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2nd Quarter June 2013

Summer Swoon?

After an extended period of significant gains, essentially, since the market low of March 2009, with a few pullbacks along the way, the Dow Jones Industrial Average hit an all-time high of 15,409 on May 28, 2013. We always expect market corrections, and 10-20% is typical. More significant pullbacks do occur as prices on some types of investments can become overheated, and fear can quickly replace euphoria. Usually bonds and stocks do not move in the same direction at the same time; for example, in the 2008 and 2009 credit crisis, treasuries went up significantly as stocks, real estate, and commodities declined. That is because during potential recessions, the Fed lowers interest rates and increases the money supply. In the current cycle, interest rates have been kept very low for several years. This has helped the housing market and those needing to refinance or borrow money to repair their balance sheets, but it has been difficult on savers, insurance companies and pension funds.

Bernanke recently suggested that if the recovery in the economy continues, the Fed may taper off the purchasing of bonds, known as QE3. The market has anticipated higher interest rates, (although the federal funds' rate which is determined by the Fed has not changed) and interest income related investments have fallen (see the chart below). Yields went up on longer term bonds. For example, the thirty year treasury yield went from 2.95% to 3.52% and the ten year treasury went from 1.75% to 2.52% year-to-date thru 6/30/2013. It appears that stocks, both U.S. and international, bonds, and commodities are reacting to the concern of higher rates.

Our belief is that a strong economy and more normal interest rates are a good thing. However, we have not been in this particular situation before with interest rates so low for so long and it is likely to be a choppy transition. The World Bank as well as the Fed see slow growth continuing in varying degrees around the globe. Some emerging market countries have stronger balance sheets, but haven't participated in the level of increase that the U.S. has thus far. Companies with good earnings and strong financials can hopefully provide growth over time. Commodities have fallen as inflation remains low and fear appears to be somewhat muted. (Gold is down year-to-date 28% this year).

Our strategy is to diversify bond holdings by adding different types of bonds which may include floating rate bonds and international bonds. We believe TIPS (inflation protected treasuries), and high yield bonds are fairly valued, and we would generally reduce positions there where appropriate. We would still hold a core position in high quality, shorter term bonds, because recessions are hard to predict, income is still needed and diversification potential remains. We anticipate that bonds will begin to reverse the 20 year bull market that they have enjoyed and can even incur losses if interest rates should rise quickly and unexpectedly. As rates normalize, we hope to see higher yields in the future.

Financial Market Update* Year-to-date change as of June 30, 2013
S&P 500 Index 13.82%
Dow Jones Industrial Average 15.20%
NASDAQ Composite 13.43%
Russell 2000 15.86%
MSCI EAFE US$ (International) 4.10%
Barclay US Aggregate Bond -2.44%
*Indexes are for illustrative purposes only. One cannot invest directly in any index. Assumes dividends are reinvested.
Source: Morningstar

Continuing Education

Two of my staff and I attended the Raymond James National Conference in Dallas earlier this year. This conference is packed with education and meetings with money managers, economists and best practice workshops. Social Security and Medicare challenges, low interest rates and the booming stock market were main topics. One of the highlights was meeting George W. Bush (#43), who was our keynote speaker. I was fortunate to be able to meet him.

I was also recently invited to attend the National Security Forum at the Air War College at the Air Force base in Montgomery, Alabama. Community leaders are invited to attend lectures and forums with the newly graduated officers, professors, guest speakers, including The Honorable Michael B. Donley, Secretary of the Air Force and General Mark A. Welsh III, Chief of Staff U.S. Air Force. It was a fascinating and very informative time. It gave me a better understanding of the state of our military, its budget implications, and security issues that we face as a country. I was extremely impressed with the caliber of all that I met there.

New Office

I am happy to announce that our new Tampa office is now up and running. My good friend and colleague, Tori Boswell, whom I have known for over 15 years, will be managing that office. You may know that we have many clients in that area, Raymond James headquarters is there and it was an easy decision for me to have a location in the south. Tori has over 20 years of experience in the financial services industry and is very knowledgeable and capable. We are happy to have her join us. Please check out her biography on our website.

Other News

I have been recently honored to be included in the 2013 Barron's top 100 Women Advisors in the country. The list is based on advisors' assets under management, revenue generated for their firms, and the quality of their practices. This is my 7th time on the list and I am always thrilled to be included. I attend their conference every year and have met new friends across the industry around the United States and have learned a great deal from my experiences there.

Additionally, we have added Richelle Verran to our client service team. Richelle's background includes security licenses Series 7, 9, 10, 63, and 66, and over 15 years of industry experience with UBS and Morgan Stanley. We are very happy she has joined us.

I hope you enjoy your summer!


S & P 500: An unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Dow Jones Industrial Avg.: An unmanaged index of 30 widely held U.S. Stocks. NASDAQ Composite: An unmanaged index of securities traded on the NASDAQ system. Russell 2000: An unmanaged index of small cap securities which generally involve greater risks. MSCI EAFE: An unmanaged index that is generally considered representative of the international stock market. Barclay's Capital: The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. Past performance may not be indicative of future results. Expressions of opinions are as of this date and are subject to change without notice. Any opinions are those of Sherri Stephens and not necessarily those of RJFS or Raymond James. Stephens Wealth Management Group is independent of RJFS. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

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