The Cornerstone Investment Commentary: 1st Quarter 2014
The horrific U.S. winter, Russia’s shenanigans in the Crimea, the coming online of the Affordable Care Act, the Fed’s taper dance (and even the collapse of the U.S. speed skating team at the Winter Olympics) all notwithstanding, global financial markets behaved with quite a bit of sanity in 2014’s first quarter to post a small overall gain as economies around the world continued to slowly regain their health.
As would be expected, slower-than-hoped revenue growth sent a shiver through global equity markets in January which prompted high-grade bonds to rise in value. Once equities had re-stabilized by the end of February, the most highly valued assets (U.S. growth stocks) declined in March while more attractively-priced equities (emerging markets and large U.S. value stocks) rose sharply. In fact, from mid-March on, U.S. growth stocks have fallen 5% while emerging market equities have gained 6%.
Perhaps surprisingly, this is good news when the degree of your portfolio’s overall fluctuations also matters. It allows for any potentially over-priced holdings to ease their way back to being more fairly-priced without the volatility which can occur when equities move in lock-step. (I say ‘potentially’ because there is always honest debate about when an equity asset class has actually become over-priced.) Should this pattern pick up steam, it would present the opportunity to add money to these newly-undervalued holdings; however, we are quite a way from a situation where that opportunity exists.
For now, the key economic questions seem to be whether the very low inflation rates in the developed world (particularly in Europe) are actually inhibiting consumer spending growth and whether monetary policy alone is enough to accelerate this. The last several years’ evidence is not encouraging since so many consumers still have one eye on reducing their debt levels. It is possible that rising home values – from ‘under’ to ‘above’ water for many homeowners – may change the perspective of some consumers on this. Otherwise, we will see whether their slow (but steady) spending growth will be sufficient to allow equity prices (especially in the U.S. stock market) to stay at their current levels.
Against this backdrop, we believe your portfolio is appropriately positioned both in light of your financial goals and these economic conditions and that our investment approach will continue to help us navigate through the uncertainties that abound. Should we detect shifts in these fundamental conditions, we will be able to respond and will certainly be in touch with you.
As always, we look forward to your thoughts and questions. We wish you a pleasant lead-up to this year’s summer and as always thank you for the continuing opportunity to work together.