January 21, 2014
Stocks have turned in a mixed performance so far in 2014. The Dow Jones Industrial Average is down 0.7% and the S&P 500 is down 0.5% while the Russell 2000 and NASDAQ are up 0.4% and 0.5% respectively.
The three best performing sectors so far are Health Care (+2.9%), Real Estate (+2.6%), and Financials (+0.4%). The weakest sectors are Energy (-2.6%), Consumer Discretionary (-2.6%), and Consumer Staples (-2.1%).
Looking abroad to international markets, the Developed markets sector is unchanged while the Emerging Market sector has dropped 2.7% continuing its underperformance into 2014.
Bonds have started the year on a positive note with the Barclays US Aggregate bond index up 0.9% led by long maturity government bonds and preferred stock. This upward move in bond values has been precipitated by a general decline in interest rates. The 10-year US Treasury yield has fallen 21 basis points from 3.030% at market close on December 31, 2013 to 2.818% through last Friday’s close.
Commodities are flat at the start of the year. The Dow Jones UBS Commodity index which is representative of a broad basket of commodities is up just 0.2%. WTI Oil is down just over $4 per barrel (-4.1%) while Gold is up $13.30 per ounce (1.1%).
Here is what I see three weeks into the new year:
We remain completely stalemated in Washington, DC. Until the mid-term elections of 2014 are completed and a new Congress is sworn in early next year I believe there will be little movement on the fiscal policy front. Depending on the elections, this stalemate may or may not stretch into 2015 and 2016.
The economy will continue its slow but steady pace of growth at somewhere around 2.5% real GDP. I do not consider this to be a particularly challenging or insightful call. This is what our economy has been doing over the past couple of years and I see little to no chance that any of the key fiscal policies that are, in my opinion, hindering growth will change in 2014. What you see is what you get.
As most of you know I follow six major asset classes: US stocks, International stocks, Bonds, Currencies, Commodities, and Money Market. These six asset classes are ranked based upon their current relative strength calculated by DorseyWright & Associates and from this analysis I make my general investment observations. Currently US stocks and International stocks are favored followed by Bonds, Currencies, Money Market, and Commodities. These broad relationships have not changed much over the past year.
Within the US stock asset class, growth is favored over value, equal-weighted indexes are favored over capitalization-weighted indexes, and small capitalization stocks are favored over large cap stocks. The Consumer Discretionary, Health Care, and Industrials are currently the strongest relative strength sectors.
Developed markets remain strongly recommended over Emerging markets within the International stock asset class. Finally, within the Bond asset class, I prefer the High Yield and Floating Rate sectors.
Paul L. Merritt, MBA, C(k)P®, AIF®, CRPC®
NTrust Wealth Management
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Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.
Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable; however, NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
Emerging market investments involve higher risks than investments from developed countries and involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political, or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.
The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future. The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities, which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The CBOE Volatility Index - more commonly referred to as "VIX" - is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500® Index (SPX) option bid/ask quotes. VIX uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index.
TIPS are U.S. government securities designed to protect investors and the future value of their fixed-income investments from the adverse effects of inflation. Using the Consumer Price Index (CPI) as a guide, the value of the bond's principal is adjusted upward to keep pace with inflation. Increase in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest payments on inflation-protected debt securities can be unpredictable.
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.
Currencies and futures generally are volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors’ expectations concerning interest rates, currency exchange rates and global or regional political, economic or financial events and situations.
Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.