. held its own with improved unemployment and a continued housing recovery.

In Europe there was a much hyped bailout of Cyprus. This generated renewed concerns about the ability of the European monetary union (EU) to hold together. The situation and bailout terms are too detailed for discussion here, but a major component of the deal are government established capital controls (i.e. bank withdrawal restrictions). This is an unprecedented step beyond past EU bailout agreements.

Current Quarter Outlook 

At the risk of being overly conservative, I repeat my concern about the coming quarter. With possible budget and debt-ceiling fights in the near future, the risk of market volatility should not be ignored. However, I do recognize that continued postponements, or even solutions are possible. Looking beyond politics the U.S. economy appears to be continuing its slow, positive trend. Gross Domestic Product (GDP) for the fourth quarter of 2012 was revised up in the last official revision to 0.4%. First quarter GDP looks like it could register in the 2+% range...more unremarkable but steady growth.

Europe adds a certain risk to the second quarter story. The Cyprus bailout appears to represent a new twist in the continued political crisis in Europe. I say political purposely because it seems apparent that some of the Cyprus decisions made by EU leaders, mostly German, were influenced by the elections coming in September. Cyprus is on a path of austerity and recession that will be considered by many in the EU electorate to be better than funding the bailout with taxpayer funds. It will be interesting to see how this plays out over time.

What I am describing are not "run for the hills" types of risk. Overall, there is a chance the markets will hold current levels with little volatility. The U.S economic fundamentals are more positive than negative. Thus, my approach is to shift some portfolio risk while remaining at or near fully invested. My equity strategy for the quarter is to maintain both U.S. and European exposures. For fixed income, my strategy is to reduce short duration bonds and add to alternative investments.