1st Quarter 2014 Market Commentary

Financial markets greeted the New Year with increased volatility. Global stock markets retreated in January, rebounded strongly in February, and declined again in March.  By quarter end, US Stocks were up 1.81% (S&P 500 Index), developed international stocks were up a modest 0.66% (MSCI EAFE Index), and emerging market stocks, showing continued weakness, were down -0.43% (MSCI Emerging Markets Index).  Fixed income investors caught a breather from negative price pressure, as bonds returned 1.84% (Barclays Aggregate Bond Index) for the quarter.  Alternative investments demonstrated their value in a diversified portfolio. Global real estate was up 7.03% (S&P Global REIT Index), and commodities snapped a lengthy losing streak, returning 6.99% (DJ-UBS Commodity Index) year to date.

During the quarter, the current bull market for US stocks turned 5 years old. For those who love useless data facts, it is now the 5th longest bull market for US stocks since the Civil War. [1] The S&P 500 Index has returned 179% since its March 9, 2009 intra-day low of 666, and is 7% shy of tripling in value.[2]  However, current levels are only 21% above the previous high in October 2007. Television pundits and Wall Street sell-side analysts are ever so eager to call the top of the market and predict the next down turn. While we do not attempt to make such predictions, we have a difficult time finding legitimate reasons for a major stock market decline in the near-term. Bear markets are caused by the existence of one or more of these four factors – economic recessions, restrictive monetary policy, excessive valuations, and exogenous shocks.

The Federal Reserve expects the US economy to grow at a rate of 2.8 – 3.0% in 2014.  This is higher than the Fed’s long-term normal expected growth rate of 2.2 – 2.3%, and is a strong projection. [3]  Last year the US private sector grew at a 3% rate, but a -1.0% reduction in the government sector brought the total GDP (Gross Domestic Product) number down. For 2014, this fiscal drag from government spending cuts is no longer a factor. Despite expectations for a low 1st quarter GDP number, likely caused by harsh winter weather, most economists expect 2.5 – 3.0% economic growth for 2014.  One is hard pressed to find a negative economic indicator. The cyclical sectors of the economy (vehicle sales, housing starts, inventories, and real capital goods orders) are all at or below long-term averages. Unemployment, at 6.7% in February, is approaching the 50-year average of 6.1%.  It seems unlikely the US will experience a recession in the near-term.

The Federal Reserve met for the first time under new chair, Janet Yellen, in March. In her first press conference on March 19, Yellen indicated that the Fed will no longer use 6.5% unemployment as a hard measure for raising policy rates.[4] The Fed continued its tapering of bond purchases, known as Quantitative Easing (QE3), by an additional $10B per month. At this rate, new bond purchases should stop by year-end. Yellen also noted she expects policy rates to remain low “for a considerable amount of time” after the bond buying program ends; i.e. mid to late 2015. We are unlikely to experience restrictive monetary policy for quite some time.

The third factor contributing to bear markets is excessive valuations in equity prices.  Based on forward (15.2x) and trailing (17x) Price Earnings (PE) ratios, the S&P 500 Index is trading at average historical valuations. [5] Economist Robert Shiller’s longer-term Cyclically Adjusted Price Earnings (CAPE) ratio, 24.90, indicates the US market valuation is high, but still nowhere near the 40+ valuations of the late 1990s.[6] While the US stock market may be fairly or slightly overvalued at current levels, we have not yet reached what even Shiller would call asset “bubble” levels.

Shiller PE (CAPE) Plot

The fourth and final factor that causes a bear market is exogenous shocks. These things are sudden and least predictable of all – war, terrorist attacks, natural disasters, etc. Russia gave the world a taste of the Cold War by annexing the Ukrainian peninsula of Crimea last month. Syria is still in the throws of a brutal civil war. We have no idea what, where, or when the next tsunami, earthquake, or hurricane will be. Of the four factors, outside shocks are the most likely to be the cause of a bear market in the near-term, but they are also the least predictable.

Many investors are concerned about the near-term prospects for the bond market. Some have even thrown in the towel, declaring bonds to be dead. This is irrational at best, and absurd at worst. Yes, it is true that rising interest rates are bad for bond prices in the short-term. In 2013, the Barclays Aggregate was down -2%, a dismal year for bond investors. Consider, however, that the yield on the 10-year Treasury note rose from 4.86% in January 1966, to 15.93% in September 1981.  An investor in intermediate-term government bonds earned 5.15% per year during that time period. [7] Rising rates are not a death knell for bond investments. In fact, higher rates can be good for bond investors who need income, in the form of higher coupon payments.

Risk is inherent in investing. In fact, it is risk that allows investors to earn a return. We strive to eliminate as many unnecessary risks as possible in our clients’ portfolios. Unnecessary risks such as; concentrated positions, large over or under weights relative to the market, leverage, penny stocks, illiquid investments, and short selling. Trying to time the market is another unnecessary risk. This is what financial media pundits are trying to get investors to do on a daily basis. Why else would they need to call the top of the market or the death of bonds? We believe a disciplined, diversified portfolio, rebalanced regularly with an eye on costs and tax efficiency, should best serve the prudent investor in the long-term.



Blair duQuesnay, CFA, CFP ®
April 2014


  • All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.
  • Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
  • Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
  • ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.


[1] JPMorgan Chief Global Strategist David Kelly, 2Q Guide to the Markets Conference Call, April 3, 2014.
[2] Fritz Meyer Economic and Investment Update, Advisors 4 Advisors hosted conference call, April 8, 2014.
[3] Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, March 2014.
[4] Janet Yellen is the Wolf of Main Street, Heidi Moore, The Guardian US, http://www.theguardian.com/commentisfree/2014/mar/19/janet-yellen-fed-wall-street-press-conference, March 19, 2014.
[5] JPMorgan 2Q 2014 Guide to the Markets, page 4, March 31, 2014.
[6] Online data Robert Shiller, http://www.econ.yale.edu/~shiller/data.htm.
[7] 5 Year US Treasury Note total return calculated using monthly data; 1/1966 – 9/1981.