DWM 1Q14 Market Commentary

Brett DetterbeckGrinding higher. That’s what the markets did in the first quarter of 2014, evidenced by both the S&P500 Equity Index and Barclays US Aggregate Bond Index, registering a 1.8% advance. There may be a sense of calmness now, but January tested investors’ nerves with stocks experiencing one of their worst months in a long while. What we liked seeing was how the liquid alternatives investments that we follow performed during that time.  As a group they had a positive result, thus behaving in a non-correlated manner to stocks which is exactly what we like to see.  Please recall that the use of multiple assets classes helps to smooth out overall results, which leads to better long-term results. January served as a good reminder why it is necessary to look beyond just the equities asset class.

That being said, we aren’t “Debbie Downers” on stocks. We think for most investors they should represent a majority allocation. Frankly, there is a lot of good news out there:

  • Continued low interest rates and the belief that, even as the Fed pulls back from its most aggressive measures (i.e. “tapering”), it will keep them low for an extended period.
  • US growth remains on track, enough to keep currently strong corporate earnings rising.
  • The job market is slowly but steadily improving.
  • Consumers and companies that delayed spending during the harsh winter may soon be playing catch-up from pent-up demand.
  • Housing is no longer a drag.
  • Political parties in Washington have actually been cordial lately, and somewhat productive.
  • Outside of the US, Europe’s economy is seen as slowly mending.
  • The violent swings in emerging markets have calmed after central banks moved swiftly to defend their currencies by raising interest rates thus luring investors with higher returns.

On the flipside, it’s not all coming up roses entering 2Q14:

  • The Fed has done a great job of late walking its tightrope on tapering. Nevertheless, nervousness comes hand in hand with the Fed’s plan to end unprecedented efforts to aid the economy which could lead to choppy waters.
  • The stock market is showing some strains. For example, many investors in the first quarter shifted from growth companies to value companies, suggesting that some sectors may have run their course.
  • From a fundamentals perspective, stocks in the S&P500 were trading at 15.2 times the next twelve month’s expected earnings, which is higher than the 13.2 times average of the past five years, and 13.8 times average for the last decade.
  • There has been a lot of soft economic news out of China. With China being the second biggest country in terms of GDP, the whole world can feel the effects of their hiccups.
  • Cold War nervousness – all bets are off if a huge geopolitical issue unfolds. Frankly, it was pretty amazing how investors shrugged off the Crimea headlines, but who knows what the next event will be and what it will bring.

It might be overwhelming to think about all the factors at play and how they can affect you and your portfolio. But no matter what the world throws at you, remember we cherish our role as our clients’ first-line of defense for their portfolio and helping them reach long-term goals. We take pride in filtering out the noise and keeping them abreast of what is really important.

Consider talking to a wealth manager like DWM today if you feel like you’re lacking that first-line defense and want help in achieving those long-term goals.

Brett M. Detterbeck, CFA, CFP®