Marching Forward......

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2014 Market Performance Review (as of 3/21/2014)

            S&P 500:       

YTD Price Change:                                               2.19%

Qtr. to date:                                                             2.19%

Current Dividend Yield:                                        1.94%

            Global equities ex-US:

                        Developed Markets (EAFE) YTD:                     -2.69%

                        Emerging Markets (MSCI Index) YTD:             -6.18%

            Bonds (Barclays US Aggregate Index):

                        Total Return YTD:                                                  1.43%

            Interest Rate Change (10 Yr. Treasury Yield):          -7.04%

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As the stock market continues a march upward, the world around us seems to be offering multiple reasons to, at the very least, pay attention.  Having staved off our own domestic political uncertainties, for the time being, our attention is squarely on world geopolitical and economic changes.

For the last decade or so, China has been the primary engine of global growth.  The population movement from rural to urban combined with the rest of the world gaining access to their labor force, created an opportunity for global growth from cost efficiencies and demand creation.  China is 10% of world GDP.  According to economist Jim Rickards, “the world is not ready for a China slowdown….If you take Chinese growth rates down from 7-7.5% even to 4.5%, let alone 2.5%, which is possible, that’s going to have a major impact on the entire world.”  It stands to reason a slowdown there, of any size will have impact on global economies.  Although not likely catastrophic, China’s coming changes and growth reduction demands attention. 

While the economic impact of one area of the world is weighing on our decisions, the political effects of a potentially rogue leader are actually more concerning to us.  In a very short amount of time, with relatively little media outcry, Russia is the new owner of Crimea.  Taken by force and subsequently “voted on” by the rebellious people in that region, Russia claimed the landmass with a crucial deep water sea port their own.  Vladimir Putin may be hated internationally, but he is still loved at home.  His latest approval rating jumped to 71.6% - its highest level since he returned to office in 2012.  While the full effect of world economic sanctions may not yet be felt, eventually they will be.  In our view, a certain kind of civil war in the Ukraine is likely as Putin will not settle for just Crimea.  There are many more economic benefits to Russian to take the whole country “back”.  It is our view that this “battle” will be escalating in the coming weeks and months and will force larger EU and Western countries to get involved.  So far, the United States response has been mild and less than effective in getting the attention of Russia.

Those two significant issues may be weighing on the overall markets, but they are clearly not causing fear or panic to set it.  In fact, the stock market volatility has not changed.  Investors are either not paying attention, are overconfident in our own United States government’s policy of supporting markets or simply have nowhere else to go with investable dollars.  We believe it is the latter two ideas that explain what is occurring in stock prices holding steady.

For many quarters we have expressed our concern with the fiscal policy of the Federal Reserve and the mounting debt of world economies.  We are quick to concede that we are not able to compete with the intellectual horsepower of the Reserve, nor many of those in charge.  That said, it stands to reason the motivating forces on them to make decisions are quite different than individuals.  It is difficult to understand how a long term outlook can remain bullish with the wall of debt continuing to rise each month.

These thoughts are why we are allocating portfolios along the following ideas. 

•       Interest Rates and Stock Prices:   Watching the historic relationship between these is valuable.  It is a marker we watch closely.  When they move in directions that send mixed signals, we prefer to believe the bond market.  We have a bias toward value and conservative positions.

•       Hedging Opportunities:  Not wanting to be market timers, we are implementing tools for hedging a little bit of our portfolios against potential change.  This is done in the most cost effective and efficient methods.

There are opportunities and there are dangers.  We seek to be balanced in our attempt to find and implement both.