Last Quarter Round-Up 

In the last newsletter, I expressed some concerns for the second quarter of 2013. Much of that concern was political based on budget and debt-ceiling debates, which didn't materialize and now appear to be postponed until after the August Congressional recess. In addition, I mentioned the situation in Cyprus and how that might evolve into something more substantial for the European continent. That too, has not materialized. Overall, the quarter was good for the financial markets with the S&P 500 Index gaining 2.4% for the quarter and 12.6% year-to-date. The latest Gross Domestic Product (GDP) reading for the 1st quarter of 2013 was 1.8%. Not unlike previous readings, this is weak growth at best, but still better than contraction.

Our own Federal Reserve (Fed) was the source of the greatest market volatility for the quarter. The Fed hinted at the idea of reducing its Quantitative Easing (QE) program purchases of bonds and mortgage-backed securities. Ben Bernanke made comments that sent the S&P 500 plummeting nearly 5% over just a few days. The market recovered some of those losses by the end of the quarter, but the controversial QE program puts the Fed in a very difficult position where even the mention of reduced easing sends the market into turmoil.

I finished up my commentary last quarter by saying that the risks I described were manageable and that the U.S. economic fundamentals were more positive than negative. My portfolio decisions were more about shifting and adjusting risk exposure as opposed to complete risk avoidance.

Current Quarter Outlook  

The third quarter of 2013 looks like it could be relatively quiet based on the lack of noteworthy events on the horizon. Any U.S. political drivers are likely not going to happen until late in the quarter, or early into the fourth quarter. For the U.S. economy, employment reports, housing sales and GDP estimates are the most anticipated data points - none of which are expected to be out of the ordinary. Of course, these expectations can change quickly.

Looking more closely at investments, with the stock markets hovering near all-time highs, the idea of a more significant correction than what we saw in the second quarter is a possibility. Investors may want to try to find ways to capture some positive gains when markets move up, while offering a degree of protection when they fall. Alternative investments in real estate, commodities and active trading strategies are just a few options.

There are also signs of increased risks in the bond market as interest rates rose notably after recent Fed comments. I expect some of this will reverse, but the writing is on the wall that interest rates will eventually move higher. And that spells trouble for many bond positions. Here too, I am looking at further diversifying bond investments with less interest rate risk, and investigating alternative strategies to reduce overall bond exposure. Bottom line: I believe we may be seeing the beginning of an interest rate transition. My equity strategy for the quarter is to reduce some U.S. exposure in favor of alternatives. For fixed income, my strategy is to add to tactical bond positions and inflation protected bonds.