The 2nd quarter of 2014 was full of milestones and momentum as the “sell in May” theorists were again on the wrong side. We saw the quarter end with a gain of over 4% in the S&P 500 with all-time highs eclipsed on multiple occasions throughout the quarter. It seems almost inevitable that 2014 will see S&P 2000.
The quarter began with sub-par economic data and questions as to whether it was a seasonal aberration due to a record setting cold winter or potential for a longer term economic slowdown. Fears gradually abated as corporate earnings and guidance remained positive and both the ECB and US Fed reaffirmed their long-term support of world economies. The ECB by setting the lending rate to negative and the US Fed by commenting that inflation was in check. By the ECB setting a negative interest rate, the belief is it would encourage banks to lend rather than be charged to have their cash deposited with the European Central Bank. The US Fed’s comments about inflation eased fears that they would start raising interest rates soon.
Looking forward, we still see a positive environment for equities due to the same factors we have spoken about in the past. A low-interest rate environment increases the attractiveness of equities, especially those that pay a dividend as they can be seen as fixed income replacements. The markets also do not seem to be overvalued from a price-earnings standpoint compared to historical market peaks. Combine that with a substantial percentage of investments in cash and money managers looking for an entry point should put a floor on any market pull-back not due to an extraordinary event.
From a model allocation standpoint, we are not making any major changes in our weightings. For equities, we still think US will do well and favor small cap if economic data continues to improve. We still think dividend paying companies will perform well as investors seek yield they cannot find in bonds. For our fixed income portion, we are looking to stay on the lower duration side of the yield curve. With economic data looking positive, we have allocations to lower credit quality fixed income and international debt as we seek yield opportunities.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
