A Market Commentary
The market results so far for 2014 are comparable to a swan gliding along Mirror Pond. Although all was serene on the surface, those webbed feet were churning away underneath. First quarter 2014 saw most equity indexes returning +1 percent to +4 percent with fixed income in a tighter range of +2 percent to +3 percent. Reviewing the key indexes for the first quarter, most investors would be satisfied with three similar quarters to finish out the year, as that would result in high single digit U.S. stock returns and near double digit fixed income returns. In other words, an average year for stocks to consolidate the markets’ 30 percent+ 2013 gains and a very solid fixed income recovery after last year’s negative results.
Moving steadily down the stream with few changes of direction (low volatility) is the scenario preferred by most investors and certainly retired clients. That is not exactly what took place in the first quarter though, particularly for equities. Global stock markets tumbled in January as investors focused on the potential negative aspects of the tapering of the Federal Reserve’s Quantitative Easing bond purchasing program and harsh winter weather- although Central Oregon was rather unscathed from the winter storms. Many media commentators were telling market participants they should be nervous because stocks were very strong in 2013 without any significant pullbacks and that valuations were high due to modest earnings growth for the year. Equities were thus susceptible to any new worries, so the severe snow storms provided a catalyst for stock market weakness and all of the major equity indexes finished January with negative results.
By early February, the S&P 500 was down 5.7 percent year-to-date and diversifying indexes were worse as S&P small cap was -7.7 percent, EAFE -6.2 percent and emerging markets were -8.6 percent. The bearish contingent was calling for further declines, possibly even the beginning of a Bear Market. Our swan seemed to be headed in the wrong direction towards Klamath Falls, but it managed to fight the currents and return to its prior, favorable course. Over the remainder of Q1, the major equity indexes reached further new highs despite the effects of continued bad weather, worries about the Fed Chair handoff from Bernanke to Yellen and additional signs of global economic slowing.
For the full quarter, U.S. mid caps led the way at +3.0 percent, with the S&P 500 +1.8 percent and Small Caps +1.1 percent. International stocks trailed a bit overall, finishing relatively flat for the quarter, despite a very strong March for emerging markets and a strong overall quarter for international small caps. The strong returns in March for emerging market stocks nearly made up for a difficult January. Plagued by concerns over the fallout of Fed tapering, currency valuations, falling commodity prices and the slowdown in GDP growth rates from “very high” to just “high,” emerging market stocks have lacked clear direction for over a year. While some investors want to punish these markets for enacting policies that many would consider prudent in the long term, others highlight that emerging market stocks might be one of the best investment opportunities available at this time.
Domestic REITs were a clear leader among asset classes for the first three months of 2014, a solid rebound from last year when REITs trailed the broader market by the widest margin since 1998. The Fed’s tapering plans were seen as a negative by many investors who regard REITs as a yield play, but now investors seem to be adjusting to the new interest-rate environment, again focusing on the fundamental strength in the REIT sector. As the economy improves, many expect earnings in the real-estate sector will be more than enough to compensate for higher interest rates. Specifically, the sector has been led by strength in Apartment REITs, Healthcare REITs and Mortgage REITs. Real estate has certainly picked up steam here in Central Oregon and is probably getting the attention of REITs. With the OSU Cascades Campus expansion plans in place the need for off campus housing will dramatically increase in an environment with a less than 1 percent rental vacancy rate.
Probably the most interesting occurrence in Q1 was that most areas of fixed income (bonds) reported steady positive returns each month. In January, as stocks retreated, investors turned to bonds and bond yields dropped nearly across the board with 10-year U.S. Treasury yields falling back by .3 percent. As a result, intermediate term investment grade corporate bonds beat stocks for the first quarter since Q1 2012. While a pullback in interest rates was a big factor, further strengthening corporate balance sheets may have also had an impact. With some investment grade bonds nearly doubling the return of the S&P 500, it is a reminder of the benefits that diversification can provide in both short and long term results. A focus on relatively short duration, high levels of diversification and exposure to floating rate securities may be prudent may be prudent based on the expectation that rates will eventually rise.
While the calming picture of the steady swan gliding over the Deschutes River is desirable to most investors, it is the movement beneath the surface that keeps the momentum going and enables the swan to skirt danger. Talented portfolio managers are always on the lookout for the rare black swan, a negative occurrence that agitates the markets. Black swans are very rare, however, they are out there and it is important to be ready for them. When balancing return potential with potential risks, it is wise to make decisions with the black swan in mind. Whatever you do, do not stop paddling.
David Rosell is President of the Rosell Wealth Management in Bend. He is the author of Failure is Not an Option- Creating Certainty in the Uncertainty of Retirement. You may learn more about his book at www.DavidRosell.com or www.Amazon.com. Ask for David’s book at Barnes & Noble and Newport Market in Bend and Powell’s Books in Portland.
The material contained in the ’Market Commentary’ section is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed, nor does it constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. Past performance is not indicative of future results. Diversification cannot assure profit or guarantee against loss. Performance of an index is not illustrative of any particular investment.
Investment advisory services offered through Rosell Wealth Management, a State Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. 800 765-5201. Rosell Wealth Management is a separate entity from ValMark Securities.
