Tuesday, October 28, 2014


MARKET UPDATE AND COMMENTARY
October 26, 2014


Just as quickly as the economic storm clouds gathered over stock markets earlier in the month, they cleared and key US indexes posted their best weekly returns for the year. For the week, the Dow Jones Industrial Average (DJIA) gained 2.6%, the S&P 500 rose 4.1%, the Russell 2000 added 3.4%, and the NASDAQ jumped 5.3%. Other than the Russell 2000 (+1.6%) which is now positive for the month, the DJIA (-1.4%), S&P 500 (-0.4%), and the NASDAQ (-0.2%) still remain in negative territory for October. For the year, the DJIA is up 1.4%, the S&P 500 is up 6.3%, the Russell 2000 is down -3.9%, and the NASDAQ is up 7.3%.

The turn in markets coincided with 3rd quarter earnings announcements that have been decidedly positive overall. Current projections suggest that US corporations will exceed last year’s 3rd quarter profits by roughly 10%. Ebola fears have subsided for now. Both Dallas nurses are now Ebola-free, and the case of the Brooklyn doctor does not appear, at this time, to be a concern to the markets.

International markets also rebounded last week. The broad MSCI EAFE index added 2.4% with the European-heavy STOXX 600 gaining 2.6%. The Emerging Markets region lagged with a 0.8% gain. For the month, however, the Emerging Markets region has outperformed the key international indexes I follow with a loss of -1.6%. The STOXX 600 remains down -4.6% in October, and the MSCI EAFE is down about -3.0%. European leaders continue to seek solutions for their economic woes; however, I believe they face significant, self-imposed obstacles.

Bond yields edged slightly upwards this past week for the first time in six weeks. The US 10-year Treasury yield rose nearly seven basis points (a basis point is .01%--similar to a penny to a dollar) to close Friday at 2.263%. The slight rise in interest rates pushed the broad Barclays US Aggregate bond index down 0.3% for the week. For the month, however, this index is up 1.3% and 5.7% for the year.

Commodities in general continue to struggle. The Dow Jones UBS Commodity index lost -0.8% last week as Gold (-0.7%) and WTI Oil (-2.1%) continued their recent slides. Grains are the notable exception to general commodity weakness. Corn and Wheat have risen in price about 10% since October 1st. Coupled with high meat prices, these increases could lead to higher food prices in the next few months.

THE TROUBLE WITH EUROPE

I wrote in my previous Update and Commentary that I had lost confidence in Europe, and despite the recent jump in key European indexes, my view remains. Let me explain.

Several recent events illustrate my concern. First, the German economy has slowed exposing economic weakness in other countries most notably France and Italy (second and third largest countries in the European Union (EU) by Gross Domestic Product--GDP). France is growing at just 0.4% and Italy is contracting -0.2% in 2014. Growth forecasts for 2015 by the International Monetary Fund show the EU growing at an anemic 1.3%, France 1%, Italy 0.8%, and Germany 1.5%.

Second, the ability of the EU to oversee member nations and enforce rules is facing its most important test to date. In response to all of the recent economic troubles, the EU strengthened its Stability and Growth Pact. Under the terms of this pact, member nations are required to reduce annual borrowing to 3% of GDP. France submitted its 2015 budget to the EU projecting borrowing of 4.3% of GDP. The French government currently spends approximately 56% of the nation’s GDP each year. Tax revenues have improved, but spending continues to grow as well. Violating the borrowing levels set by the EU subjects France to an €800 million ($1.01 billion) fine. The EU has forced smaller countries to undertake unpopular austerity measures, so the question confronting the EU is whether they will impose such a fine on France. France has indicated they will not cut spending. If the EU fails to enforce its rules on larger members, there will be no incentive for other countries to adhere to the unpopular austerity measures demanded by the EU, and call into question the viability of the EU. Investors are watching this development very closely.

Third, the EU has just concluded stress tests on 125 of the largest banks in the EU. Results just released show 25 banks failed, an increase of five banks over the last test. Initial reaction to the test results has been mixed. I think this is a negative development and shows continued weakness in the EU banking system.

Fourth, unemployment within the EU remains at high levels. According to Eurostat, unemployment throughout the EU sits at 10.1%. France’s unemployment rate is 10.5%, Italy’s is 12.3%, Spain’s is 24.7%, and Greece is 26.4%. These high unemployment rates are likely to be a drag on any economic growth long-term. Reform-minded leaders such as Italy’s Matteo Renzi have been unable to pass meaningful changes in the face of entrenched self-interests that protect existing, older workers, leaving the unemployed to settle for temporary, poor paying work. Many EU leaders face similar challenges—assuming they want to address labor reform at all.

Finally, the outlook for population growth in the EU does not bode well for the future. A growing population is necessary for economic growth. According to the Population Research Institute (PRI) European countries combined had 10% of the world’s population in 1985. By 2025 that percentage is expected to decline to just 6%. Current birth rates are about 25% below where they need to be just to replace the existing population. A large influx of immigrants into Europe from Africa/Middle East and Asia is helping to mitigate this decline, but at this time, it is uncertain to be enough to counter the trends of the past 30 years.

While population decline is a longer concern, the political dysfunction within the EU is a real and present problem. I have highlighted just a few of the problems facing the EU today. Pressure is mounting on Germany to come to the rescue once again with large public spending projects or to support the European Central Bank’s own quantitative easing program. Germans, for now, do not appear to be receptive to taking on more debt to finance such projects. Even if the Germans do change course and support some version of quantitative easing, I believe the EU will continue to postpone meaningful fiscal policy choices (cut government spending) and limp along. Better growth opportunities, in my view, will continue to be found here in the United States.

LOOKING AHEAD

Earnings season is still underway. With 70% of reporting companies exceeding profit forecasts, I would anticipate this trend to continue and help stocks.

The first case of Ebola reported in New York is certainly a cause for concern, but I believe for now this threat of an Ebola-driven sell-off has declined. As Ebola continues to challenge Africa, I believe that the medical community will improve its tactics for dealing with this deadly disease and reduce the threat there and here.

Among the key economic reports due out this week, the first estimate of 3rd quarter GDP will be released on Thursday morning. Consensus is expecting a 3.0% growth rate, and if this number is met or exceeded, I believe it will calm many investor nerves. Additionally, on Wednesday afternoon the Federal Reserve will report on its current meeting. The Federal Funds rate is expected to remain at the 0% range. Investors will be focused on the language regarding the timing of future increases in this rate. The Federal Reserve is also expected to announce the end of bond purchases officially ending this round of quantitative easing. Initial jobless claims will be announced on Thursday morning, and consensus is calling for initial claims of 280,000. This would be another positive for the markets and reflect an improving employment situation. The final report that I want to draw your attention to is the Personal Income and Outlays report of Friday morning. Consensus expects income to remain steady at 0.3% and outlays to also remain steady at 0.5%. These numbers are very important because increasing income and spending bodes well for future growth.

The mid-term elections are just nine days away. While it is difficult to determine the market impact of election results, they may certainly have some influence.

Overall the economy is slowly and steadily improving, and the likelihood of sharp correction is, in my opinion, unlikely in the near term.

If you have any questions or comments, please reach out to me.





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

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

Monday, October 13, 2014

MARKET UPDATE AND COMMENTARY
October 12, 2014


October is off to a tough start. I have no doubt most of you are aware of last week’s volatility so I will not spend time discussing what you already know, rather I want to spend the bulk of this update discussing what led to the selloff, risks, and what my technical indicators are suggesting.

First, a quick market recap.

The Dow Jones Industrial Average (DJIA) fell 466 points (-2.7%) last week closing Friday at 16,544. The size of the daily swings were among the largest of the year. Monday was the “quiet” day with the DJIA losing -18 points. Beginning Tuesday the DJIA swings were off and running losing -273 points, followed by a 275 point gain on Wednesday (best one day gain of the year), a -335 point drop on Thursday (the worst one day loss of the year), and a -115 point drop on Friday. For the year, the DJIA is now down 33 points (-0.2%). Looking at the other major indexes I track the S&P 500 fell -3.1 % last week, the Russell 2000 gave back -4.6%, and the NASDAQ lost 4.4%. For the year the S&P 500 is up 3.1%, the Russell 2000 is down -9.5%, and the NASDAQ is up 2.4%.

Looking at the major economic sectors, Real Estate, Utilities, and Consumer Staples posted positive returns last week likely helped by falling interest rates and the defensive nature of those sectors. Energy, Industrials, Materials, and Technology were the weakest performing sectors losing over 4% each. For the year, Real Estate, Health Care, and Utilities have all posted double-digit gains to lead all sectors; while Energy, Industrials, and Consumer Discretionary are the weakest sectors losing between -2% and -4%.

International markets were all down as well. The European-based STOXX 600 index fell -4%, the worst of the major international indexes I follow. The best performing region last week was the Emerging Markets Region losing just under -0.6%. The broad MSCI EAFE international index fell -2.4% for the week. For the year, the MSCI EAFE index is down -6.6%, the STOXX 600 is off -2.0%, the Emerging Markets Region is up 1.6%, the Asia/Pacific Region is down -2.8%, and the Americas Region is up 1.3%.

The bond market rallied as stocks sold off. The Barclays US Aggregate Bond index gained 0.7% and is up 5.1% for the year. The US 10-year Treasury yield fell 14.5 basis points (a basis point is 0.01%--like a penny to a dollar) to close Friday at 2.29%. This 10-year yield is at its lowest since June 19, 2013. Long-duration bonds, the most interest rate sensitive category, performed well, while credit sensitive bonds like high yield underperformed.

The Dow Jones UBS Commodity index gained 0.2% last week on the strength of gold (+2.4%). WTI Oil continued its slide to close Friday at $85.82 (-4.4%) on weaker global demand and strength of the US Dollar. Natural Gas also fell last week losing -4.5%, while most agricultural commodities managed a slight gain. Falling oil prices are contributing to the weakness in the Energy sector, but will help the average family as gas prices fall.

WHAT’S BEHIND THE SELLOFF?

The consensus within the financial media attributes the current weakness in equity markets to fears of a global slowdown. Most of the attention is on Europe which appears to be heading into another recession. Germany’s 2nd Quarter GDP contracted -0.2%. European Central Bank (ECB) head Mario Draghi’s comments in which he said he was not optimistic about future European growth without structural reform has not helped investor sentiment. Extremely low 10-year government bond rates in the Euro Zone suggest that bond investors share his sentiment. The German 10-year Bund closed Friday at 0.89% and France’s 10-year bond settled at 1.25%. Fears of deflation are resurfacing and Draghi is expected to seek significant infrastructure spending by Germany and other European nations early next week.

I am losing confidence in Europe. The Euro has tied European nations together as never before, but the politicians in the major economies have proven incapable of passing key structural reforms in labor laws and taxation policies necessary, in my view, to get Europe growing again. Draghi gave European politicians time to implement policy changes back in July 2012 when he told the world that he would do everything necessary to save the Euro. Unfortunately, nothing has changed. Time, in my opinion, is running out. I believe another European recession is inevitable and this in turn will affect global economies.

There are several immediate effects here at home. First, the US Dollar has surged relative to the Euro. This hurts US exports to Europe because goods and services now cost almost 10% more than they did three months ago. Second, the Federal Reserve has signaled that it may have to put off raising rates in the US longer than planned over fears that US growth will suffer from a global economic slowdown. Third, if Draghi implements a more aggressive quantitative easing (QE) program in Europe, the value of the Euro is likely to continue falling just as QE here led to a weakening US Dollar. This is not a recipe for global growth, however, I believe some of the negatives will be mitigated here because of cheaper imports, lower commodity prices, and a desire by foreigners to continue investing in the US.

Adding to European concerns, we’ve had confirmation of the first US transmission of the Ebola virus in Dallas. I believe that if the Ebola virus spreads here and in Europe, global economies (not to mention the human toll) will suffer. I sincerely hope the Center of Disease Control’s assurances that they can contain this virus are true, however, if they are wrong, I cannot see how such a catastrophe will not impact the global economy. I am not overreacting at this time, but I am remaining extremely vigilant on this issue.

Finally, the geopolitical situation remains tenuous. Setbacks continue in Middle East, China and Russia appear undeterred, and the absence of North Korea’s premier over the past several months is raising concerns about North Korean stability.

I realize that I have set forth a pessimistic view of the world, but that is where we are today. The markets have taken notice and I believe these are the circumstances contributing to the current short-term weakness in the markets.

While it is easy to focus on all the negative headlines, I want to remind you of the positives. First, the US economy continues to grow. Key economic indicators reflect this strength, however, investors have ignored these facts and sold stocks. Second, my important long-term technical indicators continue to favor stocks. Third, with the recent selloff, most stock categories have reached very oversold levels. In past selloffs, stocks rarely remained at such oversold levels for long before they rallied. While every situation is different, I consider this an important factor. US companies remain strong and I believe they will be able to weather the current weakness, and if the global economy weakens as some predict, I believe the Federal Reserve will have no choice but to hold off raising rates—a positive for markets in the short-term.

LOOKING AHEAD

I will be watching small cap stocks closely. I believe stability will first appear in this sold off market segment. While I have repeatedly said that higher interest rates represent a strengthening economy, the prospect of delayed rate hikes by the Federal Reserve will be welcomed by most investors.

I also believe that higher interest rates will signal a strengthening economy. If the 10-year and 30-year US Treasury yields start climbing again, the equity markets may follow. Remember, the Federal Reserve does not set longer rates so this observation is not inconsistent with my view that the Fed may hold short rates steady for a longer time.

We will be entering earnings season soon. Corporate profitability is critical to stemming the current slide in stock prices. I will be watching earnings announcements very closely.

Among the key economic reports due out next week, the September Retail Sales report will be published on Wednesday. Consensus is expecting a slight pullback of -0.1% compared to August. I believe any upside report will be well received. Weekly Jobless Claims will be announced on Thursday and this is always a closely watched report. Consensus expects 290,000 new claims which would continue reflect an improving employment situation.

Small cap stocks (Russell 2000) have corrected over 10% from their earlier high this year. Technology stocks (NASDAQ Composite) are off 7.2% from their high in September, and large cap stocks (S&P 500) are off 5.6% from their high. A mild correction at this point.

I fully expect volatility to continue with so many uncertainties facing investors. Volatility is unpleasant, but a natural condition in stock markets. However, I will continue watching my technical indicators for any serious breakdown and I will let you know if and when that happens.

If you have any questions or comments, please reach out to me.





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

P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.

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.

Wednesday, October 1, 2014








MARKET UPDATE AND COMMENTARY
September 28, 2014


I told myself that I was not going to do it, but I just can’t help myself: there are now just 88 days till Christmas! You may be asking yourselves why on earth is Paul bringing up the onset of the holiday season? I have two reasons. First, I am a very slow shopper so I need to start thinking about gifts now if I am going to meet the holiday deadline. Second, and what really matters, is that we are now three-quarters of the way through 2014 and rapidly closing in on 2015. I would like to offer a few thoughts about where we are and where we might be going over the next few months. Before I do, I will quickly summarize September’s actions.

September has two trading days left and the S&P 500 must rally 21 points (1%) to close out the month positive. For the year, however, the S&P 500 is up a respectable 7.3%. The Dow Jones Industrial Average (DJIA) is positive by 0.1% but lags the S&P 500 with a gain of just 3.2% for the year. The technology-heavy NASDAQ exchange is down 1.5% in September but is up 8.0% for the year. Smaller company stocks as measured by the Russell 2000 have had a tough month and year with this index falling 4.7% in September and losing 3.8% for the year.

Interest rate sensitive sectors have underperformed in September as interest rates have made their largest monthly increase in 2014. The US 10-year Treasury Yield has climbed 19 basis points (0.19%) to close Friday at 2.53%. The Real Estate and Utilities sectors have lost about 6% and 4% respectively for the month. The Energy sector has also been hit hard losing a little more than 6% as energy prices continue to pull back. Only Health Care and Consumer Staples have managed to post a positive month so far.

International regions are having a tough month as well. The Emerging Markets region has fallen 5.0% in September followed by the Asia/Pacific region with a 3.7% drop while the Developed Markets region is down 2.8% in September. For the year, the Emerging Markets region is up 4.3%, the Asia/Pacific region is up 1.7%, and the Developed Markets Region is up 2.4%.

The second estimate of the 2nd quarter Gross Domestic Product (GDP) was released on Friday showing an upward revision in real GDP from 4.2% to 4.6%--welcomed, but expected news. The GDP Price Deflator (a measure of inflation) remained unchanged at an annual rate of 2.1% continuing to give the Federal Reserve more latitude on when they may start raising interest rates.

THE YEAR SO FAR

Increasing geopolitical instability has been the overarching theme in the news this year. Ukraine fighting to retain its sovereignty from an expansionist Russia, the rise of ISIS and the increasing military involvement by the US in the Iraq/Syria region, and a more aggressive China are, in my opinion, the most significant challenges facing the US and investors today. Quietly, Argentina and Venezuela are suffering severe economic setbacks led by very socialistic governments, and Brazil finds itself in the midst of its own economic challenges. In addition to geopolitical concerns, investors remain fixated on parsing every word the Federal Reserve utters about the future of monetary policy.

The US economy has continued its “plow horse” growth. After a weather-related setback in the first quarter of the year, the economy rebounded in the second quarter keeping pace with an overall growth rate of just around 2.5%. Corporate profits remain at record levels. The GDP report released on Friday showed that non-financial US corporate profits rose 11.9% and the overall percentage of profits to GDP is at its highest since the early 1950’s. At the same time, European and Asian economies are stagnant or slowing down.

This economic divergence between the United States and the rest of the world has the attention of international investors. Demand for the US Dollar has risen dramatically (foreign investors must convert their home currency into US Dollars to invest here). The Euro has fallen 9.4% to the US Dollar since May 8th and the US Dollar index has increased 8.5% over the same period. This is a seismic shift in terms of currency changes and I believe related, in a positive way, to the rise in interest rates. Let me explain.

While the Federal Reserve controls very short-term interest rates, the market sets longer rates. As Scott Grannis summed it up well this week in his blog, “10-year (Treasury) yields are largely driven by the market’s expectations for economic growth and inflation.” Watching the benchmark 10-year Treasury yield, rising rates indicates a positive growth outlook given the tempered rate of inflation. At the same time the European Central Bank (ECB) is getting ready to launch their own quantitative easing (QE) program to fight sagging economic growth in Europe while the Fed must address raising rates in response to stronger economic growth here. The Federal Reserve, I believe, will be forced to raise rates in response to these changes.

While I believe US markets are the place to be, this does not mean that going forward investors do not face some headwinds, we most certainly do. A rise in interest rates may result in a revaluation of interest rate sensitive stocks such as we have begun to see in the utility and real estate sectors. Additionally, demand for these same stocks may lessen as more conservative investors shift some of their investments back into higher yielding bonds. Greater supply implies lower prices.

So far in 2014 there has been a shift away from small-capitalization stocks. These stocks have underperformed large cap companies by nearly 10% on average. As the theory goes, when investors become nervous about the markets in general, small caps are sold first. I understand this theory, but I am tempered by the knowledge that this has happened several times over the past few years only to see the “riskier” part of the stock market rebound swiftly. As I said in my last Update and Commentary, if you are uncomfortable with your stock exposure, look to the small and mid-cap holdings to raise cash.

Going forward, I believe we will continue to see higher volatility and possible short-term disruptions in stock prices. I am firmly committed to overweighting US stocks over international stocks and bonds. The US economy, for many reasons, has the ability to adapt to the challenges that may lie ahead. US companies are extremely well run and have strong balance sheets. If Washington addresses some of the fiscal policies holding back our economy, we will see this plow horse economy start to gain momentum. Finally, the Federal Reserve must continue to manage monetary policy effectively. I believe the secular bull market will continue to run over the next year or two.


LOOKING AHEAD

September has been a lackluster month for stocks. If the month ended this past Friday, it would be the third weakest month (measured by the S&P 500) and one of four negative months for the year. January and July were worse.

Rising rates have put pressure on many bond sectors with high yield and extended duration among the weakest performers. This may continue if rates keep rising in the last quarter of the year.

The DorseyWright & Associates Money Market sector score currently stands at 1.65 (out of 6.00) up from 1.48 at the end of August. This sector’s overall ranking remains at 128 out of 134, and while this is a trend I generally do not like to see, I am not overly concerned with the sector ranking unchanged at 128.

The September Employment Situation report will be published on Friday. This monthly jobs report is closely watched by investors worried about an early increase in interest rates by the Federal Reserve. The August report surprised investors with a job increase of just 142,000, but consensus is expecting the August number to be adjusted significantly upward and for the September non-farm payroll to show an increase of 215,000 jobs. While the jobs report is very important to investors, it is hard to predict how investors will react to either an upside or downside surprise given the many Federal Reserve cross currents impacting investor decisions.

If you have any questions or comments, please reach out to me.





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.