Mid-quarter Report for May 1, 2104
Our Mid-quarter Report focuses on period investment performance, tactical weighting adjustments and action taken since the last Quarterly Perspective. This report is intended as an executive summary of how we have interpreted recent market and economic data.
During April we saw intense selling in momentum stocks, typically with high P/E ratios, from several sectors, but, most specifically internet and biotechnology stocks. For the month, US Large Cap benchmarks rose slightly as seen in S&P 500 (+0.62%) and DJIA (+0.74%). US Small Cap (-3.98%) and Mid Cap (-1.48%) both underperformed the large cap categories. International (+1.63%) and Emerging Markets (+0.78) both performed better than the US Large Cap benchmarks. The Barclays US Aggregate Bond Index rose (+0.57%) as the yield in the 10 year US Treasury bond declined from 2.72% to 2.65%.
On April 30th, the Commerce Department reported that the US economy grew at a disappointing rate of just +0.1% for the first quarter of 2014. Estimates had predicted an increase of +1.0%. This compares to some rather strong data seen in the last two quarters: 4th quarter of 2013 (+2.6%) and 3rd quarter of 2013 (+4.1%). Growth fell short in business investment in inventory and exports. Businesses restocked their inventories at a much slower rate this quarter after adding $110 billion in the 4th quarter (holiday season) of 2013. This slowing of inventory growth sliced about 0.60% from GDP growth in the quarter. Exports fell 7.6% during the quarter which translated into a further reduction of 0.80% from GDP. Later on the same day (April 30th) the Federal Reserve looked past the weak economic growth data and announced a cut (from $55.0 billion to $45.0 billion) in its monthly bond buying program, which cut signaled the Fed’s continuing confidence in the economy’s prospects. In its statement, the Fed reported “that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.”
It has not been an easy road, however, the US economy appears to be picking up steam and earnings season has been better than previously lowered expectations (biggest reason is harsh winter). We have now seen first-quarter earnings from half of the S&P 500 companies. Thus far, over 75% of companies have reported earnings which exceeded estimates. Analysts now anticipate that S&P 500 earnings gained 1.0% last quarter while revenues rose 2.5%; both estimates are down from one month ago. The forecast for the second quarter looks better as many S&P 500 companies have expressed optimism not seen over the last two quarters. These forecasts, combined with an increase in durable goods last month and an improving US labor market, suggest that American companies may soon return to form after the winter related slowdown seen in the first quarter.
Investment performance in the second quarter has, thus far, shown the following trends:
- Best US Large Cap sector has been Energy (+5.25%)
- Worst US Large Cap sector has been Financials (-1.70%)
- US Mid and Small Cap classes have both underperformed the US Large Cap asset class
- International and Emerging Market classes have both outperformed the US Large Cap asset class
- Our active multi-sector bond fund selections continue to perform above or in line with the Barclays US Aggregate Bond Index. We will continue to maintain our “low to the ground” approach to bond portfolio construction with a target duration of about five (5) years, lengthening duration slightly.
