Despite near universal belief that interest rates will climb higher in 2014 the 10 year note went from 3.0% at year end to 2.65 % by month's end. Most believe this is a technical correction not an economic signal.
The move to a risk adverse posture comes from concerns over the slowdown in Chinese manufacturing, European deflation fears and fourth quarter weak retail sales in the U.S. In addition, the Fed is slowing it's buying of mortgage and Treasury bonds by $10 billion per month.
Slow growth in our employment numbers and a swift move into safe haven currencies surprised the investment community. A currency crisis in socialized economies like Argentina, Turkey, and Venezuela led to confusion and uncertainty.
Stock market bulls are counting on a year of earnings growth to support current valuations. The SPX is expected to earn $120.50 in 2014 up some 10% according to consensus estimates.
Bonds are expected to continue their inexorable decline in price. Europe is likely to gain economic traction after a severe recession. Consumers will continue spending while capex around the globe increases due to increased confidence. Thus far, 2014 is not unfolding according to this script.
We anticipate a more volatile year than last. Investor sentiment moved to 5 year highs at year end which is a contrary indicator. Real growth is hard to come by in a slow growth world so while growth stocks made new highs last month, commodity companies are floundering.
Emerging market economies are now 35 % of global GDP and collectively support more people than reside in developed countries. The fact remains that financial wealth disproportionately resides in North America, Europe, and Asia. Large companies in these economies are adept at turning profits given low labor and commodity costs.
The U.S. is the best of the big economies and has a clear energy and technology cost advantage. Our market multiple at 14.6 times forward earnings reflects this situation yet it is far from historical highs if earnings come through.
We seek more growth exposure this year and less dependence on fixed income assets. Cash still yields little in US dollar terms. While inflation is still very tame at 2%, gold has increased about 3% in 2014.
We know from experience that stock markets can rapidly move from one extreme to another. According to Stock Traders Almanac, every down January, since 1950, has been followed by a new or continuing Bear market, a 10% correction, or a flat year. This indicator has had an 88.9 % accuracy, so we are paying close attention to the character of this decline.
We will be diligent in monitoring signs that the heretofore positive investment climate remains benign for equity investors. Five to ten percent corrections are normal and healthy in rising markets.
Doug Coppola
February 3, 2014
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Disclaimer: This communication is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any interest in any investment vehicles managed by Client First Advisors, LLC or an associated person or entity. Client First Advisors does not accept any responsibility or liability arising from the use of this communication. No representation is being made that the information presented is accurate, current or complete, and such information is at all times subject to change without notice. Opinions expressed may differ or be contrary to the opinions and recommendations of Client First Advisors. Client First Advisors does not provide legal, accounting or tax advice. Any statement regarding legal, accounting or tax matters was written in connection with the explanation of the matters described herein and was not intended or written to be relied upon by any person as definitive advice. Any discussion of U.S. tax matters contained within this communication is not intended to be used and cannot be used for the purpose of avoiding penalties that may be imposed under applicable Federal, state or local tax law or recommending to another party any transaction or matter addressed herein. Each person should seek advice based on its particular circumstances from independent legal, accounting, and tax advisors regarding the matters discussed in this e-mail.
