Sustained drop in stocks not likely despite uncertainties, global worries

By Robert C. Doll,  Chief Equity Strategist and Senior Portfolio Manager at Nuveen Asset Management

There is growing investor anxiety about the strength of global equity markets following their strong run in 2013, especially in light of a slightly lackluster economic backdrop. Many equity investors are questioning the efficacy of monetary policy, the level of profit margins and valuations, the threat of Fed tapering and geopolitical risks. Five years after a harrowing economic recession, equity investors still appear largely focused on risk.

Fourth-quarter earnings season announcements are showing stronger signs. Thus far, 68% of companies reporting 4Q 13 earnings beat consensus expectations. Approximately 25% of S&P 500 companies have reported earnings.

Severe weather across much of the U.S. will likely impact economic data in January. Once temperatures return to normal, a bounceback could unfold.

The Federal Open Market Committee announced it will cut its monthly asset purchases by another $10 billion. Despite concerns about emerging markets and a weak December payroll report, the Fed will reduce its purchases to $65 billion per month, and leave the interest rate forward guidance unchanged.

A correction in equities may be under way. A price correction would be natural after the substantial increase in prices over the last few months. Potential areas of concern include the squeeze in China's shadow banking system, increasing currency instability in several emerging-markets countries and a renewed spike in interbank borrowing rates in the eurozone. Nevertheless, none of these issues are likely to significantly unsettle the global economy.

Bear markets have almost always coincided with economic recessions.

Today, the developed world has barely recovered from the 2008 financial crisis, and it is not probable that another recession will emerge soon. If this conclusion is correct, the bull market should remain intact. Investors seem to be more upbeat about the world economy and prospects for stocks than they were 10 months ago, but signs of a bubble are not yet prevalent.

A forward price to earnings (P/E) ratio of 16 for the S&P 500 is not viewed as extreme, compared with a 10-year U.S. Treasury yield of 2.75%. We believe the sweet spot for equities is when the underlying economy remains weak but recovering, and monetary policy is stimulative.

We have been in the sweet spot for some time, and it is likely to continue.

Profit growth is about to accelerate. The eurozone is coming out of a recession and the U.S. economy remains below its potential. Also, inflation rates in G7 countries are below central bank targets. Overbought conditions and periodic worries about the impact of Fed tapering, particularly in emerging markets, is causing near-term choppiness. While the current turmoil may not be over, current conditions do not suggest a sustained decline in equity prices.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

More Volatility Ahead

By Russ Koesterich, CFA, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

After a rocky first few weeks of the year, U.S. equity markets fell sharply last week. The media blamed much of the decline on market turmoil in emerging markets.  China reported some surprisingly weak economic data, and financial turmoil in Argentina and Turkey led to a sell-off in EM currencies.

But while EM volatility certainly contributed to investor angst, I believe last week’s equity market sell-off had more to do with two other factors, as I write in my new weekly commentary.

1.   Stretched Valuations. Last year’s gains were powered mostly by multiple expansion – investors were willing to pay increasingly more for a dollar of earnings. In fact, 2013 saw the largest single-year increase in market valuations since 1998. In addition, not only did stocks become more expensive, but bonds became cheaper. As a result, many large institutions are rotating back into bonds, contributing to pressure on equities.

2.   Domestic issues. Last year’s rally was largely an act of faith that the economy and earnings would improve, justifying higher stock prices. While the economy does appear to be mending, the improvement has been modest and gains are not yet evident in earnings numbers. It’s still relatively early in the fourth-quarter reporting season, and to date, the results have been respectable, but hardly inspiring. The percentage of companies that are reporting better-than-expected results is actually below the four-year average.

Investors’ growing frustration with earnings results is evident in recent flows. U.S. equity funds have been seeing outflows, while European and global equity funds have been attracting assets.

So what does this mean for investors and their portfolios? While I still think that stocks will post gains this year, those gains are likely to be more muted and accompanied by more ups and downs. As the Federal Reserve tapers, market volatility is likely to revert back to its longer-term average. As such, investors should consider preparing their portfolios for the rockier road ahead.

In addition, in a week when much of the news was negative, Europe surprised to the upside with a big surge in manufacturing. So, for investors that have focused on the United States, I advocate looking to increase international exposure to the other large developed economies, specifically Europe and Japan. In fact, I now hold overweight views of both markets.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Equities market 'the best in our lifetime,' but hold on tight

By Jeff Benjamin, Investment News

Don't be surprised if the stock market corrects by as much as 10% this year, but don't even think about giving up on the secular bull market.

That's the bottom line message from Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Inc.

Speaking at the Inside ETFs conference in Fort Lauderdale, Fla., on Tuesday, Ms. Sonders stressed that from both valuation and sentiment perspectives, there is no reason to walk away from the equity markets at this point.

“There is a slightly elevated risk of a 10% correction this year, but I don't think the secular bull market is over,” she said. “I have some short-term concerns, but I personally think the bull market we're in now will be the best is our lifetime.”

Some of the driving forces she identified include the fact that U.S. businesses “are sitting on a huge hoard of cash, which is at a level not seen since World War II,” she said. “We know the capital is there, but we haven't had the animal spirits to put it back to work yet. But this is the year we'll probably see increase in [capital expenditure] spending.”

Inflation is not a threat at this time, she explained, because “there is no velocity of money.”

“The money is not multiplying and that has held inflation in check, but it has also kept economic growth low,” Ms. Sonders said. “You don't get an inflation problem when you have no velocity of money, but if we start to see velocity pick up, then I think we could start to change the thinking around future [Federal Reserve] policy.”

The current spread between bank deposits and bank lending, which Ms. Sonders said has never been as wide as it is today, could narrow this year as lending picks up.

“But we're still a long way from the point where lending matches deposits,” she added.

Another area of potential fuel for the U.S. economy is one of Ms. Sonders' favorite themes, the U.S. manufacturing renaissance.

“We're at an inflection point,” she said. “For the first time in post-World War II history, U.S. manufacturing is up three years in a row, but keep in mind it is coming off a very low base and it is still only 13% of the U.S. economy.”

In terms of equity market valuations, Ms. Sonders said she is not worried about the fact that forward price-earnings ratios are around the historic median level.

“Bull markets rarely stop at the median P/E,” she said.

In making her point, Ms. Sonders used a slide showing that the average trailing P/E of every bull market since the 1950s was 18.7, which compares to the current level of 16.6.

“We know that profit margins are at or near all-time highs,” she said. “But unless you're rolling over into a crash, it has not been historically a problem for the market coming off all-time highs in profit margins.”

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Case for Munis Still Strong, Despite Market Woes

By Ilana Polyak , Financial Planning Magazine

Pity the poor municipal bond fund managers. Every few years, they are called on to defend the sector in the face of worries about a debacle in the muni market.

This is another of those times. Among the reasons that bears are wary of the muni market: Detroit’s default last summer, Puerto Rico’s looming (as of mid-January) downgrade, Illinois’ mounting pension obligation and the Federal Reserve’s decision to begin tapering its $85 billion monthly bond-buying program. The S&P Municipal Bond Index was down 2.3% for the year that ended on Jan. 7 — ouch.

But Christopher Alwine, head of Vanguard’s municipal bond team, has seen this before. He has been managing municipal bond funds since 1991, and over that period he has witnessed some bleak times.
In 2008, the worldwide financial collapse seized up credit markets — and bond insurers, once ubiquitous, experienced credit problems all their own.

That led investors to question the creditworthiness of munis and the eventual departure of insurance from the market.

The worst fears passed — until 2011, when prominent banking analyst Meredith Whitney predicted a massive wave of municipal bond defaults. (They didn’t happen.)

By comparison, Alwine says, today’s worries are relatively modest. “When munis have a bad year, it’s not all that bad,” Alwine says of the recent dip in the sector’s performance.

RARE DEFAULTS

Although muni default rates are on the rise since the financial crisis, they are still extremely unusual. According to Moody’s Investors Service, the default rate for munis rated by the firm is 0.03% over the last five years.

And compared with corporate bonds, the recovery rates — that is, the amount of money that bondholders eventually wrangle out of the issuer after a default — looks good too: 65% for muni bonds versus 49% for corporate bonds.

In 2012, as hungry investors looked for yield advantage, munis were a natural place to get it with relatively little risk.  But 2013 proved something else, amid the Detroit bankruptcy and fears about an impending ratings downgrade for Puerto Rico.

THE CASE FOR OWNING

Despite the headlines, Alwine says, the case for munis is strong. First of all, the income produced by munis is tax-free; that is especially important now that the net investment income of high-income individuals is subject to a 3.8% Medicare surtax.

And when problems do flare up in the muni market, they don’t tend to be contagious, Alwine insists. Part of this has to do with the sheer number of issuers — there are tens of thousands of them. In addition, the financial troubles in one jurisdiction tend to be unique. So, highly publicized troubles in a few locations aren’t necessarily symbolic of difficulties throughout the market.

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The D2 Capital Management Tax Free Income Portfolio is currently yielding 4.83% (Trailing 12 month Tax Equivalent Yield at 28% Tax Bracket, of 24 January 2014).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Last Week’s Selloff Isn’t a Big Deal

By Vahan Janjigian, Editor of MoneyMasters Stock Report

When stocks sell off, everybody wants to know why. Last week’s selloff is being blamed on everything from the collapse of the peso in Argentina to a contraction in manufacturing in China to disappointing Q4 earnings announcements in the U.S. Whatever the case, the bigger concern is how long the selloff will last.

Of course, nobody knows for sure how long any selloff will last. To keep things in context, keep in mind that stocks rallied about 30% last year. That’s a rather large one-year return. Over the long term, stocks tend to rise by approximately 8-10% annually. But that is just the average. Average, of course, implies variation. For example, if stocks go up 10% every year for 10 years in a row, the average return is 10%; but in this case, there is no variation. This would be a highly unlikely occurrence. On the other hand, if stocks fall 5% every year for five years in a row and then rally 25% per year over the next five years, the (arithmetic) average annual gain is still 10%. This, too, would be a highly unlikely occurrence; however, in this case, there is variation. Notice also that in the second case, even though the average is 10%, there was no actual year in which stocks rallied 10%.

The point is that selloffs are inevitable. As Warren Buffett has said, long-term investors should welcome selloffs. It gives them the opportunity to buy more shares at lower prices. No one, however, can consistently pick the tops and bottoms. When you buy stocks following a selloff, you run the risk of getting in too early.
The S&P 500 is down only about 3% since the year began. Many pundits have been calling for a 10% correction. Even long-term bulls view 10% pullbacks as healthy. We’re still a ways from that point so the selling could easily continue for a while. In 2013, the stock market rallied strongly even though the economy showed little signs of health. This year (so far), the economy is looking better. However, that does not imply further gains in stocks. To a large extent, last year’s rally anticipated an improving economy.

Right now, we are in the heart of earnings season so we can be sure to see more volatility in the days and weeks ahead. Furthermore, Ben Bernanke’s last FOMC meeting as Chairman of the Federal Reserve occurs on Jan. 30. The Fed has embarked on a course of reducing the amount of quantitative easing. The market currently expects the Fed to announce an additional $10 billion reduction in easing. That means, the Fed would continue buying bonds at the rate of $65 billion per month. One thing is for sure. If the Fed chooses some other course of action, stocks will respond very quickly one way or the other. In fact, if the past is any guide, stocks could shake, rattle, and roll even if the Fed does exactly what is expected.

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

2014 Will Be a Year of Moderation

By Max Chen, ETF Trends

The economy is moving along and the markets will continue to strengthen. However, investors should not expect a repeat of last year as growth moderates.

“We expect U.S. and global growth to pick up modestly in 2014 given stronger household balance sheets and less fiscal drag,” according to Russ Koesterich, Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist.

BlackRock expects the U.S. economy to expand 2.5% to 2.75%, up from 2% over the past few years, while global growth could rise to 3.5% from about 3% in 2013.

However, investors should remain vigilant if Capitol Hill bickers over another budget deal. Additionally, the labor market is still slow to pick up and wage growth has been subdued, which means households will keep a lid on their wallets.

Potential Federal Reserve tightening has weighed on the markets, but the Fed is committed to low short-term rates for the time being and has tapered its monthly bond purchasing plan.

“We foresee the 10-year Treasury yield modestly climbing this year, finishing 2014 at around 3.5%,” Koesterich added.

While gains may be muted, BlackRock suggests investors should stick to stocks. Specifically, Koesterich is overweight U.S. mega-caps, Eurozone stocks and Japanese equities.

“Against this economic backdrop, we continue to advocate overweighting stocks, which remain more attractively valued than bonds and cash,” Koesterich said. “That said, U.S. equity market gains will likely be more modest this year than in 2013, and international stocks have more room for multiple expansion.”

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association. 

Fidelity 2014 Outlook

As we emerge from a blockbuster 2013 for U.S. stocks, which gained more than 30% on the way to setting all-time highs, investors have numerous opportunities to consider, along with some unique challenges.

Here are the key things to know right now, according to a range of Fidelity experts featured recently in Fidelity Viewpoints:

• Stick with stocks as economic growth solidifies. Stocks may continue to outperform bonds and cash. Focus on companies with high earnings growth potential and reasonable valuations. If it is appropriate to your goals, investment objectives, and risk tolerance, consider financial, tech, and health care stocks.
• Brace for some volatility. Stay diversified. If you’re a long-term investor and it is in line with your investment objectives and goals, consider using pullbacks to buy strong companies at reasonable prices. If you’re a trader and are willing to assume the risk of investing in options, consider strategies like calendar and other spreads.
• Rates may inch higher, not spike. Bonds still play a role for income and diversification. The Fed could keep short rates low, and much of the change in longer rates may have already happened.
• Search for income beyond conventional bonds. If maximizing income is part of your investment objectives and you are willing to assume the risk, consider a mix of high yield, floating rate, convertibles, and equity income.
• Look abroad for opportunities. Europe’s economic cycle appears to be turning positive, and many foreign companies have lower valuations than their U.S. counterparts.
• Watch for a transition in emerging markets. Emerging market countries, such as Indonesia, Turkey, and South Africa, could suffer from U.S. central bank tapering. However, others—such as Mexico—may benefit from the next phase of growth.

Source:  Fidelity Viewpoints

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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.