In BSW Blog, Economic Outlook, Portfolio Commentary, Quarterly Newsletter


Prologue: The historic and unprecedented Boulder Flood of 2013 had repercussions throughout the BSW community.  Reaching out to clients and colleagues in the midst of the flooding, we spoke with folks who could not see dry land from their front porch, some who awoke to find random cars swept into their yards, and others who had newly-formed rivers running one both sides and even underneath their homes.  Yet despite the destruction and damage, the flood also produced an outpouring of support, fellowship, and community spirit. BSW is honored to work with such outstanding and civic-minded families and we are actively pursuing ways to further lend our support to the community and those impacted by the Great Flood – more on this to come.

3Q13 Portfolio Update: Climbing the Wall of Worry

Heading into September, global markets faced a host of looming slings and arrows, including: a potential military strike on Syria, a change in leadership at the US Federal Reserve, anxiety over the “Taper” of quantitative easing, a looming Federal debt ceiling, a precipitous rise in interest rates and mortgage rates, fears of a Chinese property bubble, faltering growth in key emerging economies, and a critical and highly anticipated election in Germany.

As the third quarter of 2013 draws to a close, although a few of these event risks remain, investors have been gladly checking most of these uncertainties off of their worry checklists.  At the Fed, the more hawkish Larry Summers bowed out leaving perma-dove Janet Yellen as the front-runner for the next Chairmanship.  More recently, true to their data-driven mandate, Bernanke’s Fed opted against a QE taper due to less than ebullient reads on mortgage applications and jobless figures. Internationally, Chinese economic indicators appear to have bottomed, German Chancellor Angela Merkel’s party won an overwhelming majority, and a US strike on Syria was averted through a Russian-brokered peace deal (really?!?!).


As discussed in the first quarter’s Portfolio Update (here), our research suggested that European company valuations had reached very compelling levels and that economic conditions in the Eurozone appeared to be bottoming.  Consequently, we began boosting our foreign-developed allocations by adding a manager dedicated to investing in small cap foreign companies – as small cap typically leads out of recessionary environments.

Shortly after adding this manager, the European purchasing manufacturer’s index (PMI) – a leading economic indicator – turned positive for the first time in six quarters and signaled that the European economy may finally be finding its animal spirits.  Foreign small has also been outperforming foreign large.


Although we believe that US stocks (in aggregate) are fairly valued to a bit expensive (depending on the sector and/or market capitalization), we still like US large cap growth (especially technology) and believe it has further room to run.

Emerging markets also finally began to rebound from their 2013 slump and contribute to performance.  This quarter marked the first time in many quarters that emerging markets have outperformed US markets.  Year-to-date, emerging market indices are down 3%.


Looking ahead to the fourth quarter and beyond to 2014, BSW is rational optimistic about global economic growth– perhaps in contrast to broader sentiment – for several reasons.  Domestically, after several years of belt-tightening and paying down debt, US household debt service has reached a new all-time low.


Meanwhile, after bottoming in 2009 due bursting of housing bubble and the subsequent financial crisis, US household net worth has rebounded, regained its lost ground, and has also reached an all-time high.


Consumer confidence, however, remains muted.  Although its been climbing, it is nowhere near the former highs of prior recovery periods – probably due to stagnant wage growth from persistently high jobless levels.  This is important because consumer confidence levels often have an effect on how much investors are willing to pay for a stream of earnings – the price-to-earning ratio.  Consequently, if US corporate earnings can continue to grow – even at a modest rate – US stock prices can continue to climb as multiples expand.


Speaking of US corporate earnings, in light of the public’s generally dour view of the economy, first and second quarter US corporate earnings (as measured by the S&P 500) set consecutive all-time highs and, if estimates are correct, will do so again for the third quarter.


Meanwhile, surging domestic energy production has acted as a check on inflationary pressures, a boost to consumer purchasing power, and created a significant competitive advantage for US companies.  Indeed, many factors are conspiring to suggest that the US economic recovery, although slower paced than past recoveries, may prove to be more sustainable and longer lasting.

A stable and growing US, combined with Europe emerging from recession, Japan shaking off its deflationary funk under Abe-nomics, and emerging markets resetting growth expectations to more sustainable levels could prove to be the alchemy needed for a broader, synchronized global expansion.

We hope this Update & Commentary provides you with better insight into your BSW Growth Portfolio.  If you would like to discuss these positions or your portfolio in greater detail, please don’t hesitate to contact BSW.  As always, we are happy to help.

– David Wolf, Chief Investment Officer

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