Closing Prices 03/31/2014
S&P 500 INDEX.................................................
US TREASURY BOND
Current Yield - 10 year bond.................................................
Current Yield - 30 year bond.................................................
Past performance is no guarantee of future results and investing involves risk,
including the possible loss of principle.
The first quarter finally yielded some volatility but ended on a high note as
many major averages reached near record highs. After seeing returns over 25%
for many equity indexes in 2013 while economic growth was anemic, one
should expect a consolidation of these gains. The S&P 500 started the year off
with a quick 6.1% drop from its peak but bounced back with an 8.4% rise from
its lows. In total, the S&P with income advanced 1.8%, while the Nasdaq rose
0.8% and the DJIA actually declined 0.2%. Performance varied widely from
sector to sector as Utilities led the way with a 9.9% return while the Consumer
Discretionary sector performed the worst, declining 2.8%. Healthcare was also
a strong performer, returning 5.8%.
Value typically outperformed growth and Mid-Caps outperformed their counterparts. The S&P Mid-Cap 400 advanced
3.0%, while the Russell 2000 posted a 1.1% total return. Participation and stock picking rose to the forefront as only 18%
of stocks are above their twenty day moving averages even though many benchmarks are making new highs. A return to
normalcy where reasonable valuations, high free cash flow, top-line growth and shareholder friendly management comes
back to favor as opposed to the momentum driven market of sky-high valuations and IPO's with no earnings being
rewarded would be a welcome sight. Gold rebounded 6.7% following its first down year since 2000. Most commodities
posted generous advances, primarily tied to the food industry. Coffee, lean hogs, corn and wheat were up 60.7%, 47.5%,
19.0% and 15.2%, respectively. However, the economic sensitive copper and lumber were down 11.5% and 6.8%,
respectively, for the quarter.
Fixed income investors were also a tale of two stories. As the Federal Reserve continues down the taper path, short-term
rates are expected to continue their rise. Two-year Treasury rates bounced from a low of 29 basis points to close the
quarter at 42 basis points; a rise of 45%! However, the ten year Treasury yield dropped from 3.0% to 2.7%. This
flattening of the yield curve could wreak havoc on companies who have relied upon short-term rates to fund their
operations. In total, the Barclays U.S Government Credit Intermediate Index returned 1.0% during the quarter as the
Long-term Index advanced 6.5%. Municipal investors generally fared better than taxable bonds as the Barclays Muni
Bond Index rose 3.3%.
A healthy consolidation of the generous gains over the past five years is constructive. Investors now have to weigh
differing economic numbers and headline risk. Some of the froth in this market has been taken out as many of the
favored momentum stocks are down over 20% in a short period. This has caused a rotation into safer areas with
higher dividends and lower valuations. The bullish case is consistent. A tame gasoline price, even with geopolitical
risk stemming from Russia and the ever unsteady Middle East, speaks volumes to our expanding ability to selfsupply
oil and gas. Manufacturing is making a comeback on the home front due to lower input costs related to
energy. Housing remains supportive with mortgage rates well below historic norms. Household net worth is on a
steady ramp upwards. Corporate and consumer balance sheets continue to strengthen. Wages are finally perking up
while job gains remain positive. Reduced political bickering on budget and debt ceiling issues, however short-term
it may be, is always beneficial. Consumer sentiment is steadily improving as incomes rise and job prospects
International markets are showing signs of less stress from inflationary pressures which will allow their central
banks to focus on growth initiatives. Europe is slowly coming out of their recession, while Japan's new regime is on
a similar money printing path that the U.S. was on a few years ago. Expansion is expected, how much is the
question. Aside from the weather related slowdown this winter, all signs point to positive GDP growth with a
possibility of 3+% later in the year. We are expecting sub-2.0% growth during the first quarter due to the short-term
impact from weather across the country.
These are all great signs, but after a 170% advance in the past 5 years, how much good news is priced in? Since
2008, S&P earnings per share are up 118% but revenues per share are only up 7%. A large portion of the
earnings gains are attributed to easy monetary policies and low financing rates. Corporations have been able to
issue debt at low levels and buy back stock. Now that the Federal Reserve is on the path to tightening, the
market must discount higher rates. That's a major concern, but not our only one. Corporate insiders are selling
stocks at 25-year highs. Rising wages are great for employees, but are also the first major sign that inflation
could be forthcoming. Rising healthcare costs and taxes could put a dent in the consumer's wallet and corporate
profits. China and emerging markets are attempting to rebound but nothing is certain. Europe is barely growing
at all and any unexpected event could flip them back to recession. Any further hiccup in their markets could
eventually hit the U.S.
Valuations are reasonable with respect to growth prospects. Any consolidative period would be welcome news
as healthy markets do not go up in straight lines. Corporate balance sheets are much improved. Companies
raised their dividends during the first quarter at a record pace. Dividend payout ratios have historically averaged
52%, while we are currently at only 36%. The trend should continue, which will reward long-term investors. A
correction could be a great buying opportunity.
We continue to participate in this market, booking profits along the way and collecting income. Paying strict
attention to support levels and macro-economic conditions should allow us to preserve principal should any
correction occur. Investors should be rewarded by focusing on dividends, franchises with broad economic
moat, high quality balance sheets and reducing risk as the market advances. Increasing credit quality while
emphasizing shorter maturities in the corporate bond market will remain our strategy for fixed income
investors. Protecting principal in the short-term, while identifying positive, long-term stories over the coming
months, should yield positive results.
We appreciate your confidence and business. Please do not hesitate to call if you have any questions or if we
can be of assistance.
Your financial needs are our highest priority. To meet with a Wealth Management
Advisor, call or visit any of our Regional Offices.