Commentary provided by Siegel/Yocum Asset Management – 2Q 2014

2Q 2014 – Commentary

2Q 2014 Commentary

by Richard Siegel, CFP®

The past three months can be characterized by a stock market grinding steadily higher in the face of confusing, inconclusive economic data and geopolitical turmoil. The equity market has continued to climb a wall of worry while investors are wondering if we are yet again in bubble territory. By all accounts, 2014 was supposed to be a year of slightly improved economic growth, but the most recent GDP reading was ‐2.9%. The Russia/Ukraine conflict along with increasing violence in the Middle East have added to the concerns of global financial markets.

Although economic growth in the U.S. has been very disappointing, data will most likely turn positive in the near future. According to Brian Wesbury of First Trust Advisors “so far in Q2 the data suggest a rebound back to solid economic growth, at around a 3% annual rate. Improvement in the labor market has accelerated, industrial production is growing rapidly, and auto sales have soared.”

The bond market also turned in respectable gains for the quarter primarily based on demand for U.S. Treasuries. Although a 10 year Treasury yield in the 2.55% range is not very attractive, it is significantly higher than the government debt of most other developed markets (ex. Germany 1.24% and Japan 0.55%) Additionally, U.S. debt is the investment vehicle of choice for investors looking for a safe haven during turbulent times.

 

Equity Overview

The stock market has been on a phenomenal bull market run for the last 5 years. Even with a few significant bumps along the way, the U.S. market has risen about 150% from the generational low of March, 2009. Do stocks still make sense? Are stocks in bubble territory?

Let’s take a closer look.

  • “Don’t fight the Fed.” Nearly every major central bank in the world has implemented an
    easy money policy. This is stimulative action, helping economies grow.
  • P/E ratios in the teens are reasonable considering interest rates and inflation are low.
  • Cash rich corporations are increasingly looking for ways to pump up their share prices
    (stock buybacks, M&A activity)
  • here is still a lack of enthusiasm for the stock market.

Stocks are a viable component of any portfolio for diversification, as an inflation hedge and as the primary growth component for building wealth. That said, not all stocks are valued the same. We continue to stress U.S. centric equity exposure, but have made a concerted effort to minimize exposure to U.S. small cap stocks, which look pricy at current levels. Additionally, we maintain that foreign markets are presently a better value than U.S. equities, and have tactically increased exposure to these markets in client portfolios.

Finally, with our overriding focus on risk/return optimization, we rebalanced all of our strategies during Q2 to remove some risk from portfolios due to the fact that the bull market has now gone thirty‐one months without a 10% correction, an unusual occurrence.

 

Fixed Income Overview

Bonds have been the surprise asset class this year. After 2013’s rough ride of interest rates spiking and bond prices falling, this year has been kind to bond investors. The primary reason that bonds have performed well is what we would consider a temporary drop in interest rates based on economic and geopolitical uncertainty. It is important to note that rates are still historically low, making the upside for yields significant and the downside minimal from current levels.

The path for bond yields and therefore bond prices will be reactive to Fed policy and economic data in the coming months. If indeed the economy reverses course and continues its positive growth trend, we would expect that yields will begin to rise and prices to be under pressure. We continue to invest in the fixed income markets for income and protection from stock market volatility, while at the same time guarding against interest rate risk.

With earnings season and mid‐term elections upon us, we anticipate an increase in market volatility and feel that our portfolio strategies are allocated to sustain near term turbulence.