The second quarter of 2013 featured increased volatility, as U. S. equities withstood a June swoon to end higher once again, while foreign stocks gave up their gains to finish lower. Fixed income markets both here and abroad were rattled by Federal Reserve pronouncements of a tapering in the $85B a month QE (Quantitative Easing) program, possibly by this autumn. Also, the PBOC (People’s Bank of China) sharply raised overnight rates in order to deflate a possible credit bubble, adding to uncertainty, while middle class protests in developing economies such as Brazil, Turkey and Egypt highlighted growing pains in those countries.

The U. S. economy continues to improve slowly, though the debate still continues among economists and policy makers whether we are getting close to self-sustainable growth without further Fed stimulus. If current Fed economic forecasts are correct, QE would end by mid-2014, but Fed forecasts have been consistently too optimistic since the recovery began four years ago. Housing and auto sales have firmed, though the rest of consumer spending has recently been tentative and regional Fed surveys are very mixed at this point.

We will watch foreign economies closely, as China attempts to navigate a rather tricky transition from an export to domestic consumption growth model.  In addition to its stimulative monetary policy, Japan needs to make structural changes in its economy to achieve sustainable growth. Latin American and other resource based countries will have to broaden their economies to avoid another boom-bust cycle, and the EU (European Union) needs to continue to financially assist weak peripheral members such as Portugal.

We remain constructive on the outlook for U. S. equities, especially those companies with revenues which are domestically based, which are benefiting from the slow but steady economic recovery. Valuations are not stretched, and balance sheets are still in good shape. We are more cautious on fixed income, but recognize that yields have already risen a good amount and should inch up on a more gradual basis going forward. Though the markets may continue to be choppy as they were in the quarter just past, the trend remains higher for equities for the foreseeable future.