12-20-2013 10:45 AM
By Wasif Latif
Vice President, Equity Investments
Signs that the economy was building up momentum led to this week’s decision by the Federal Reserve to trim its monetary stimulus effort. Friday’s final third-quarter GDP numbers told us just how strong that momentum is.
The Commerce Department reported that real GDP grew at an annualized rate of 4.1% in the July to September period, well ahead of the earlier estimate of 3.6% and the fastest rate since late 2011. The higher number was due in part to an upward revision in consumer spending in the quarter. In issuing the earlier estimate, officials believed there had been a decline in personal consumption, which comprises roughly 70% of the U.S. economy. Surprising growth in the consumer sector suggests that the years-long recovery may actually be gaining strength.
Other figures out this week support the strengthening outlook. Third-quarter worker productivity saw its largest jump in four years, and U.S. factory production in November increased for the fourth straight month and is now above where it was when the Great Recession began. Also in November, housing starts rose to their highest level since early 2008.
Even before the release of all these numbers, we had believed that the Federal Reserve had more than enough reason to start cutting back its $85 billion monthly government bond purchases. The Fed clearly shared that viewpoint, and on Wednesday it voted to begin tapering its bond purchases by $10 billion per month in January.
So what does this mean? Our first observation is that the Fed will still be buying $75 billion in bonds each month, so its easy monetary policy remains intact, albeit at a slightly reduced level. This should temper the rise in long-term interest rates.
In our view, gradually rising long-term interest rates are generally favorable for stocks, as it indicates a belief that the U.S. economy will grow faster without generating much inflationary pressure. Growth with low inflation tends to boost corporate earnings and stock prices. On the fixed income side, we see gradually rising rates as being neutral for bonds overall, but a positive for income-oriented investors who have struggled to find yield in recent years. Our bond portfolios are tilted more toward credit risk than interest-rate risk, so gradually rising rates should have a limited impact.
The Fed has also placed greater emphasis on its forward guidance – how it signals its intentions to the market. It is currently telling markets that it plans to keep short-term interest rates close to zero until unemployment improves, assuming no hike in inflation.
Worries of an impending taper last June caused markets to plummet, but this week’s announcement of the tiny taper actually propelled markets to new all-time highs. The S&P 500 closed the week at a record 1,818.31, up 2.4%, after two straight down weeks. Yields on the 10-year Treasury bond ended at 2.89%, up .03%, while gold finished at $1,203.30, down 2.9%.
We will not publish a commentary on December 27 due to the Christmas holiday. We will return to our regular schedule on January 3.
We wish you all a very happy holiday season and offer our best wishes for a happy and prosperous 2014.
For more insights on the markets in the coming year, please read our 2014 investment outlook.
USAA Investments Managed Portfolio Outlook
Our view of caution toward risk assets remains unchanged. We remain slightly overweight in bonds and cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.
We also have a small position in gold and precious-metals mining stocks, which we view as attractive as a long-term inflation hedge. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.
Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.
As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based upon your individual goals, objectives, risk tolerance and time horizon.
This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.
Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Contact us at 1-800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.
Investing in securities products involves risk, including possible loss of principal.
Past performance is no guarantee of future results.
As interest rates rise, existing bond prices fall.
Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.
Some income may be subject to state or local taxes or the federal alternative minimum tax.
Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. Emerging market countries are most volatile. Emerging market countries are less diverse and mature than other countries and tend to be politically less stable.
Precious metals and minerals is a volatile asset class and is subject to additional risks, such as currency fluctuation, market liquidity, political instability and increased price volatility. It may be more volatile than other asset classes that diversify across many industries and companies.
The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.
USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.
High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.
The Real Return Fund may be subject to stock market risk and is non-diversified which means that it may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response to the activities of individual companies, general market, and economic conditions domestically and abroad. When redeemed or sold, may be worth more or less than the original cost.
Diversification does not guarantee a profit or prevent a loss.