12-06-2013 02:10 PM
By Arne Espe
Vice President, Mutual Fund Portfolios
For months, the Federal Reserve has been waiting for a sign that it’s safe to start scaling back its monetary support of the U.S. economy. We think that signal may have come with this week’s release of better-than-expected economic numbers.
Unemployment dropped to 7% in November, its lowest level since 2008. New jobless claims were well lower than expected, marking the seventh time in the past eight weeks that the number of claims has decreased. U.S. manufacturers reported that exports are their highest since early 2012, and the Fed’s latest Beige Book data shows modest to moderate economic expansion across most of the country.
And if all that wasn’t enough, the Thomson Reuters/University of Michigan consumer confidence report for December topped forecasts, and a new Business Roundtable survey of large-company CEOs found that most of them plan to boost hiring and spending over the next six months.
Adding up all of the positive indicators of late, we see a greater likelihood that the Dec. 17-18 meeting of the Fed governors will herald the arrival of the long-anticipated “taper” of its $85 billion monthly bond purchases aimed at stimulating growth by keeping interest rates at historically low levels. Then again, the Fed could postpone the decision until its January or March meeting.
Despite the fears of many in the market, the beginning of tapering does not mean the end of Fed support of the U.S. economy’s slow and bumpy recovery from the 2007-09 recession.
In our view, the Fed wants to gradually take away one form of support by tapering bond purchases. But it would keep in place the other helping hand of its current policy, known as “forward guidance” — providing consistent reassurance to the market that it will keep short-term interest rates pegged at zero for at least a few more years. The thinking is that keeping a tight lid on short-term rates will help to moderate the potential rise in longer-term rates, buying more time for the economy to strengthen.
GDP growth in the U.S. did jump up to an annualized rate of 3.6% in the third quarter, the fastest rate since early 2012. Roughly half of that increase, however, was due to the largest restocking of inventories in the past 15 years, so unless the holiday shopping season empties out the shelves, we expect that this surprising gain will be balanced out by slower growth in the fourth quarter.
The S&P 500 edged up 0.1% over the week to 1,805.0 on Friday. The index has shown consecutive rises since the first week in October. Ten-year Treasury yields finished the week at 2.87%, up 0.12% on the rising possibility that tapering will start this month. Gold ended at $1,229.05 per troy ounce, down 1.9%.
For more insights on the markets, read our investment outlook for the third quarter.
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. For investors seeking exposure to precious-metals mining stocks, the USAA Precious Metals and Minerals Fund is an example. 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 on 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.
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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.