We’ve officially entered the second half of the year, and after the erratic market behavior of the past few weeks clients are asking me how to position their portfolios for the back half of 2013.
I am changing some of my investment views. For instance, I am now advocating lower exposure to gold. But while I’ve been surprised by the recent sharp spike in interest rates and the weakness in emerging markets, most of what occurred in the first half generally met my expectations.
Here’s a closer look at how the first half of the year shaped up compared with my initial view, and a look ahead at the remainder of 2013.
The US Economic Landscape
• First Half: As I write in my latest weekly commentary I came into 2013 with the view that, due to higher taxes and lower government spending, this was not the year that the US economy was likely to breakout. So far, 2013 has played mostly to this script, with continued equity-friendly slow growth of around 2% and low inflation.
• Second Half: I expect growth to remain positive, but below trend, with some modest acceleration from 2% toward the end of the year.
• First Half: While I expected rates to rise this year, I wasn’t expecting the rise to be as sharp as it was in the second quarter.
• Second Half: In the near term, nominal rates may continue to overshoot to the upside, but I believe the 10-year Treasury yield will ultimately finish 2013 around 2.25% to 2.5%. This is because, as I’ve mentioned before, there are a number of factors conspiring to keep long-term yields from rising too much.