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3rd Quarter September 2013

Taper Tantrum?

The U.S. markets continue their upward momentum close to all-time highs on the DJIA and S&P 500. Other markets, however, are much different. International developed, like Europe, are not up as much as the U.S. and emerging markets (China, India, and South America as examples) are struggling this year. Gold and other commodities have dropped as well. For the first time in as long as many of us can remember, many bond indexes are negative. As we have been expecting, interest rates have gone up and bond markets have declined, as measured by the Barclay's Aggregate, which is a short intermediate term, high quality bond index. Please reference the table below.

Not all bonds are alike. High yield bonds, which are typically lower quality and pay higher interest, are positive year-to-date. Bank loans, sometimes called floating rate bonds, are positive year-to-date as well. Floating rates are also a lower quality bond. The interest rate moves and bond price changes between May and June were in reaction to Bernanke's recent speech, suggesting that he may begin to "taper" the buyback of bonds, i.e., print less money. This was interpreted by the bond market as a signal that higher interest rates were coming and the easy money policy was ending, even though a change in the fed funds rate was not mentioned. The swiftness of the price moves was surprising, even to the Fed.

On September 16th, Bernanke surprised most of us again by deciding not to do anything yet, which was confusing. It may be signaling that the moves after the previous statement were so significant that a slowdown concerned them. While the Fed is being cautious, we are left wondering if the economy is weak and if their credibility is intact. I was in New York during the announcement, meeting with bond managers from JP Morgan, Goldman Sachs, and BlackRock. They were somewhat surprised as well.

Our strategy is to continue to diversify our bond investments to include additional types of bonds and flexibility in the portfolios in order to navigate through what we think will be a more traditional interest rate environment in the next few years. We think this means higher interest rates for both short term and long term borrowers. As interest rates have been declining for decades, this will be a much different environment for bonds going forward. However, we believe this is a good thing in the long run, as it is an indicator that the economy is growing and savers could once again be able to earn an income.

Financial Market Update* Year-to-date change as of September 30, 2013
S&P 500 Index 19.79%
Dow Jones Industrial Average 17.64%
NASDAQ Composite 26.12%
Russell 2000 27.69%
MSCI EAFE US$ (International) 16.59%
Barclay US Aggregate Bond -1.89%
*Indexes are for illustrative purposes only. One cannot invest directly in any index. Assumes dividends are reinvested.
Source: Morningstar

Why Own Bonds at All?

Bonds can still help provide stability when stock markets are volatile. Bonds have maturity dates. We believe it still makes sense to own them, but the days of generating generous income and capital gains going forward is not likely. Most interest rate sensitive investments have been affected as well by the concerns of interest rate increases, including preferred stocks, utilities, REITs, MLPs, etc.

Client Event

We had a wonderful turnout for our client appreciation event. Our speaker was Heidi Richardson from BlackRock Advisors. She presented a very informative perspective on global economies and markets going forward. Thank you to all who attended; we had a full house. As I mentioned during our dinner, we plan to change the format to something different next year, just as educational, if not more so, and a little more variety in terms of topics of interest. Stay tuned, and we will be sure to let you know once we have an agenda put together. Our plan is to do it a little later in the year, in October.

Tax Planning

It is hard to believe that we are already entering the last quarter of the year of 2013. As we are doing our tax planning for this year and beyond, feel free to call us if you have questions or need our assistance. We are happy to work with you and your CPA or attorney to help in your year end planning. This is the first year under the new tax law. Be prepared for a higher tax bill if you have income above $250,000 for joint filers.

As the Affordable Care Act becomes effective on October 1st, we will try to send along helpful information as it pertains to business owners and individuals as our healthcare landscape continues to evolve.

All the best,


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. Investments mentioned may not be suitable for all investors.

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