DWM 2Q14 Market Commentary

brett-blogIt’s unusual when nearly all asset classes move in one direction and even more unusual when that direction is up. But that’s what has happened so far in 2014 with stocks having another good quarter, alternatives having a solid quarter, and most surprisingly bonds having a stellar quarter. The primary driver behind the rallies in both stocks and bonds remain the aggressive efforts of global central banks to keep printing money in efforts to keep sluggish economies moving in the right direction. In other words, results have been good but one can’t help but feel like this rally is mostly due to artificial catalysts. And what happens when those aren’t good enough to propel us forward? Back to that question in a little bit.

Let’s look at the numbers:

    • Stocks have been on a roll with the S&P500 notching its sixth consecutive quarterly gain. The average diversified US stock fund returned +3.4% in 2q14 and is now up 4.9%.
    • In the fixed income markets, bonds prices surprisingly rallied as evidenced by the US Barclays Aggregate Index registering +2.0% for the quarter and up 3.9% Year-To-Date (“YTD”). This unexpected bond rally so far this year is from generally declining bond yields as evidenced from the 10 Year US Treasury rates falling from 3% at the start of the year to about 2.5% at quarter end. Almost everyone had expected rates to move higher, but the reverse happened when central global banks pushed looser monetary policy in response to slow economic indicators. That being said, with little further room for yields to fall, we expect rates to gradually move back up with the Fed moving toward higher rates in 2015.
    • Many liquid alternatives fared very well in the second quarter. Here are some of the ones we follow and use within our DWM Liquid Alternatives Model:
      • *JPMorgan Alerian Master Limited Partnership Index (symbol: AMJ) – up 7% 2Q14
      • *SPDR Gold Trust (GLD)– up 3.5%
      • *SPDR DJ Global Real Estate (RWO) – up 7.4%
      • **Pimco All Asset Authority (PAUDX) – up 3.9%
      • **RiverNorth DoubleLine Strategic Income (RNDLX) – up 3.3%

* denotes an alternative asset
** denotes an alternative strategy

Another important factor is that housing appears relatively strong. The Case-Shiller 20-city Home Price Index rose 10.8% in the year ended in April. However this has been driven by a lot of cash buyers. As many people with great balance sheets know, the mortgage approval process is complicated, lengthy, and no fun these days. Furthermore, the strength is showing up in pockets – one suburb may be hot, but another nearby may not be moving at all. If you’re considering a real estate transaction, make sure you have done your due diligence and it’s also a good idea to get your real estate broker and financial advisor helping you together.

As we move into the second half of 2014 (crazy how fast this year has gone!), we look to history to give us a relative view of what to expect. For example, the current S&P500 bull market is now over 5.3 years old. The longest bull market since 1950 lasted 9.5 years, so we may have some time left. Furthermore, the S&P500 has gone over 1000 calendar days without a double-digit pullback, the fifth longest stretch without a 10% or greater drop in the last 50 years. Some fear that this represents the “calm before the storm”; on the other hand, perhaps we are in a “Goldilocks” environment and this low volatility environment can continue on.

It definitely is not all roses out there. Interest rates are still low, but trending up, meaning inflation could be right around the corner. Jobs look better on the surface, but the wage growth isn’t really there as companies continue to squeeze productivity out of their workers. That means Americans won’t spend money like they use to, and hence economic growth could be kept in check. Case in point of this comes from the final 1Q14 GDP reading which showed negative growth of 2.9%. This was worse than expected and the worst reading since 1Q09, the height of the recession. The report showed that consumer spending, the main component within the GDP calculation, fell from 3 to 1 percent. Sounds serious, but in 2014-style, investors simply shrugged it off saying, hoping, that it was due to the harsh winter weather. The 2Q14 reading to be released at the end of July will need to show serious improvement or we doubt the market will just shrug it off again. The nation’s quarterly growth has only been as bad as or worse than this reading only 18 times in the last 67 years.

To sum it up, 2014 has not been flashy but it has been a profitable one for most investors so far. There is a lot of noise out there, but no one knows exactly what is going to happen next. There are both many headwinds and many tailwinds. That said, make sure you and your portfolio have a captain to steer you through those winds. One that will help you stay well-diversified and employ strategies that can help in all market scenarios, be it up, down, or sideways. We at DWM have a lot of experience navigating these terrains. We looking forward to continuing the journey with our crew and reaching new heights.