Investment Commentary
sur•prise   (s r-pr z )
tr.v. sur•prised, sur•pris•ing, sur•pris•es
1. To encounter suddenly or unexpectedly; take or catch unawares.
2. Something, such as an unexpected encounter, event, or gift, that surprises.

And such it was for the markets, when in mid-September, the FED pronounced “We Shall Not Taper”, or at least not yet. Perhaps Bernanke had become alarmed that his coveted engine of recovery, housing, was showing signs of dramatic de-acceleration, coincident with the 10-year treasury brushing 3%, fully double its coupon from a mere 5 months prior. Perhaps, the FED was exhibiting extraordinary prescience, correctly predicting that the intransigence of all parties involved in DC, or “inside the beltway” as they say, would lead to a government shutdown and possible debt default. Or maybe, just maybe, the FED was simply being consistent, correctly recognizing that US economic growth remains anemic, and that the monthly bond and mortgage purchases should continue, until such time as they were no longer warranted.

And what is the state of the US economy? Well, due to the government shutdown many major economic releases have been delayed, so one must look elsewhere, perhaps to one of the most predictive of places, the market itself.

Over the past three months, our equity portfolios enjoyed double-digit gains, outstripping all the major averages. Energy stocks, especially solar, powered the outperformance. Consumer discretionary stocks, an important indicator of economic growth, also rebounded from their spring lows. So it would seem that despite all the bickering and brinksmanship by the politicians, that the economy has maintained its footing throughout it all. On the fixed income side, the investment environment remains difficult, but we are encouraged that bond prices have begun to stabilize, especially post-no-taper, with levels improving markedly during the month of September. We expect this trend to continue over the next several quarters, as we expect the FED to maintain low front-end rates, even after ceasing open market purchases.

Politics aside, there will be a real and most tangible impact of the implementation of universal healthcare in the world’s largest economy. Daily we read reports of large companies trimming their workforce, or replacing fulltime jobs with part-time positions. Recalling that 70% of GDP is consumer spending, the swelling of the ranks of both the under-employed and the under-utilized employee will most assuredly dampen future growth. We will vigilantly monitor this impact, and adjust our investment concentrations accordingly.

Douglas Capital Management
October 16, 2013