Market Insight - April 2014

Financial markets struggled to make way during the first three months of 2014, facing headwinds at home and abroad. While US economic news was generally neutral, the crisis in the Ukraine, belligerency between the Koreas, and a deteriorating situation in parts of West Africa and Syria all impacted investor sentiment along with an exceptional chilly winter that saw much of the Midwest and Northeast weather bound for the first quarter.  China’s economy, though still an engine of global growth, slowed markedly. Yet, despite these problems, markets ended the first quarter at about where they started, and balanced investors saw some gains overall.

Large stocks, measured by the S&P 500 and the Dow, rose 1.26% and .75% respectively for the quarter. For the trailing 12 months the Dow has returned 13%, the S&P 500 19.8%. Mid-sized company stocks added 2.61%, while smaller companies, measured by the S&P Small Cap 600, gained less than a percent. Global equities were also adrift, with developed market stocks adding a half percent, and emerging markets continuing their decline, falling 1.88% for the quarter.  Investment real estate rebounded; measured by the Cohen & Steers Realty Shares, which gained 10% for the quarter.

Bonds and fixed income investments put in a respectable performance, confounding the naysayers and buoying returns for balanced portfolios. The IShares 7-10 year Treasury Bond Index gained nearly 2% for the quarter, while higher yielding bonds, measured by the Pimco High Yield Bond Fund, added nearly 3%. On the corporate and Muni side the Ishares US Preferred Stock Index gained 5.39% for the quarter, while the Vanguard Intermediate Term Tax-exempt Bond Fund, added 2.7%.

Earnings and the Fed

We view revisions in earnings expectations and Fed policy as defining market prospects over the next 3-6 months. After a tentative beginning that left markets a little rattled, new Fed chairwoman Janet Yellen spoke more directly in March, providing a relatively straightforward communication of evolving Fed viewpoint to global markets. First, she continued the Fed’s measured taper of QE3 bond buying program, a strategy that markets have now come to view (we think correctly,) as favorable to long term growth of the economy and financial assets. Second, she signaled a shift away from a strict unemployment metric for withdrawal of interest rate stimulus. She addressed the fact that employment gains, while steady, are slower and more modest than at this point in previous recessions, (see chart) and that there was little consensus to move short term rates higher until more progress was made getting 11 million plus unemployed Americans back to work.

Earnings present and future pose their own challenge. As corporations begin to report first quarter 2014 results, early indications are that cold and snowy weather had an outsized impact on profits in early 2014. Analysts’ consensus for the S&P 500 earnings growth in first quarter are around 1.1 percent, much slower than the 8.8 percent increase in fourth quarter 2013, and the lowest rate since second quarter of 2012.  Investors seem to think it likely the polar vortex, which played havoc with shopping, spending, travel and general business for most of the winter, was responsible for the poor showing. However, it is also possible that weather related  

problems may be masking something more ominous.  If so, PE ratios may be pushing stock prices further out from earnings, and more likely to correct sooner.  Our investment discipline calls now for moderation, and rebalancing of stock allocations in the face of strong markets, both to secure gains, and to keep funds in reserve for buying when the markets correct, and we continue to rebalance to normal levels of risk as markets move higher.  We are confident that returns for balanced investors should be acceptable in 2014 despite the risks that come with higher valuations and earnings disappointments. 

We are proud to have been a sponsor for the Literacy Volunteers of the Lowcountry “Cooks and Books pre-party Gala, held at Tide Pointe Community on Hilton Head Island in February. We want to thank all of our friends and clients who attended, as well as those who enjoyed food and literary conversation at the actual Cooks and Books event the following Sunday. Literacy Volunteers is celebrating its 40th year in Beaufort County, and has had an extraordinary impact on literacy in our community.


Steven Weber              Gloria Harris               Frank Weber

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