Market Commentary – 2014 is Going to be a Challenge

By Greg Sweeney, CFA, Chief Investment Officer, Bell State Bank & Trust

The stock market started the year on firm footing, but has been volatile over the last few trading sessions.  As the market addresses tapering announcements by the Federal Reserve to reduce its QE program and the decreased liquidity that comes with it, stocks have been under pressure. This includes foreign markets. The Fed announcement today to taper another $10 billion per month is the second step in a process that started last month. Open market purchases of U.S. Treasury bonds and mortgage securities by the Fed are now targeted at $65 billion per month down from $85 billion in December 2013. The S&P 500 is down 4% from where it started the year. Over the same time period, bonds have increased in price with the yield on the 10 year U.S. Treasury bond declining from 3% to 2.7%. Some of this new demand for bonds is coming from pension funds that are locking in gains from the attractive stock returns last year and shifting some of the proceeds to fixed income securities.  At the same time, the spread (additional yield over Treasury bonds) on corporate bonds has tightened.

It appears there is some hesitation currently to push forward with too much optimism. Corporations are providing some caution on their expected earnings growth for 2014.  Regulations and taxes coming out of congress continue to make it harder for companies to hire, pay and retain employees. This environment appears to support the old saying that says: “congress loves jobs but dislikes employers.” Jobs are the core driver of economic growth but population in the U.S. continues to grow at a faster pace than job creation. Another challenge just around the corner is the upcoming debate on the debt ceiling and funding the federal government for the remainder of this fiscal year.

Gross domestic product (GDP), a broad measurement of the U.S. economy, grew at a 3.2% annualized rate in the final quarter of 2013. Consumer and business spending along with export growth helped fourth quarter results.

Housing slowed a bit as the market adjusts to interest rates that are about 1% higher than they were last year at this time. We do not see this as a long term setback as housing is ultimately determined by need.

What does all of this mean for investors? Stock market declines of 5% are fairly regular occurrences and should not be a catalyst for knee jerk reactions. It does serve as a good reminder that allocations to other assets like bonds help reduce fluctuations in portfolio values even though interest income is currently quite low. These market movements do not come as a surprise. Our Economic Outlook events covered the prospect of corporate earnings growth slowing, the need for more jobs and the challenges of increasing regulations at a time when the economy is struggling to generate more growth. If market forces are causing some uneasiness, perhaps that is a sign it is time to contact Bell State Bank & Trust to review your allocations and investment profile.

This article has been written for the general information of clients and friends of Bell State Bank & Trust. It is not intended, nor may it be relied upon, as legal, tax or investment advice with respect to any matter. This article also cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service or other taxing authority.


If you’d like to talk more about market commentary, call Greg Sweeney to start the conversation.


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