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4019550-236220Rick M. Higgins Certified Financial Planner?, Managing PartnerMatt C. Smith Vice President of Wealth ManagementLem H. Walker, Jr. Chartered Life Underwriter4th Quarter 2013 Market Review and OutlookWe hope all of you had a great summer and are looking forward to fall and cooler weather. As always, there has been a lot going on in the financial markets over the last quarter.Federal Reserve ActionThe biggest recent news of the 3rd quarter was the surprise Federal Reserve announcement that it is maintaining its current pace of asset purchases (QE4) and offering no specific guidance on the timing of winding down this popular program. The Fed based its decision on a weaker than expected economy as GDP growth is projected to be an anemic 1.9% for 2013. Our take is the Fed was also spooked by the huge spike in interest rates since May and did not want to provide rates another reason to go up.As we have written in the past, the rise in U.S. stocks has been largely based on Fed action and monetary policy, not economic fundamentals. Yet most people seem to know very little about the Fed. To be sure, sweeping changes are coming to the Federal Reserve. Of course, it’s widely believed that current Vice Chairman Janet Yellen will replace Chairman Bernanke in January. Importantly, 9 of the 12 voting members of the Federal Open Market Committee will turn over in 2014. The result could be tension as the Fed focuses on its mission with mostly new people. Yellen will favor an emphasis on reducing unemployment. Some of the new members are sure to dwell on holding inflation in check. Financial markets will watch it all very ernment Budget Gridlock and Debt Ceiling DebacleDominating the recent news is the soap opera playing out in Washington. Will the Continuing Resolution pass in time to keep the government from shutting down? Will the debt ceiling be lifted in time to prevent default on government bond payments? The last time a debt ceiling debacle played out was in the week of August 7, 2011. Here’s how that week went for the Dow 30 Industrials: Monday minus 635 points, Tuesday + 430 points, Wednesday minus 520 points, Thursday + 423, and Friday + 126 points. In other words, buckle your seat belts! Look for this to go down to the wire, but not quite over. The politicians on both sides need to save face and giving in too early or taking it too far is not in their political best interest.The Affordable Care Act (aka Obamacare)This sweeping legislation will very definitely have a dramatic impact on the health insurance market. Many of the short and long term effects are still not understood, but one thing is for certain—the so called “insurance exchanges” opened October 1. They will change the way a good portion of thepopulation buys their medical insurance. Primarily, they will provide a place for people to go and purchase insurance with the government subsidizing a good portion of their premium. This new entitlement program will pile on top of Medicare, Medicaid, and Social Security. Of course, all of those entitlements have huge unfunded liabilities and it would be safe to assume that the subsidy portion of this bill will as well. Premium rates will be adversely impacted. Recently, the SC Department of Insurance released exchange estimates—they believe premiums will increase by 50% to 70% in the individual insurance market and by 10% to 20% in the small group market. We don’t except any immediate impact in the financial markets, but it seems obvious that the economy will face a long term headwind to overcome because of Obamacare.Theme for the 4th QuarterAs most investors have been consumed with “what the Fed will do”, other issues continue to develop. Geopolitical risk in the Middle East is obviously very high. The hot spots are numerous—Syria is currently getting all the attention but a Nuclear Iran is a very big problem for the region and the world. Egypt and Libya continue to be problematic. All this uncertainty points to the necessity for the U.S. to continue to push toward energy independence. Oil and natural gas run the economy and we need to strive for reduced dependence on the most volatile region in the world.In the U.S., we would like to love the stock market. As we have said over and over, the market is being pushed higher by Fed action, not fundamentals. The 2014 outlook for the U.S. economy does look better with the GDP growth estimate at 2.6%. We would, however, urge investors for two things—patience and discernment. We are overdue for a correction in the U.S. Market—patient investors will wait before jumping on board (buy low!). Also, rather than blindly buying into the U.S. market, we believe it’s important to over allocate to certain sectors and under allocate to others. We like the technology, healthcare, and energy sectors because of their higher growth prospects and lower valuations than other sectors.Globally, we are starting to be interested in European stocks for the first time in 3 years. It seems like they have averted disaster and the Euro zone is expected to emerge from recession next year. European stocks appear to be cheap (especially relative to U.S. stocks) and we will likely recommend a larger allocation to this area soon. Emerging markets have had a very tough year so far and we feel the need to be careful over the short term here. Over the next 3 to 7 years, however, we are quite confident this is still the place to look in the world for growth. It’s a simple matter of timing about increasing allocation here at some point.We are happy to see the fixed income and bond markets have a modest recovery. The handwriting, however, is on the wall and we continue to favor unconventional and flexible instruments in this space. We will continue to over emphasize bank loans and credit segments of the market in our allocations.Our basic philosophy continues to be generally defensive but selectively offensive. We always appreciate the trust and confidence our clients place in us. Please feel free to contact us at any time- we would also welcome the opportunity to visit with your colleagues, friends, and relatives who may benefit from our services as well. ................
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