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Investment Letter

4th Quarter 2013

As we bid a final farewell to 2013 and celebrate a new beginning in 2014, I wanted to share an inspirational New Year’s wish. 

On this New Year, may you change your direction and not dates, change your commitments and not the calendar, change your attitude and not the actions, and bring about a change in your faith, your force, and your focus and not the fruit. May you live up to the promises you have made and may you create for you and your loved ones the most happy new year ever. – Author Unknown

The theme of positive change was prevalent in the financial markets during 2013 as investors enjoyed outstanding equity returns in domestic large cap, domestic small cap, and international stocks despite negative economic headwinds.  The Dow Jones Industrial Average (DJIA) finished the year at 16,576.66 points or up approximately 29.65%.  The DJIA also set a new record high 54 times during 2013 including a new all-time high (16,576.66) on the last trading day of the year.  The broader S&P 500 Index also enjoyed an exceptional year of performance by returning a positive 32.39% and setting a new record high (1,848.36) on December 31, 2013.  U.S. Small Cap Stocks (represented by the Russell 2000 Index) ended the year with a positive 38.82% return and International Stocks (represented by the MSCI EAFE Index) returned 22.78% for 2013. 

The chart below recaps the 4th Quarter and 2013 performance of other major indices:


Asset Class


4thQtr. 2013 Total Return

2013 Total Return


ML Three-Month U.S. Treasury



U.S. Bonds

Barclays Intermediate-Term Treasury



U.S. Large Co. Stocks

S&P 500 Total Return



U.S. Small Co. Stocks

Russell 2000 Total Return



International Stocks

MSCI EAFE (net div.)



Real Estate

DJ Select Real Estate Securities Total Return



 Source: Morningstar

Unfortunately, the advancement in stocks did not accompany a dramatic recovery in the domestic economy during 2013.  Slower housing expansion, fiscal policies (payroll tax cut and sequester cuts), and the Federal Government shutdown all helped to keep the level of economic growth subdued.  In spite of the negative economic headwinds, the U.S. economy has been quite resilient.  According to data released by the Bureau of Economic Analysis, third quarter real Gross Domestic Product (GDP) increased at a revised rate of 4.1% and fourth quarter estimates should come in around 3.0%.  Additional data indicates evidence supporting pent-up demand in the cyclical sectors (auto, housing, manufacturing, capital goods) of the economy, and rising household net worth.  This is good news for the trickledown effect that improved consumer spending will have on economic growth.  Furthermore, consumer sentiment is on the rise, the Federal Deficit numbers are improving, the unemployment rate fell to 6.7%, the latest inflation estimates remain low (1.2%), the housing market is still affordable, and mortgage rates are still relatively low.  All these factors should help support growth going forward into 2014.

 The Federal Reserve’s commentary once again stated the economy was expanding at a moderate pace, and that economic indicators confirmed conditions are improving across the nation.  The big news from Federal Open Market Committee (FOMC) was on the Fed Taper size and timetable.  According to the FOMC statement released in December, the Fed’s strategy used in 2013 will remain virtually the same.  However, beginning January 2014, the Fed has decided to change the amount of the purchase program.  Instead of $85 billion, the Fed will now purchase $75 billion per month of Mortgage Backed Securities and Treasury Securities.  They also plan to maintain the existing principal payment reinvestment policy, the policy of rolling over maturing Treasury securities at auction, and the decision to keep the federal funds rate at zero to 1/4 percent.[1]  The FOMC believes this strategy will continue to make broader financial conditions more accommodative, which in turn will support a stronger economic recovery.  Going forward, the Fed stated they will monitor incoming economic and financial developments and adjust their strategy accordingly.  The Fed will have a new leader come January 31, 2014 when current Chairman Ben Bernanke’s term expires.  Current Fed vice chair Janet Yellen was officially approved by the U.S. Senate and will be the head decision maker on future monetary policy issues.  We have confidence there will be a seamless transition in leadership due to her years of experience and expertise.

Economic data from the rest of the world showed little change since last quarter.  The Eurozone continues to struggle but the major risks have been reduced and financial conditions are stabilizing.  Japan’s fiscal stimulus and monetary easing are promoting positive economic activity.  China continues its search for financial stability and the path to sustained and balanced growth.  Finally, overall growth in emerging markets and developing economies should continue but specific improvements could vary by country.

Our 2014 economic outlook is more sanguine than 2013.  Over the short-term, we expect economic conditions to show additional improvement, but we also believe that the improvement will be a slow and steady increase.  We anticipate the Fed Taper will have more of a significant impact as conditions continue to improve, but the new FOMC leadership could be a wild card in future monetary policy decisions.  Our long-term economic outlook is similar to the outlook we had for much of last year, but we believe the economic headwinds that plagued 2013 will subside during 2014.  We anticipate U.S. economic growth to be around the 3% to 4% range during the next 12 months.

We believe companies will remain profitable and consumer sentiment will increase.  Generally, we expect domestic and international economic conditions to improve further, and we also believe the fiscal drag on the economy will be reduced over the coming year.  This sounds like perfect conditions for another year of exceptional returns in the stock market.  While we believe 2014 should be a good year for the stock market, it is hard to imagine a scenario where equity returns would be superior to the outstanding returns of 2013.  Also consider the fact that this bull market is approaching its fifth anniversary (March 2014), and the average length of a bull market since 1947 is approximately 53 months.  Excluding the current bull market, the previous 11 bull markets (since 1947) only had 5 instances where the duration lasted to year five and three instances to year six.  We can’t predict how much longer the current bull market will last, but it is safe to say that this bull market is getting long in the tooth.

 Creating a long-term investment strategy that mitigates financial uncertainty can be accomplished by using a diversified investment portfolio of bonds and stocks.  While domestic stocks represent a substantial portion of the world’s stock market capitalization it is important notto omit international stocks as a significant component of a diversified portfolio.  The international stock market is made up of a vast group of equities from the rest of the world, and excluding this asset class as part of diversified portfolio means ignoring approximately half of the world’s investable stock assets.  Investing in international stocks allows access to companies, technologies, and industries that do not exist domestically while increasing the potential for higher growth rates.  This makes international stocks an attractive complement to domestic stock investments.  Of course, the opportunities for investment gain and diversification potential come at a price.  International investments carry an additional amount of risk due to fluctuations in foreign currency, foreign taxes, political and economic risks, and different accounting standards.  This means that international stocks could provide a wide range of returns in any given year.  See the summary table below for an illustration of the regional returns in the global stock market during the period 1970-2012.[2]   The data in the table indicates that while the compound annual returns are very similar in the four global regions, the ranges of the return during the 42-year period are quite different.  The highest return in the U.S. during the period was far less than any of the three international stock markets.  In summary, a strategic allocation to international equities is a prudent technique to provide portfolio diversification and enhance the overall performance of an investment portfolio.


Global Stock Market Returns 1970-2012


United States




Highest Annual Return





Lowest Annual Return





Compound Annual Return






Our investment philosophy remains based on the fundamentals.  We believe that it is time---not timing---that matters most.  That is why we believe the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return.  

See the list below for some interesting market facts for 2013.

 ·   THE LONG-TERM AVERAGE- The S&P 500 stock index has gained an average of +10.0% per year(total return) over the last 50 years(i.e., the years 1964-2013). No single calendar year actually gained +10.0%in the last half century. The closest that any year came to the long-term historical average was in 1993 when the stock index gained +10.1% for the year (source: BTN Research).

·   MISSING THE BEST- The total return for the S&P 500 was a gain of +32.4%(total return) in 2013. If you missed the 5 best percentage gain dayslast year, the +32.4% gain falls to a +20.7% gain(source: BTN Research).
·   AVOID THE WORST- The total return for the S&P 500 was a gain of +32.4%(total return) in 2013. If you avoided the 5 worst percentage dayslast year, the +32.4% gain rises to +45.9% gain(source: BTN Research).
 ·   AVOIDING A CORRECTION- As of today, the S&P 500 has gone 825 calendar days(i.e., from 10/03/11 through and including 1/05/14) without a 10% or greater dropin the index, the 5th longest stretchwithout a double-digit pullbackin the last 50 years(source: BTN Research).
 ·   FROM THE MARCH 2009 LOW- Since dropping to a bear market low on 3/09/09 (i.e., approximately 58 months ago), the S&P 500 stock index has gained +202.8% (total return) through the close of trading on 12/31/13 or an average gain of +1.9% per month (source: BTN Research).

Your financial health is important to us, so consider making a New Year’s resolution to revisit and update your financial plan.  Please feel free to contact our office to set up an appointment to discuss any changes to your financial situation. 

As our firm enters its 31styear of providing advisory services, I want to wish you and your family a happy, healthy, and prosperous New Year.  Should you have any questions, or wish to receive William Howard & Co.’s SEC Registration Form ADV Part 2A and Part 2B Narrative Brochure, please let us know. 

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust.  Please contact me if you have any questions. 


With kindest personal regards, I am


Very truly yours,




[1]Source: Federal Reserve System. 2013 Monetary Policy Press Release. 18 December 2013. http://www.federalreserve.gov/newsevents/press/monetary/2013monetary.htm

[2]Principia® Presentation and Education, Global Investing Module. U.S. stocks in this example are represented by the Standard & Poor’s 500® index, International stocks are represented by the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE®) Index, European stocks by the Morgan Stanley Capital International Europe Index, and Pacific stocks by the Morgan Stanley Capital International Pacific Index.

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