Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Private equity secondary market wikipedia , lookup
History of the Federal Reserve System wikipedia , lookup
Interbank lending market wikipedia , lookup
Stock selection criterion wikipedia , lookup
Financialization wikipedia , lookup
Interest rate wikipedia , lookup
Interest rate ceiling wikipedia , lookup
The S&P 500 Index – Seven Quarters of Gains and Counting Market Overview U.S. large cap companies continued to show strength in the 3rd quarter with the S&P 500 index increasing 0.66%, extending its string of quarterly gains to seven and pushing the year-to-date gain for the index to 6.68% as shown in Exhibit 1. During the quarter, the index hit its 34th record close on September 18th but declined over the last several days of the quarter. The Nasdaq index also saw strength in the quarter, gaining 5.20% and 12.78% year-to-date with investors favoring the growth opportunities of the technology sector. Exhibit 1 Source: WSJ But as shown in Exhibit 2 below, many other asset classes saw weakness in the quarter including U. S. small caps equities which were down 7.96%, emerging markets equities which were down 3.86% and the U.S. aggregate bond index which was down 0.27%. With weak global demand and a strong U.S. dollar as shown in Exhibit 1 above, commodity prices saw a dramatic decline of 12.64% for the quarter. Exhibit 2 September 3rd QTR YTD -1.84% 0.66% 6.68% -6.19% -7.96% -5.21% -3.88% -6.22% -4.43% International Emerging Market Equity Index 4 Bond & Commodity Markets -7.77% September -3.86% 3rd QTR -0.56% YTD US Bonds Index 5 -0.79% -0.27% 2.52% Commodity Index6 -7.23% -12.64% -9.51% Stock Markets Domestic Large Cap Equity Index 1 Domestic Small Cap Equity Index 2 International Developed Equity Index 1 S&P 500 Index, 2 Russell 2000 Index, Q 3 |2 0 1 4 3 3 MSCI EAFE Index, 4 MSCI Emerging Markets Index, 5 Barclays Capital U.S. Aggregate Bond Index, 6 PowerShares DB Commodity Index 1| P a g e Domestic Insight The U.S. economy continues to demonstrate slow but steady growth across most sectors. The biggest story line of the quarter is the continued improvement in the labor markets with the unemployment rate dropping to 5.9% in September and with 248,000 jobs being added in the month, an improvement over the 12 month average gain of 218,000 jobs. With such strong job numbers, the expectation would be that the Federal Reserve would be raising rates very soon but with inflation running below 2% the Fed indicated in their last meeting that they would be keeping rates low for a “considerable time”. Our expectation is that the Federal Reserve will begin raising rates in the 2nd or 3rd quarter of 2015. As we have stated previously, having the economy become strong enough to grow without the support of the Federal Reserve is a positive and even with higher rates, the economy and the markets can continue to grow. Another factor that has benefited both consumers and businesses over the past quarter is the continued decline in commodity prices as shown in Exhibit 3. Lower commodity prices help businesses trim their cost of production and allow consumers to increase their consumption of more retail goods. This tail wind was witnessed in August with consumer spending rising 0.6% over the previous year. Exhibit 3 Source:Factset The one area that has continued to show mixed signals all year is the housing sector. August building permits and housing starts came in below expectations and demand remains weak in many areas due in part to strict lending requirements still in place with most banks. A positive that continues this year and is a change from previous years is the federal government is not creating an artificial crisis situation and government spending and taxes have remained primarily unchanged over the past year. One of the more compelling stories driving growth is capital spending by businesses. Since the recession, businesses have made every effort to increase their cash reserves. They have done this in large part by reducing costs and delay capital investments in their business. With the large cash surpluses they had Q 3 |2 0 1 4 2| P a g e accumulated, they started to buy back their outstanding shares and increase their dividends but only recently did they start increasing their capital investments in their business. As Exhibit 4 shows, business capital spending as a percentage of GDP has been well below its average since 2009. Based on historical data, the upward trend in capital spending could continue for a number of years and will be a strong supporter of future GDP growth. Exhibit 4 Source: Factset International Economy and Markets On the international front the third quarter continued the trend of numerous geopolitical flashpoints and mixed economic data. The economic news from China and Japan continues to be mixed while most of Latin America and Europe has struggled to show economic growth and there is concern over declining prices or deflation in those areas. Outside of the U.S., the majority of central banks are becoming more aggressive with their monetary policy in hopes of stimulating growth. The European Central Bank (ECB) released a plan this quarter to begin purchasing bonds in the same way the Federal Reserve has purchased bonds under its quantitative easing program over the past several years. The main issue with the release of the plan was that it was severely lacking on specifics as far as the size of the plan. Fixed Income For the quarter, interest rates remained mostly flat with the 10 year U.S. Treasury ending at 2.52%. Even with the Federal Reserve tapering its monthly bond purchases with the last bond purchase occurring in October, interest rates remain low caused by strong global demand for U.S. bonds, low inflation and a strong U.S. dollar. With the potential for rising interest rates in the U.S. we continue to favor international bonds and floating rate bonds and in general we are continuing to minimize the duration (i.e. interest rates sensitivity) of our bond allocation. As was shown this year, even with the potential for higher interest rates over the next 1-3 years, fixed income plays a valuable role in diversification, capital preservation and providing income for a portfolio. Q 3 |2 0 1 4 3| P a g e Portfolio Allocations & Economic Outlook As we look out for the remainder of 2014 and start planning for 2015 we are still very bullish on equities as an asset class. Although U.S. equities are at their long-term average valuation and corporate profit margins are at all-time highs, there are a number of reasons to expect the U.S. economy and U.S. equities to perform well. One of those areas that can continue to propel GDP growth is housing. Although housing has not been overly strong for the year, as shown below in Exhibit 5, housing starts are well below their historical average while housing remains very affordable from a historical perspective. These factors would indicate that housing should be more of a positive than negative over the next 1-3 years. Another catalyst for the market is the sizable amount of cash still on the sidelines which is currently at a record level of $11.2 trillion in cash and cash equivalent accounts. For international equities, the compelling investment point is current valuation versus long-term averages. Our favor towards equities is also supported very strongly by the fact that fixed income does not look as appealing based on the potential for higher rates over the next 1-3 years. Exhibit 5 Source: J.P. Morgan As it has been 35 months since the last 10 percent correction in the market, there is the likelihood that we may see one in the upcoming quarters. We would view this type of correction as more of an opportunity to put cash to work versus a long-term trend in the market. It is valuable to note, that over the past 25 years we have had two periods where the market went 60 months without an official 10% correction so it would not be unprecedented if the low volatility were to continue in the market. There is usually a catalyst that causes a market correction and it is possible that one of the catalysts for increased market volatility may be the Federal Reserve increasing interest rates. Q 3 |2 0 1 4 4| P a g e