MARKET UPDATE AND COMMENTARY
March 30, 2014
A lackluster first quarter is about to close.
With just one trading day left in the 1st quarter, the Dow Jones Industrial Average (DJIA) is down 1.5%, while the Russell 2000 (small to medium size stocks) is down 1.0%, and the tech-heavy NASDAQ is off 0.5%. The S&P 500 is the only one of the four key indexes I track still positive with a gain of 0.5%. Last week saw some relatively large drops in the NASDAQ (-2.8%) and the Russell 2000 (-3.5%). Two thoughts come to mind. First, this quarter-long pause is not surprising given the strength of the markets last year, and second, the larger pullback by the NASDAQ and Russell 2000 comes after these two indexes posted the largest gains last year. Even with last week’s drops, the NASDAQ (+27.2%) and Russell 2000 (+21.0%) have outperformed the DJIA (+12.0%) and S&P 500 (+18.4%) over the trailing twelve months. From where I sit, I believe investors have been taking some profits from their largest winners in the face of global uncertainty—not unexpected in my opinion.
International markets have moved sideways to start the year much like US markets. The European-heavy STOXX 600 has done relatively well with a 1.6% year-to-date gain while the Asia/Pacific region is the weakest posting a loss of 2.6% due in large part to the Japanese market losing roughly 8%. Emerging markets also are negative so far with a drop of 1.6% despite a 4.1% gain last week.
As I noted in my last Market Update and Commentary, gold has had a strong run this quarter as investors sought out the safety of this precious metal, but in the past two weeks gold has fallen nearly $85 (-6.1%) to close Friday at $1294.30 per ounce. Gold remains up 7.6% for the year, but this latest trend is worth watching. Bonds continue to drift within a range between 2.5% and 2.75% with the yield on the 10-year US Treasury bond closing Friday at 2.72%. The general trend in gold and US Treasuries reflects, in my opinion, a more defensive stance by investors as they digest continued sluggish US growth and fears over the tensions in the Ukraine.
The final revision of the 4th Quarter 2013 Gross Domestic Product (GDP) came in last Thursday with a gain of 2.6% and inflation running at an annual rate of 1.6%. I would certainly like to see the GDP closer to 3%; however, I do not consider a 2.6% expansion reason for investors to sell the market off to any significant degree at this time. Additionally, the markets were spooked a bit by Janet Yellen’s (the new Fed Chair) comments last week that the Federal Reserve could begin to raise short-term interest rates as early as May 2015. Ms. Yellen’s comments did not reflect any real change to Ben Bernanke’s earlier pronouncements (except she put a date in her discussion) and she gave herself plenty of room to maneuver around that time frame. I have said many times before that the Federal Reserve must begin to change the face of monetary policy for the health of our economy and I believe she understands this will include raising interest rates to more normal levels at some point in time. What is unknown today is how successful the Federal Reserve will be in this transition to more normal monetary policy. I believe real risks like much higher inflation lay ahead if the Fed gets it wrong.
STAYING THE COURSE
I believe patience is one of the important attributes to successful investing. This is why I spent so much time with my comments earlier this year discussing the historic volatility of the S&P 500. I want each of you to understand that markets can be jumpy, especially in times of tension. The question in most investors’ minds is how do we know if a correction is part of the normal cycle of the markets or possibly something far more devastating like what happened in 2008? I attempt to answer this question by evaluating a number of data points/technical indicators beyond the normal range of economic statistics. What I see today does not, in my opinion, suggest that a major market correction is around the corner despite the lackluster start to the year.
Let me briefly discuss some of the technical indicators I consider when I make my observation about the markets. DorseyWright & Associates (DWA) provides all of the proprietary data for the indicators I am discussing in this section. Please note that technical indicators are just one tool you should use when evaluating an investment.
New York Stock Exchange Bullish Percent (NYSEBP): this is one of my key indicators of market risk. The NYSEBP looks at every stock listed on the New York Stock Exchange and counts how many are on a buy or sell signal on their individual point and figure chart (if you would like a more detailed discussion on point and figure charting, please give me a call). All the buys are tallied up and divided by the total number of stocks listed (approximately 2800) to get a percentage. This percentage is currently 63.5%--a little high but not extended (over 70% and the markets are considered to be of higher risk of a future pullback).
The Dynamic Asset Level Investing Indicator (DALI®): The DALI divides the overall market into six major asset classes: US stocks, International stocks, Bonds, Currencies, Commodities, and Money Market Funds. There are 1079 components representing all of these six major asset categories. These components are put into a matrix (similar to the one I described in my May 16th Update and Commentary) and then ranked by the number of victories each major asset category has. This gives me an idea of where the relative strength is within the market at any given time. US stocks have been the number one ranked major asset category since October 25, 2011, and importantly, has not shown any erosion in strength recently.
Over Bought/Over Sold Percentage (OBOS %): This indicator tracks the last ten weeks of prices for the S&P 500 index and places those prices on a normal statistical bell curve with the middle of the curve marking the ten-week price average. Currently the S&P 500 is just 24% overbought which tells me that the markets are not too expensive at this time. A reading north of 100% is considered to be very overbought while a reading of -100% is considered to be very oversold.
Money Market Fund Score and Ranking: DWA tracks 132 separate individual asset classes each day (not to be confused with the six major asset classes) and assigns a score to each individual asset class. Money Market Funds is one of those 132 individual asset classes. DWA computes a score for each of the individual asset classes based on a proprietary measure to summarize each individual asset class’ strength on a scale of 0 to 6 with 6 being the very best score. In my opinion, this indicator is my “canary in a coal mine” and if I see the money market score and ranking start to rise, my concerns will rise with it. Currently, the Money Market Fund score is 1.68 and the asset class ranks 127th out of 132 asset classes. This tells me that the Money Market asset class is only stronger than five other asset classes. I like to see the Money Market asset class near or at the bottom of the 132 individual asset classes.
Taking these indicators together along with many others, I use a disciplined methodology in determining my take on the markets. At times staying in the market may not “feel” right, however, I have learned over time to trust my data and to stay the course as warranted. I am also prepared to change course if I believe a shift in data suggests this is the proper action. Emotions and gut feeling can, at times, be the worst enemies of investors and lead people to use poor judgment when they manage their investments. Using these tools is not foolproof nor is it a panacea to make investing easy. Investing is not easy. There are going to be times when relative strength might lag markets such as in very choppy sideways markets, however, I do believe that trends appear in markets and understanding the general strength and direction of the market might help you overcome your emotions and may allow you to minimize the negative impact of making emotional decisions.
LOOKING AHEAD
Even with the lackluster performance so far this year, my guidance remains unchanged. I favor US stocks overall of the six major asset classes I follow. 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.
The International stock asset class still ranks number two of the six major asset classes. However, the International stock asset class has shown some weakness lately which has made it less attractive for now and I would avoid adding new money at this time. I continue to strongly advise against owning the Emerging Market region for now.
Bonds have shown some life with the pullback in interest rates. A defensive move for sure. I continue to like the High Yield and Floating Rate sectors within this major asset class.
The overall rally in the Commodity asset class continues and is looking slightly more attractive in the short term. While it may be too early fundamentally to add commodities to an allocation, the numbers are improving and are worth watching.
Next Friday’s (April 4th) release of the March Employment Situation report has the potential to be the major financial news story of the week. After a disappointing February report (129,000 increase in jobs), consensus is looking for a rebound to 206,000 new jobs in March. This is considered a key indicator of the vitality of the economy. Fed Chair Janet Yellen is also speaking tomorrow (Monday, March 31st) and her comments always have to possiblity to move markets.
My next Market Update and Commentary will be published around April 17th. I will postpone my review of the NCAA Men’s Basketball bracket analysis until after the Final Four concludes on April 10th. For those of you who do not follow the games closely, the Final Four will be made up of a 1 seed (Florida), a 2 seed (Wisconsin), a 7th seed (Connecticut), and an 8 seed (Kentucky).
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, March 17, 2014
MARKET UPDATE AND COMMENTARY
March 16, 2014
I spent some time this morning trying to come up with just the right adjective to describe how stock markets have acted so far this year. Some of the words that came to mind were “squishy,” “unsettled,” “rudderless,” “aimless,” and “lackluster.” I think I will go with lackluster. So far this year nothing stands out to me that would allow me to identify a theme for the markets, but we are just eleven weeks into 2014 so there is still time. For the year, the Dow Jones Industrial Average is down 3.1% hurt primarily by the year-to-date stock price performance of General Electric (-10.4%), Boeing (-9.8%) and Travelers (-8.7%). The S&P 500 has held up a little better having lost only 0.4% so far in 2014. The Russell 2000 (a broader index that has smaller companies in its database) is up 1.5% and the technology-heavy NASDAQ is also up 1.6%.
As this market struggles to find an identity, I believe that a number of stories are contributing to the indifferent market performance both here and abroad. The two biggest being the Russian incursion into the Ukraine coupled with the geopolitical implications of a resurgent Russia (and possibly a declining USA), and the growing unease about economic growth in China. The Russia story is sad but straightforward—tyranny over freedom. The world has seen this type of thuggish behavior many times before and I suspect, will for many generations to come. The China story is a new one—ongoing conversion to free markets in a totalitarian state in order to stimulate domestic growth. The China story is also more complex which I will address in greater detail in the coming weeks, but for now let me summarize by saying that the Chinese government has decided to let its currency float a little and is trying to clean up a “shadow” banking system that is enormous and unregulated. Think of the shadow banks as a black market collection of lenders. How the Chinese government navigates this transition has global implications. Also keep an eye on Israel and the unrest there as militants from the Gaza area have renewed their rocket attacks on the Jewish state.
With the geopolitical concerns escalating, investors have been moving some of their assets into more defensive positions notably bonds and gold. The yield on the US 10-year Treasury has fallen 0.38% or 38 basis points (bps) since the start of the year (as yields fall, prices of bonds rise). The Barclays US Aggregate bond index has improved 2.1% year-to-date eliminating most of the losses from 2013. Gold prices have surged in the face of the geopolitical uncertainty gaining $176.00 an ounce (14.6%) this year helping push the DJ UBS Commodity index up 7.3%. Oil prices have been relatively stable in the face of rising demand as the US, Iraq, and even Iran have stepped up production.
MARCH MADNESS AND HOW I SEE THE MARKETS
For those of you who have worked with me or have been reading my Updates on a regular basis know that I talk about Relative Strength (RS) as one of the key analytical tools I use to study the markets and make investment decisions. You also know that I like to use sports analogies to help explain how RS works in context of investments. There is no better time of the year than March Madness to learn about or refresh your understanding of how RS works.
The NCAA men’s basketball tournament is known as March Madness. It is a head-to-head single game elimination tournament to determine who is the best college basketball team in the land, and some would argue the most exciting couple of weeks in sports each year.
Sixty-four teams earn spots or are selected to compete in the tournament. The teams are divided into four regions of 16 teams. Since 1979, the NCAA has seeded the teams in each region based upon their perceived strength in an effort to prevent two outstanding teams from meeting early in the tournament and sending one of the better teams home prematurely. The NCAA’s selection committee is tasked to pick those teams that do not earn an automatic bid along with ranking every team and seeding them into the regions. They use a variety of quantitative and qualitative measures such as quality of schedule, number of victories, and recent performance to make their seeding decisions. Once the tournament starts, all the #1 seeds plays the #16, the #2 seeds play the #15, and so on. My friends at DorseyWright & Associates using information from CBS Sports have created the chart below to show you just how each seed has performed over the past 29 years.
Here are a couple of key takeaways:
1) No #16 seed has defeated a #1.
2) The #1 seeds have the highest win percentage at 80%.
3) The top three seeds have won 73% of all games played, while
4) The bottom three seeds have won only 7% (27 games) of games played.
5) The top five seeds have won 68% of all games played while the bottom 5 seeds have won only 17% of their games.
You may ask, so what. Why does this matter? Well for many fans both serious and casual, when it comes time to participate in the office pool and bragging rights are at stake, success may be no further away than simply picking by seed. Does this mean you will win? Probably not. In fact it is so hard to predict every game correctly that Warren Buffett and Quicken Loans have offered $1 billion to anyone who can do just that for this year’s tournament. What are the odds? The game rules estimate the chances are one in 9 quintillion! How much is a quintillion—let me just say it is so small that Warren Buffett is willing to wager $1 billion in an advertising campaign on those odds.
The good news is that as investors we do not have to pick each and every game correctly to succeed. We need to be generally right. There is always going to be a Cinderella team that disrupts the brackets or strong RS stock that disappoints, but that is simply the way it is. There is nothing we can do about that. But when confronted with uncertainty, thousands of choices, and countless opinions, I want to be able to focus my decision making on the “top seeds” and avoid the bottom ones.
Using a relative strength matrix like the example on the left (Dow Jones Industrials 30 components) allows me to identify the “top seeds” currently found in the DJIA and use this information as a guide to my investment decision making.
Let me interject an important reminder: past performance is not a guarantee of future returns and all investing involves risk. There is no full proof methodology that can guarantee success.
These tools are invaluable to help me focus my attention and analysis to those investments that I believe have a higher probability for success as compared to the entire universe, and while the concept is not new, technology has allowed the matrices to become more robust and responsive in just the past few years. As an Army brigade commander told me years ago when I was a young lieutenant, “work smarter, not harder!” This is a lesson I continue to live by today and certainly applies to relative strength analysis.
LOOKING AHEAD
I know that I sound like a broken record because the overall relationships in the markets have not changed in many, many months. I favor US stocks overall of the six major asset classes I follow. 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.
The International stock asset class still ranks number two of the six major asset classes. However, the International stock asset class has shown some weakness lately which has made it less attractive for now and I would avoid adding new money at this time. I continue to strongly advise against owning the Emerging Market region.
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.
The overall rally in the Commodity asset class continues and is looking slightly more attractive in the short term. While it may be too early fundamentally to add commodities to an allocation, the numbers are improving and are worth watching.
Last week’s 2% pullback in the markets marks the second largest weekly drop in 2014 and the S&P 500 has now pulled back 2.25% from its all-time high of 1878.04 on March 7th. As this market drifts for a while I believe you can continue to anticipate greater volatility, but as I have said before, the underlying fundamentals of this market have not changed.
My next Market Update and Commentary will be published around April 1st. I plan on spending a few minutes to analyze how this year’s seeds do compared to the historical averages and see if there are any lessons we can take away from this great example of relative strength.
Happy St. Patrick’s Day!
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.
Thursday, March 6, 2014
MARKET UPDATE AND COMMENTARY
March 3, 2014Stock 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.
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
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.
Tuesday, February 18, 2014
MARKET UPDATE AND COMMENTARY
February 17, 2014
Last week’s market action gave stocks their first good weekly performance in 2014. The Dow Jones Industrial Average (DJIA) and the S&P 500 gained 2.3%, while the Russell 2000 and the NASDAQ Composite each added 2.9%. For the year, the DJIA remains down by 2.6%, the Russell 2000 is off 1.2%, the S&P 500 has dropped 0.5%, while the NASDAQ has added 1.6%.
International markets were also positive last week with most regions posting returns similar to the US. While the Developed Markets region of the world continues to perform reasonably well (-0.6%) in 2014, the Emerging Markets region remains a laggard. For the year, the Dow Jones Emerging Markets Region TSM index is down 4.2% hurt by the Asian/Pacific Region which is down 3.7%.
I believe markets have struggled to get started this year for a couple of reasons. First, markets had an incredibly strong 4th Quarter 2013 to cap off a stellar year. It would be perfectly normal for investors to take a breather at some point. Second, the weather has really hit most of the US hard this winter and with it—business. While I believe that bad weather has been used as an excuse for one bad economic data point or another in the past, I do think that this time weather will legitimately be to blame for lackluster economic data as the year gets started.
Other concerns that may have affected markets include fears in the emerging market region and the start of the Federal Reserve’s policy to reduce the amount of bond purchases (aka Tapering). As I have written previously, I do not believe either of these issues have had a major impact on our markets; however, I keep such worries under scrutiny.
Finally, corporate earnings are always under the microscope each quarter when companies announce their previous quarter’s results. We are nearly finished with the 4th Quarter 2013 reporting period where, according to the Wall Street Journal, 80% of companies in the S&P 500 have announced earnings and two-thirds have exceeded analyst expectations—in line with the past four quarters exceeding the post-1994 average of 63%. Profits drive markets and profits are still climbing.
WORRY AND THE MEDIA
I had lunch today with my corporate attorney and our conversation turned to the markets and the inherent fear many investors have. Part of this fear is a residual from the Great Recession of 2008. However, he pointed out, correctly I might add, that the first inclination of the financial media before, during and after a market like 2013 is to scare investors and convince them another market meltdown is just around the corner. Why? Because fear sells.
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Ned Davis Research reviewed every correction of the S&P 500 from January 1928 through April 2012. Their research found that there has been an average of 3.5 corrections of 5% or greater every year and on average one of those corrections was grew into a correction of at least 10%. The first part of the current bull market acted similarly to the overall market average, while 2013 did not. The S&P 500 had its first 5% correction of 2014 losing 5.8% between January 15th and February 9th. If history is any indication, we are likely to have more corrections this year, and that would be perfectly normal.
I have included a chart from Ned Davis Research that gives you greater insight into US stock market corrections:
LOOKING AHEAD
There has been no change to my key market fundamentals nor has there been any significant deterioration of the data. US stocks are favored along with International stocks. Bonds remain in the #3 position among my six major asset classes followed by Foreign Currencies, Money Market funds, and Commodities. While I have been avoiding the Commodity asset class, it is important to note that Gold has risen 9.7% in 2014 and the Dow Jones UBS Commodity index has risen 3.9%. There may be life in commodities, but for now I am still avoiding or minimizing my exposure.
Small capitalization US stocks remain favored and Growth is favored over Value stocks. On a relative strength basis, Consumer Discretionary, Health Care, and Industrials remain the favored sectors; however, on a performance basis, Real Estate, Health Care, and Utilities have been the best performing sectors in 2014. Please keep in mind that the relative strength relationships I discuss in this section of my Update are long-term in nature to avoid constant turbulence in portfolios.
Developed International markets remain favored over Emerging markets, and I continue to prefer the High Yield and Bank Loan bond sectors. With the drop in interest rates so far in 2014, more interest rate sensitive bond sectors like Long Government and Preferred Stock have outperformed, however, I believe as interest rates begin rising again, these interest rate sensitive bond sectors are likely to pull back.
There are no major economic reports due out over the next couple of weeks. However, there are a couple of key reports such as Housing Starts, Consumer Price Index, and Initial Jobless Claims that will be published. As I noted earlier, I would expect these reports to be below consensus due to the weather impact on the economy.
My next Update and Commentary will be published around March 3rd.
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 Dow Jones Emerging Markets TSM Index is produced by S&P Dow Jones Indices and represents 21 of the largest emerging market economies led by China, South Korea, Taiwan, Brazil, India, South Africa, and Russia.
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.
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.
February 17, 2014
Last week’s market action gave stocks their first good weekly performance in 2014. The Dow Jones Industrial Average (DJIA) and the S&P 500 gained 2.3%, while the Russell 2000 and the NASDAQ Composite each added 2.9%. For the year, the DJIA remains down by 2.6%, the Russell 2000 is off 1.2%, the S&P 500 has dropped 0.5%, while the NASDAQ has added 1.6%.
International markets were also positive last week with most regions posting returns similar to the US. While the Developed Markets region of the world continues to perform reasonably well (-0.6%) in 2014, the Emerging Markets region remains a laggard. For the year, the Dow Jones Emerging Markets Region TSM index is down 4.2% hurt by the Asian/Pacific Region which is down 3.7%.
I believe markets have struggled to get started this year for a couple of reasons. First, markets had an incredibly strong 4th Quarter 2013 to cap off a stellar year. It would be perfectly normal for investors to take a breather at some point. Second, the weather has really hit most of the US hard this winter and with it—business. While I believe that bad weather has been used as an excuse for one bad economic data point or another in the past, I do think that this time weather will legitimately be to blame for lackluster economic data as the year gets started.
Other concerns that may have affected markets include fears in the emerging market region and the start of the Federal Reserve’s policy to reduce the amount of bond purchases (aka Tapering). As I have written previously, I do not believe either of these issues have had a major impact on our markets; however, I keep such worries under scrutiny.
Finally, corporate earnings are always under the microscope each quarter when companies announce their previous quarter’s results. We are nearly finished with the 4th Quarter 2013 reporting period where, according to the Wall Street Journal, 80% of companies in the S&P 500 have announced earnings and two-thirds have exceeded analyst expectations—in line with the past four quarters exceeding the post-1994 average of 63%. Profits drive markets and profits are still climbing.
WORRY AND THE MEDIA
I had lunch today with my corporate attorney and our conversation turned to the markets and the inherent fear many investors have. Part of this fear is a residual from the Great Recession of 2008. However, he pointed out, correctly I might add, that the first inclination of the financial media before, during and after a market like 2013 is to scare investors and convince them another market meltdown is just around the corner. Why? Because fear sells.
How many of you have seen the stories bouncing around the internet about how similar the chart of the DJIA today is to 1929? In case you have not seen the chart, here it is (top chart). The chart looks as if the markets today are tracking the 1929 markets with eerie similarity. However, what the fear mongers do not tell you is how the scale of the two periods are highly different in order to provide the similarity. If you scale the charts in the same manner (bottom chart) you will see a far different chart and most likely draw a very different view of today compared to 1929.
Source: The Wall Street Journal
Another topic I want to discuss is the importance of putting corrections into context. Again, the news media seem to hype every pullback as the coming of the next Great Depression fanning the fears of many investors. To help offer some perspective, I addressed this subject in the first Market Update and Commentary (January 2, 2014) of the year where I reviewed market corrections of the S&P 500 from March 2009 until the end of 2012, and then for 2013. Looking at the first years of this current bull market, I noted that the S&P 500 suffered 3.8 corrections between 5% and 10% every year and one correction greater than 10% every two years. I then noted that 2013 had no corrections of 5% or greater which made 2013 an unusually quiet year. Since my evaluation covered just the most recent five years of data, I was curious to see what a longer-term perspective might offer so I found a report that looked at S&P 500 corrections since this index’s inception.
Ned Davis Research reviewed every correction of the S&P 500 from January 1928 through April 2012. Their research found that there has been an average of 3.5 corrections of 5% or greater every year and on average one of those corrections was grew into a correction of at least 10%. The first part of the current bull market acted similarly to the overall market average, while 2013 did not. The S&P 500 had its first 5% correction of 2014 losing 5.8% between January 15th and February 9th. If history is any indication, we are likely to have more corrections this year, and that would be perfectly normal.
I have included a chart from Ned Davis Research that gives you greater insight into US stock market corrections:
I am not trying to make statisticians out of everyone, but I do think it is important for you to have some context of what is possible, even probable, when investing in the stock market. Volatility is an unpleasant fact of investing. How you react to this volatility has much to do with your success as an investor, and having some perspective about market corrections will hopefully enable you to make better investment decisions.
LOOKING AHEAD
There has been no change to my key market fundamentals nor has there been any significant deterioration of the data. US stocks are favored along with International stocks. Bonds remain in the #3 position among my six major asset classes followed by Foreign Currencies, Money Market funds, and Commodities. While I have been avoiding the Commodity asset class, it is important to note that Gold has risen 9.7% in 2014 and the Dow Jones UBS Commodity index has risen 3.9%. There may be life in commodities, but for now I am still avoiding or minimizing my exposure.
Small capitalization US stocks remain favored and Growth is favored over Value stocks. On a relative strength basis, Consumer Discretionary, Health Care, and Industrials remain the favored sectors; however, on a performance basis, Real Estate, Health Care, and Utilities have been the best performing sectors in 2014. Please keep in mind that the relative strength relationships I discuss in this section of my Update are long-term in nature to avoid constant turbulence in portfolios.
Developed International markets remain favored over Emerging markets, and I continue to prefer the High Yield and Bank Loan bond sectors. With the drop in interest rates so far in 2014, more interest rate sensitive bond sectors like Long Government and Preferred Stock have outperformed, however, I believe as interest rates begin rising again, these interest rate sensitive bond sectors are likely to pull back.
There are no major economic reports due out over the next couple of weeks. However, there are a couple of key reports such as Housing Starts, Consumer Price Index, and Initial Jobless Claims that will be published. As I noted earlier, I would expect these reports to be below consensus due to the weather impact on the economy.
My next Update and Commentary will be published around March 3rd.
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 Dow Jones Emerging Markets TSM Index is produced by S&P Dow Jones Indices and represents 21 of the largest emerging market economies led by China, South Korea, Taiwan, Brazil, India, South Africa, and Russia.
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, February 5, 2014
MARKET UPDATE AND COMMENTARY
February 4, 2014
The first month of 2014 has proven to be:
a) A normal pause in an ongoing bull market
b) The result of the Fed’s reduction in bond purchases (tapering)
c) All about the growing weakness in emerging markets
d) The beginning of the next great bear market
e) All of the above
f) None of the above
Before I try to answer this question, let’s quickly review what happened in January:
US Stocks were lower: The Dow Jones Industrial Average (DJIA) fell 5.3%, the S&P 500 lost 3.6%, The Russell 2000 fell 2.8%, and the Nasdaq Composite lost 1.7%. Real Estate, Utilities, and Health Care are the best performing sectors in 2014 while Energy, Consumer Discretionary, and Consumer Staples have been the weakest.
International stocks followed US stocks lower with the Emerging Market Region significantly underperforming: The Dow Jones Global Ex-US index fell 4.3%, the European-heavy STOXX 600 pulled back 1.7%, the Developed Market Region fell 3.6%, and the Emerging Market Region lost 6.9%. Looking at major international markets, the Japanese Nikkei is down 8.5% with only Russia (-9.2%) and Turkey (-8.8%) underperforming the Nikkei among the major international markets.
Commodities continue to remain weak overall: The Dow Jones UBS Commodity index gained 0.3% in January primarily on the strength of Natural Gas (+17.9%) and Heating Oil (+6.6%). Gold added 3.5% to finish January at $1245.60 per ounce while WTI Oil fell 1.1%. I believe Natural Gas and Heating Oil have rallied as demand in January surged due to the bitter cold that has swept over much of the country. Gold rallied, in my view, on the general fear of some investors, and WTI Oil has lagged because of concerns about global growth.
Volatility has returned: As I noted in my first Update and Commentary of the year, volatility was subdued in 2013 and I suggested that it would be unlikely to see a similar calmness in 2014. If January is any indication, we will see greater volatility during the year. The CBOE VIX index, a measure of stock volatility, has increased from 13.38 at last year’s close to 18.41 at Friday’s close—a jump of 37.6%. To be fair, the VIX is a very volatile index and large swings are common. Even at 18.41 the VIX is not particularly high. Looking back to recent history, the VIX reached nearly 90 at the height of the Great Recession in 2008 and the upper-40’s in 2010 when the European crisis was at full boil. I expect to see continued volatility in 2014 as compared to 2013.
AND THE ANSWER IS?
Given all that we know today, the answer in my opinion is: A—a normal pause in an ongoing bull market.
Let me provide you a list of some of the key data that I base my opinion on.
1) The first estimate of the real 4th Quarter Gross Domestic Product (GDP) came in at 3.2%. The number would have been higher except for a significant pullback in government spending (a good thing in my view). Additionally, the Price Index (my preferred measure of inflation) grew at a subdued 1.3%. While growth should be better, the economy is still moving forward despite government-induced structural headwinds.
2) Government spending as a percent of the economy has fallen significantly over that past three years. This is important because I firmly believe that the government does not utilize dollars as efficiently as the private sector, and when government spending grows, the output of the private sector falls.
3) The trouble with emerging markets has been underway for more than a year. This is not a new phenomenon; however, some countries like Argentina and Venezuela have reached tipping points where government policies require change or else hyperinflation will set in and severely hurt the middle class. My relative strength data has signaled that emerging markets were underperforming developed markets since September 2011.
4) The jobs picture remains ok. I did not say great because there remains a lot of trouble with the longer-term unemployed and the increasing numbers of workers who have given up looking. However, with the recent termination of permanent long-term unemployment benefits as part of the budget deal early this month, expect to see a number of people move back to the employment rolls. Additionally, with the economy continuing to grow at a steady basis, look for job growth to continue as well.
5) Housing is in a long-term positive trend. Shaking off the housing bubble in 2008 has taken years to accomplish, but that is what has happened. Like other markets, this recovery will not be in a straight line upward, but a positive trend is in place.
6) The energy revolution has taken hold. This is and will remain one of the most important factors of long-term growth in the US economy. Energy creates jobs both in the oil sector but also in manufacturing sector where low energy prices can make a huge difference in manufacturing costs. Lower energy prices mean more money in the pockets of consumers and that helps everyone. Energy has the potential to be a positive force force in long-term economic growth over the next twenty or thirty years.
With the positives comes the negatives, and how these negatives work out can help determine how quickly markets get back in a winning direction.
At the top of my list of concerns is a dysfunctional Washington. I just have not seen enough out of our political leaders to give me confidence that they will tear down some of the barriers to strong economic growth. My concerns deal with the impact of rising premiums and deductibles resulting from Obamacare on the average American family’s budget, no Keystone Pipeline, the never-ending stream of regulations foisted on the private sector, and the potential battle of the debt ceiling later this month. Much of this has been underway for several years and the private sector has withstood the challenge, so I anticipate 2014 will be the same.
Another concern will be the growth in corporate profits. Through Friday about 250 of the 500 companies that comprise the S&P 500 index have reported 4th quarter earnings. The vast majority of those companies beat growth expectations by an average of 8%, however, there have been some very visible misses including Amazon and MasterCard. Keep in mind that a miss can include not projecting acceptable earnings figures to investors for the remainder of 2014. This week there are another 150 or so companies reporting. We should have a good feel for how corporate profits are looking by Friday.
International markets may continue to hold the possibility for negative surprises especially in growth rates in Europe, banking concerns in Europe, and the strains in emerging markets. The political turmoil in the Middle East has subsided for now, but this dangerous part of the world can heat up at any time.
LOOKING AHEAD
I have delayed publishing my Market Update and Commentary by about a day due to the market turmoil yesterday (Monday). The DJIA was off 326 points and registered a 2.1% drop. The S&P 500 fell 2.3%, the Nasdaq fell 2.6% and the Russell 2000 dropped 3.2%. That is volatility! It has pushed most indexes down more than 5% for the year. Most of the reporting is suggesting that the drawdown continues to focus on fears of a global growth slowdown. Emerging markets are contributing, but even here in the US, a key manufacturing indicator showed an unexpected reduction in the rate of growth for January. The Employment Situation report coming out this Friday will again take on extra significance due to this perceived contraction of growth expectations.
What I have been looking for is to see if there is any notable structural changes to my indicators. What I have observed is clearly a weakening of some key indicators but not a breakdown. For example, the New York Stock Exchange Bullish Percent (NYSEBP) fell to 57.5--a level not seen since late September of last year. Remember that the NYSEBP tells me about the general direction and riskiness of the market. A reading of 57.5 following recent highs of around the mid-70’s is showing some weakness, but it is also signalling a reduction of risk. The S&P 500 index is about 89% oversold meaning that in general the market has gotten much cheaper in the last few weeks and selective buying opportunities may present themselves.
The longer-term structural strength of the data I follow remains in place so the overall guidance has not changed. I favor US stocks overall of the six major asset classes I follow. 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. Consumer Discretionary has been weak so far in 2014 so I am watching this very closely.
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.
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.
I am avoiding Commodities completely at this time.
My next Market Update and Commentary will be published around February 17th.
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.
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.
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.
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
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.
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
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.
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