MARKET UPDATE AND COMMENTARY
September 14, 2014


Stocks here and abroad have lost some of the momentum they carried into September following a strong August. The US and global economic and political backdrops have not changed dramatically, but concerns that the Federal Reserve will start raising rates earlier than anticipated has changed and investors pushed interest rates up sharply in anticipation of the move.

All major US and international indexes (except for the European STOXX 600) that I follow are down in September. The Dow Jones Industrial Average (DJIA) is down -0.7%, the S&P 500 is off -0.9%, the NASDAQ is down -0.3%, and the Russell 2000 has fallen -1.2%. Looking globally, the Dow Jones Global Dow Ex-US index is down -1.6%. The Emerging Markets region is also off -1.6% followed by the Asia/Pacific region (-1.3%) and the Developed Markets region (-1.2%). The STOXX 600 is up 0.7% in September on the strength of a strong first week of the month. For the year the S&P 500 is up 7.4%, the NASDAQ is up 9.4%, the DJIA is up 2.5%, and the Russell 2000 is down -0.3%.

Interest rates have risen sharply in September. The benchmark US 10-year Treasury yield has increased 27 basis points (a basis point is .01%) pushing up the 10-year yield to a Friday close of 2.606%. The Barclays US Aggregate bond index is down 1.2% in September (bond prices will move inversely to interest rates) on the jump in rates. While this may not sound like a large move relative to what you may generally observe in the stock market, it represents a decline of nearly 25% of all gains made by the Barclays in 2014.

One of the big economic stories in 2014 is the continued strengthening of the US Dollar. The US Dollar index, which measures the value of the US Dollar compared to a basket of six major currencies, is up 1.8% in September, and is now up 5.2% in 2014. A stronger US Dollar makes imports and commodities cheaper, but also makes US goods abroad more expensive. As I noted in my previous Market Update and Commentary, the US Dollar’s strength is attributable to higher US interest rates, a growing economy, and an expectation that rates and the economy will continue to rise. I firmly believe that a strong US Dollar is good for all Americans over the long term.

Commodity prices continue to fall. The Dow Jones UBS Commodity Index is down -4.2% in September and is off -12.5% from its high on April 29th. Over this same period, WTI Oil fallen -5.3%, Gold is down
-5.0%, Natural Gas is down -19.6%, and Corn is off -33.9%. I believe agricultural prices are down because of a terrific harvest. Energy prices are under pressure because of greater US production of oil and gas coupled with a stronger US Dollar and weaker global demand, while higher interest rates and a stronger US Dollar have hurt the price of Gold. Falling energy prices and increased US energy production have very positive geopolitical consequences for the US because it puts serious pressure on our adversaries like Russia and Iran who depend on high energy prices to fund their regimes, and because we will be able to provide the energy to Europe they now receive from Russia. Falling prices will also help consumers here at home by increasing discretionary income and helping grow the US economy.


PUTTING INTEREST RATE CHANGES IN PERSPECTIVE

What exactly does a 27 basis point (bps) jump in the 10-year US Treasury mean? How does it compare to other recent interest rate changes? I will answer these questions as succinctly as I can in an effort to help you understand this very important shift in rates and how it may influence your portfolio. Let me emphasize here that past performance is not indicative of future returns and that there may be more than just interest rates affecting stock and bond valuations.

I have examined four previous major interest rate increases over the past decade where the rates increased from below 3%. These periods are:

____ Period______ ___Change in 10-Year Treasury Yield___
Dec 2008/Jun 2009 174 bps
Oct 2010/Feb 2011 131 bps
May 2013/Sep 2013 127 bps
Oct 2013/Dec 2013 54 bps
Aug 2014/Sep 2014 27 bps
Net Change Jun 2007/Present -269 bps
Sep 2004/Present -190 bps

What struck me as I looked at this data for the first time was the number of times since this current bull market began we have seen sharp increases in interest rates in an overall declining interest rate environment. The US 10-year yield peaked at 5.3% mid-June 2007 and has since fallen 269 bps to Friday’s close of 2.6%.

I then examined the performance data of some of the key market indexes and sectors. I will start by addressing those sectors/indexes that underperformed. Not surprisingly, long-term bonds performed worse than any other sector or index I evaluated. I say not surprisingly, because historically long-duration bond valuations are the most sensitive to rate increases or decreases. As rates increase, prices drop; and vice versa.

The Real Estate and Utilities sectors also tended to underperform during the evaluated periods. Since the Real Estate and Utilities sectors are comprised of stocks, the performance of these sectors was a bit uneven and difficult to draw any firm conclusions other than rising rates tends to hurt these sectors. My general view is that investors who need yield to pay their living expenses or otherwise are seeking income from their portfolio will purchase utility and real estate stocks to get that income, but as soon as rates rise to a certain level, they will sell their riskier stocks and buy the bonds for their income. I might go so far as to suggest this happens with other high dividend yielding stocks as well—but to a lesser degree.

What did surprise me a bit was how poorly the Emerging Market region did during the rising interest rate periods with the exception of the Dec 2008/Jun 2009 period where they were the best sector. The Emerging Market sector tended to be at or near the bottom of all the other periods evaluated and this most current rising interest period is no exception.

It is more difficult for me to draw any trends on those sectors or indexes that have tended to do well in rising rate environments other to say that stocks clearly outperformed bonds. No one sector or index dominated in any one period over another. Looking at the entire period of December 22, 2008 to Friday (net rate increase of 48 bps), the Consumer Discretionary sector outperformed all others followed by Information Technology. The NASDAQ and the S&P 500 Equal Weight indexes are third and fourth respectively. All of these four stellar performing sectors/indexes exceed a gross return of over 200%.

In summary, during the major rising interest rate environments over the past decade:

• Stocks, in general, are likely to outperform bonds
• Interest rate sensitive stocks and sectors may tend to underperform
• Be wary of the Emerging Market sector


LOOKING AHEAD

September is living up to its reputation for being weak month for stocks.

Nothing has changed my overall view that the US economy is the strongest in the world and that US equities are favored over all other major asset categories. The August Employment report released on September 5th concerned many investors, but I see it more as an aberration rather than a new trend. Although the International asset class remains firmly number two of the six I follow on a relative strength basis, I continue to recommend under-weighting.

Rising interest rates make bond investing tough. For pure preservation, the very short duration bond sector may work. If income is still important, I like the senior floating rate sector.

The Money Market sector score currently stands at 1.53 up from 1.48 at the end of August, and now ranks at 128 out of 134 up from 131st. Falling below the Money Market over the past two weeks are the Global Currency, Commodities, and Precious Metals sectors.

If you have any questions or comments please reach out and give me a call.





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.