First Quarter 2013 Financial Update


Wall Street’s bulls figured stocks were ready for a breakout in 2013, and that is
exactly what happened in the first quarter. The Dow finished March at
14,578.54, its highest close ever. The S&P 500 ended the quarter with a
record close: 1,569.19. The S&P, Dow and Russell 2000 all gained 10% or
more in the opening three months of the year. Bullish sentiment was backed up
by impressive economic indicators – in real estate, in the manufacturing and
service sectors, in consumer spending and retail sales. New anxieties in Europe
and sluggish projections of global growth couldn’t halt the rally. The quarter
was flat-out spectacular for equities, from small caps to blue chips – in fact,
it was the Dow’s best first quarter since 1998.1

The Dow jumped nearly 2% on January 2 as President Obama signed a bill into law to
avert the “fiscal cliff” – the combination of tax hikes and expiration of
Bush-era tax cuts presumed to throw the economy into recession. While the
legislation raised estate taxes, hiked the top tax bracket to 39.6% and ended
the payroll tax holiday (resulting in a 2% reduction in take-home pay for each
working American), it did preserve the Bush-era cuts for the bulk of taxpayers
and extended numerous tax breaks and long-term jobless benefits.2
The unemployment rate – 7.8% at the end of 2012 – ticked up to 7.9% in January yet
fell to 7.7% in February. Still, hiring was picking up. Non-farm payrolls added
236,000 workers in February, capping off a three-month stretch in which the
employment ranks grew by an average of 191,000 jobs a month. From June-August
2012, the pace of hiring averaged only 135,000 jobs per month.3,4
Gasoline grew costlier – rising 35¢ in February alone – and that was a big influence in
Q1 gains in consumer spending and retail sales. As the Commerce Department
noted, personal spending rose 0.4% in January and 0.7% in February; personal
wages recovered from a 3.7% plunge in January to advance 1.1% in February.
(Household wages dropped in January partly because of a rush by corporations to
issue dividends in December, ahead of the assumed fiscal cliff.) Consumer
prices rose 1.6% in January, and 2.0% in February, according to the Bureau of
Labor Statistics. Even so, retail sales rose in both months – 0.2% in January,
1.1% in February. February’s gain was the largest in five months and brought
the annualized gain to 4.6%, more than twice the rate of inflation.5,6,7
Results from America’s two major consumer confidence polls varied notably. The
Conference Board’s monthly survey came in at 58.4 in January, 68.0 in February,
and 59.7 in March; the University of Michigan’s consumer sentiment survey went
from 73.8 to 77.6 to 78.6 across the first three months of 2013.8,9
In late March, the Bureau of Economic Analysis made its last appraisal of Q4 GDP –
just +0.4%. The recent boost in consumer spending hints at improved growth for
Q1, as do the twin PMIs of the Institute for Supply Management. ISM’s
manufacturing index rose in each month of the quarter (it had contracted in
November), hitting a high of 54.2 in February, but then 51.3 in March; its
service sector PMI was at 56.0 in February, then 54.4 in March. In other
business indicators, overall hard goods orders recovered from a 3.8% dip in
January to increase 5.6% in February; producer prices rose 0.2% in January and
0.7% in February.10,11,12,13

As Congress and the White House could not arrive at a deal to postpone federal
spending cuts scheduled for March 1, the last month of the quarter saw the
start of a phase in which $85 billion would be trimmed from the budgets of
federal agencies this year. The Pentagon faced a 13% cut, while non-defense
programs stared at a 9% cut. Against expectations, Congress passed a stopgap
budget bill that would keep the federal government funded until October 1 six
days ahead of a deadline. As the quarter ended, Federal Reserve Chairman Ben
Bernanke reaffirmed that interest rates would remain at historic lows until the
economy showed more than “temporary improvement”. There would be no near-term
end for the Fed’s quantitative easing effort, though the amount of its monthly
bond purchases could vary in response to improvements in the unemployment rate.14,15,16


Like a campfire that had been inadequately doused, the financial crisis in Europe
flared up anew. Cyprus needed a bailout by March, so the European Central Bank
offered it €10 billion to rescue its banking system. The Cypriot parliament at
first rejected the plan (which would have taxed bank accounts up to 10%), then
accepted it with modifications. Adding to the drama, Italy’s February national
election resulted in a parliamentary stalemate which may not be resolved until
July; at the end of March, Italian bond yields were again rising dangerously. Eurozone
unemployment was 12.0% by the end of the quarter.17,18,19
China tried to ward off a real estate bubble during the quarter by levying a 20%
capital gains tax on home sales. Its central bank set a growth target of 7.5%
for 2013 and an inflation target of 3.5%. By March, Markit PMIs showed
expanding manufacturing sectors in the PRC (51.6), Taiwan (51.2),
South Korea (52.0), Vietnam (50.8), India (52.0) and Indonesia (51.3). Also notable: Japan’s
embrace of “Abenomics”, the stimulus-driven economic policy of prime minister
Shinzo Abe. Aimed at lifting Japan out of its current recession, it drove
Japanese stocks significantly higher and gave business sentiment a shot in the


The Nikkei 225 had another amazing quarter, rising 19.27%. Other Q1 performances in
the Asia Pacific region: Pakistan’s KSE 100, +6.17%; Australia’s ASX, +6.83%;
the PSE Composite in Manila, +17.80%; Hang Seng, -1.58%; Sensex, -3.04%;
Shanghai Composite, -1.43%. In the Americas, the Bovespa sank 7.55% on the
quarter while the TSX Composite rose 2.55%; Argentina’s MERVAL climbed 18.45%.
In Europe, the FTSE 100 gained 8.71% in Q1, the DAX 2.40% and the CAC 40 2.48%;
Ireland’s ISEQ topped all indices in the region with a 16.53% Q1 advance. The
MSCI Emerging Markets Index dropped 2.14% in Q1 2013; in contrast, the MSCI
World Index rose 7.18%.23,24


Metals prices were mixed on the COMEX for the first quarter. Gold fell 4.8%, copper
6.0%, and silver 6.3%; platinum advanced 2.1% and palladium rose 9.2%. The U.S.
Dollar Index gained 8.1%. U.S. crude futures rebounded 5.7% in the quarter,
while natural gas logged a 20.1% advance. Crop futures had it rough in Q1:
sugar lost 9.5%, coffee 4.6%, cocoa 3.0%, corn 0.4%, soybeans 1.0% and wheat


The sector was plainly on the way back. In March, the National Association of Realtors
noted that pace of existing home sales had improved 10.2% in the 12 months
ending in February, with the median price up 11.6%; pending
home sales
were up 5.0% across 12 months as well. The Census Bureau said
home sales had risen 12.3% in that same period, and it also reported much more
groundbreaking and considerably more projects in the pipeline: a 27.7% 12-month
gain in housing starts, a 33.8% annualized gain in building permits. The latest
edition of the S&P/ Case-Shiller Home Price Index (January) posted its
largest annual rise since 2006 (8.1%) with 19 of 20 cities showing gains.27,28,29,30
Broadly speaking, mortgages grew more expensive in the quarter. In Freddie Mac’s last
2012 Primary Mortgage Market Survey (December 27), the average interest rates for
mortgage varieties were as follows: 30-year FRMs, 3.35%; 15-year FRMs, 2.65%;
5/1-year ARMs, 2.70%; 1-year ARMs, 2.56%. In the March 28 PMMS, the rates
looked like this: 30-year FRMs, 3.57%; 15-year FRMs, 2.76%; 5/1-year ARMs,
2.68%; 1-year ARMs, 2.62%.31,32