Thursday, January 23, 2014

MARKET UPDATE AND COMMENTARY
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%).

JANUARY FEEDBACK


January is an interesting month. For some it represents a new beginning. A time to recommit to old goals or commit to new ones. For others January is cold, bleak, and spring seems forever away. In the financial world, January is the time when every pundit makes predictions about the markets for the coming year. Others talk about such things as the “January Effect,” or make predictions based on old sayings like, “as goes January, so goes the year.” All of these investment sayings, proverbs, and “the year ahead” type articles are interesting but they all have one fatal flaw--no one can predict what the new year is going to bring to investors.

Each year is unique in its own way and what lies ahead is impossible to know. However, and this is an important point, existing economic conditions and trends do not suddenly go away or change just because the calendar flips from 2013 to 2014. Events or policies that were affecting the markets last year can and do bleed over to the new year. A growing economy, good fiscal and monetary policies, a shrinking economy, or terrible fiscal or monetary policies are the conditions that going to be brought forward into a new year and it these conditions good or bad that, in my opinion, will continue to move the markets. Real change occurs when one or more of these factors do indeed change, and understanding the impact these changing factors may have on markets is very important.

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 Federal Reserve is likely to continue to reduce the amount of its bond purchases—also known as tapering. However, as I have commented before, I see this as a non-event and I believe current monetary policy has had a dwindling impact on financial markets for some time. One notable exception would be if the Fed suddenly began to raise interest rates. Market consensus is not expecting any move on intrest rate hikes until next year, so any change from this key monetary policy would trigger, in my opinion, a wave of uncertainty in the markets and hurt stocks and bonds.

 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.

 The December 2013 jobs report showing an increase of 74,000 jobs compared to the 197,000 expected really kicked stocks in the gut and has been a big part of the initial malaise in the markets so far this year. My interpretation of this report is that it is most likely an outlier. This employment statistic is one of the most volatile economic statistics produced by the Department of Labor. I will not try to speculate why the number came in so low, but I will be watching the January employment report (release date: February 7th) to see what revisions are made to the December number and what January looks like. I would really like to see more jobs created in 2014 than what we saw in 2013.

LOOKING AHEAD

I commented a number of times last year that one of the primary reasons stock markets climbed above expectations was because of strong corporate profits. Profitable companies, in my view, create wealth and move markets. The expectation of future profits helps drive markets upward and this helps explain why stocks can climb in value at a time when many people see the economy as flagging. Current results are important, but projected earnings figures by companies are even more so. This is a key metric.

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®
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.