MARKET UPDATE AND COMMENTARY

March 3, 2014

Stock markets posted solid gains for the month of February after getting off to a poor start in January. The Dow Jones Industrial Average (DJIA) gained 4.0%, the S&P 500 added 4.3%, the Russell 2000 increased by 4.6%, and the Nasdaq Composite led all major US indexes with a 5.0% gain. For the year, the DJIA remains in negative territory with a current loss of 1.5%. The S&P 500 is now up 0.6%, the Russell 2000 is up 1.7%, and the Nasdaq is up 3.2%.

Looking at the eleven major economic sectors, Materials, Consumer Discretionary, and Health Care were the best performing sectors in February, while Real Estate, Health Care, and Utilities are the best performing sectors so far in 2014.

International markets also performed well in February. The Dow Jones Global ex-US TSM index (a broad index comprised of 76 countries led by Japan, the United Kingdom, Canada, France and Germany) was up 4.8% and is now up 0.4% for the year. The Emerging Market region continues to lag gaining 3.6% in February and remains down 3.6% for the year while the Developed Market region gained 4.8% in February and is up 1.2% for the year.

Bonds have continued to perform well as interest rates have fallen for most of 2014. The US 10-year Treasury yield closed Friday at 2.655% compared to 3.030% at end of 2013. This has helped provide gains for most bond investors after struggling last year. The broad Barclays Aggregate US Bond index has gained 2.0% in 2014. It is interesting to note that interest rates have fallen even as the Federal Reserve has continued its policy of reducing bond purchases by $10 billion per month refuting the belief held by some economists that interest rates would rise dramatically as bond purchases were tapered. I do believe that the Fed will continue to reduce bond purchases.

Commodities continues to be a bright spot with the UBS Dow Jones Commodity index gaining 6.5% in 2014 led by a jump in Gold (9.7%), WTI Oil (4.2%), and Natural Gas (12.3%). The jump in commodities has been assisted by a general decline in the US Dollar against most major currencies. As the US Dollar weakens, commodity prices become cheaper for non-US consumers (but higher here in the US) since nearly all commodity trades are made with US Dollars.

STATE OF THE US ECONOMY

The 4th Quarter 2013 Gross Domestic Product (GDP) was adjusted downward last week from 3.2% to 2.4%. This downward revision was not totally unexpected and there are indications that the bitter December weather contributed to the downward revision. I have stated previously that I expect this quarter’s data to be weak as well, however, I do believe that the balance of 2014 will be stronger and that the US economy is growing at between 2.5% and 3% annually. I am the first one to say that this economy should be stronger but the yoke of government regulation and fiscal policies such as higher taxes are holding back our economy.

I remain positive on the US economy for a number of reasons including:

 Continued US job growth. More workers mean a stronger economy.

 Demographics. The US population continues to grow.

 Re-shoring of US jobs. US manufacturing in particular is bringing jobs back to the US from foreign operations. Additionally, foreign manufacturers like the stability of the US and a strong workforce and are also growing their presence here. Lower energy prices have also contributed to this trend.

 Technology. The US continues to dominate the world in technological innovation. Technology goes right to the bottom lines of US business income statements.
 The Federal Reserve is continuing accommodative monetary policies. Fed Chair Janet Yellen has signaled that she will not tighten policy any time soon.
 Energy continues to be a huge bright spot for our economy today and into the future. As we move rapidly to energy independence, we will create more jobs and keep more dollars here in the US.
 Housing market continues to strengthen.
 US entrepreneurs. American creativity and a desire to succeed will continue to motivate the private sector to expand and improve the lives of all of us.

These long-term trends will, in my opinion, create a stronger and growing economy for many years. This does not mean that markets will simply go up, up, up. There will be challenges to growth and risks that will always be present. Some of these risks are:

 Geopolitical turmoil. The Middle East, North Korea and now Ukraine are flash points that worry investors. The Ukraine is currently hotspot #1.
 Tax increases. Unless the government can find a solution to curtail the explosion of entitlement payments, we will continue to drown in ever-growing debt. Raising taxes to pay for benefits will take much needed revenue away from the private sector and curtail economic growth.
 Debt. Too much government spending and the prospect of paying higher interest rates on our $17+ trillion in federal debt (I am not even going to mention state and municipal debt) can squeeze the government’s ability to pay for everything. Interest rates are not going to remain low forever.
 Political gridlock in Washington. The current state of affairs in Washington is preventing more pro-growth fiscal policies from being enacted.

It is easy to be focused on much of the negative news that swirls around us every day. Remember, news outlets have one objective--to get more readers and viewers so they can charge higher advertising rates. They accomplish this by heavily promoting the negative and sensational. Do not be swayed. There is much to be optimistic about and celebrate. The markets understand this and I believe this is why we have seen such solid growth in stocks over the past four years.

LOOKING AHEAD

I am finishing this Market Update and Commentary on Monday morning, March 3rd. The European markets are all down to start the week off due to the turmoil in Ukraine. US futures are down sharply so I anticipate that some of this selling pressure will move across the Atlantic. Even though it appears that Putin is acting with impunity, markets in Russia are down about 15% so far this year, and the Russian central bank jumped a key interest rate 1.5% to 7% to prop up a plunging ruble. The central bank took this action to make the ruble more attractive as an investment hoping to stem the outflow of US Dollars and Euros out of the country. The average Russian citizen is now facing the prospect of higher inflation and a slowing economy. While the turmoil in Ukraine is a difficult situation, I also believe its impact on the markets will be temporary in nature.

US stocks are still favored and this key major asset class leads all other on a relative strength basis. Within US stocks I prefer small and middle capitalization companies over large cap. I also continue to favor the Consumer Discretionary, Health Care, Industrials, and Financials sectors.

International stocks currently rank number two of the six asset classes. However, I strongly advise against owning the Emerging Market region and suggest continued focus on the Developed Market region—especially Europe. I would consider the current trouble in Europe as a potential buying opportunity over the next couple of weeks.

Bonds have shown some life with the pullback in interest rates. A defensive move for sure. However, I continue to like the High Yield and Floating Rate sectors.

Gold continues to surge in 2014. It is a pure defensive play and futures indicate a strong jump for gold today. I still have my doubts about gold as a long-term investment in 2014.

Do not be alarmed by any short-term volatility arising from events in the Ukraine. These things happen, but if I see fundamentals break down, I will let you all know.

My next Market Update and Commentary will be published around March 17th.




Paul L. Merritt, MBA, C(k)P®, AIF®, CRPC®
Principal
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.

The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.

All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors and is a capitalization-weighted index meaning the larger companies have a larger weighting of the index. The S&P 500 Equal Weighted Index is determined by giving each company in the index an equal weighting to each of the 500 companies that comprise the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Russell 2000 Index Is comprised of the 2000 smallest companies of the Russell 3000 Index, which is comprised of the 3000 biggest companies in the US. The NASDAQ Composite Index (NASDAQ) is an index representing the securities traded on the NASDAQ stock market and is comprised of over 3000 issues. It has a heavy bias towards technology and growth stocks. The STOXX® Europe 600 is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 represents large, mid, and small capitalization countries of the European region. The Dow Jones Global ex-US index represents 77 countries and covers more than 98% of the world's market capitalization. A full complement of subindices, measuring both sectors and stock-size segments, are calculated for each country and region.