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US Stocks Continue to Outshine

Market Digest – Week Ending 5/17

The bull marches on. The S&P 500 posted its fourth straight weekly gain and has returned over 17% so far in 2013. International stocks again failed to keep pace and the Eurozone economy again slowed more than expected. Treasuries fell despite a tame inflation report and soft industrial production numbers. Gold’s downward trend accelerated, driven in part by a rising dollar and falling confidence among investors that the metal can recover.

Weekly Returns:
S&P 500: 1,666 (+2.0%)
MSCI ACWI ex-US: (+0.3%)
US 10 Year Treasury Yield: 1.95% (+0.06%)
Gold: $1,357 (-6.3%)
USD/EUR: $1.283 (-1.2%)

Major Events:

  • Monday – Petrobras issued $11 billion in new debt, the most ever in a single sale by an emerging markets corporation.
  • Tuesday – The FBI opened a criminal probe against the IRS for targeting conservative groups.
  • Tuesday – The Congressional Budget Office said the federal deficit is expected to shrink to $642 billion, sharply lower than last year’s $1.09 trillion shortfall.
  • Wednesday – Eurozone Q1 GDP shrank 0.9%, worse than expected. It marked the sixth consecutive decline and the longest recession in the region since WW2.
  • Thursday – US inflation (CPI) decreased by 0.4% in April. The core measure excluding food and energy rose just 0.1%.
  • Thursday – Technology equipment giant Cisco reported better than expected earnings and provided a positive outlook.
  • Thursday – Bill Gates regained the title of world’s richest person, according to Bloomberg. He passed Carlos Slim and has a fortune of $72.7 billion.
  • Friday – The index of US leading indicators rose 0.6%, ahead of most expectations.
  • Friday – The University of Michigan consumer sentiment index rose to 83.7, ahead of expectations and the highest level since 2007.

Our Take:
US stocks once again outpaced all other major asset classes. Treasuries, Emerging Market stocks and Gold were negative this week. From an objective diversification view, the goal is to own assets that behave differently. From an emotional standpoint, owning anything other than US stocks has been a bummer lately.

Whenever one asset class outperforms for a long time it starts to seem “obvious” it is somehow “better”. Eventually, many investors gravitate toward it, often creating a short term self-fulfilling prophecy. But after a time, the party will end. A previously shunned asset class will surprise everyone with strong performance, and most investors will have hurt themselves trying to time allocation decisions.

If you are a long term US based investor, US stocks should probably be the largest single asset class in your portfolio. But don’t abandon good diversification principles. Eventually international stocks will regain leadership. Trying to get cute with the timing is usually counter-productive.

Europe is in bad shape, but it will eventually recover. China has serious problems in its credit markets, but it is now a massive economy and it isn’t going away. Asset class leadership is always shifting and will continue to do so. This is a good thing. If you own a good long term portfolio and rebalance periodically, the benefits of diversification will help you dramatically over time – especially if you are still saving and can deploy new capital to depressed asset classes at lower prices.

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