Market-View 1st Quarter 2014

Portfolio Recap

As the 1st quarter of 2014 came to a close and the 2nd quarter began, the US stock market remained near record highs.  Talk by the Federal Reserve of ending (tapering) their quantitative easing program sooner, questions around whether corporate earnings can support valuations and recent geopolitical events in the Ukraine, all contributed to increased volatility and concerns over how much longer the current 6 year bull market will continue.  Through all of this, your portfolios showed resiliency and experienced steady, positive performance.

Our diversified approach to managing investments continued to focus on limiting downside equity risk through a bias for value-oriented, dividend paying domestic and international equities.  In the short term, volatility and potential for loss has been further mitigated by allocating fewer investment dollars to small cap and emerging international, both of which carry more risk than other areas in the equity markets.  Small cap has also experienced significant gains over the past several years further motivating a reduction because we believe the prospect for significant future appreciation has diminished.  Hybrid investments, led by preferred stock, global bonds and infrastructure, had a positive quarter validating our belief the category responds favorably when equity markets are choppy.  Despite headwinds created by the Federal Reserve’s tapering, fixed income posted modest but positive performance for the quarter and reinforced our commitment to this asset class as an effective anchor.  Performance returns for some of the major market indices follow.

1st Quarter Index Returns[1]  

2 Yr. US Treasury;                                       +.19%

Barclays US Aggregate Bond Index;            +1.8%

S&P 500 U.S. Equity Index;                          +1.8%

MSCI EAFE International Equity Index;        +0.8%

Market and Economic Backdrop

The US economy remains on track for continued modest growth.  The U.S. stock rally we are currently experiencing has outlasted the average bull market.  However, because the preceding bear market of ‘08 and early ‘09 was much steeper than average, the current bull market returns are still below the average suggesting there may still be upside potential. Economic expansion during the current bull market has been more muted, likely extending this business cycle which could give support for the stock market run to outlast historical averages. Despite a long and difficult winter, confidence is improving, at least modestly, which should help to bolster spending at both the corporate and consumer levels.

Led by the U.K. and Germany, the European economic expansion continues to grow at a slow, steady pace. Other European Union economies like Spain, France and Italy showed signs of improvement suggesting Europe’s cyclical upturn continues to be more broad-based.  A positive aspect of ongoing weak wage growth is the continued dampening of inflationary pressures leading central banks in Europe to remain inclined toward additional monetary easing.  As experienced in the U.S. over the past 3 to 5 years, we believe this more liberal stance on monetary policy will help to encourage economic growth in Europe in the foreseeable future.

In the Asian and emerging markets, credit conditions hit new lows.  Leading indicators were not as positive as those seen in the developed European markets.   Inflation pressures are a concern due to rising food costs and slow growth is highlighting the destabilizing nature of political risk in many countries.  China continues to struggle with economic reform and a pending consumption-tax and current account deficit in Japan are considered potential sources of wider volatility for the Japanese Nikkei.

Looking Ahead

At this time, we believe a still-dovish Federal Reserve monetary policy, improved confidence and employment combined with solid corporate earnings, will allow stocks to end the year modestly higher.  We fully expect continued volatility and will not be surprised if the market experiences a correction of 10% or more.  In anticipation, you may see higher levels of cash relative to what you have traditionally seen.  We plan to remain diligent in maintaining our fixed income and hybrid allocation targets.  Small cap and emerging market positions will generally remain below their targeted thresholds.  U.S. large cap and developed international holdings will be kept at, or slightly above their allocation benchmarks for the possibility of further appreciation.  To conclude, we reiterate the importance of taking a long-term view. Despite making a few short-term adjustments to allocation targets in certain areas, we will remain invested because even in years with extreme volatility, end of year returns can conclude on a positive note as illustrated by the following chart.[2]

JPMorgan graph


[1] Quarterly index returns sourced from JPMorgan 2Q/2014 Guide to the Markets.  Clearview Wealth Management uses a blend of selected indices that are specific to a clients’ risk profile to gauge performance.  Historical performance is not a predictor of future returns.

[2] Portions of this newsletter were sourced from Charles Schwab, Fidelity Investments and JPMorgan


Clearview Wealth Management Investment Committee