16 Apr 2013 Dodge & Cox - Q1 2013 Commentary ( Portfolio )

The S&P 500 reached an all-time high during the first quarter of 2013, surpassing its previous peak from 2007. All sectors of the S&P 500 generated positive returns while the Health Care, Consumer Staples, and Utilities sectors (generally considered more “defensive”) had the highest returns. Strong equity returns were influenced by positive U.S. economic news as well as solid corporate profitability. The U.S. economy gained momentum, with increased hiring by private sector firms, strong retail sales, lower unemployment, rising home prices, and continued monetary stimulus by the Federal Reserve. Corporate profits for the fourth quarter beat expectations, and U.S. companies returned record amounts of cash to shareholders via share repurchases and dividends. Amid these positive indicators there were some areas of concern: consumers and corporations were faced with higher taxes and gas prices; the negative effects of sequestration cuts by the U.S. government received a lot of attention; and the banking crisis in Cyprus and inconclusive elections in Italy contributed to continued uncertainty in Europe.

In spite of these economic and political challenges, the long-term outlook for equities remains attractive. Even including the strong stock market rally during the first quarter, valuations are reasonable at 14.0 times forward earnings for the S&P 500, and 12.1 times forward earnings for the Fund’s portfolio. Recognizing that markets could be volatile over the short term, we encourage shareholders to share our long-term investment horizon.