Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
Presented by Ruth M. Matt, CFP ®Fore River Financial, 22 Free St, Suite 201,
Portland, ME 04102207-450-5032
First Quarter 2014Market Overview
Economic Summary: First Quarter 2014
• Milestones– Equity markets hit all-time high (again)– Russia annexes Crimea, sparking outcry from the West– Janet Yellen eases up on dovish position in latest speech – Fed tapering continues as expected– Companies worldwide gain confidence to increase spending– Debt limit raised, ending threat of government shutdown– U.S. support builds for sale of gas to Europe, Ukraine– EU and U.S. resume trade talks, following NSA spying – American Airlines returns to Wall Street– Investors eye Chinese stimulus
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Economic Themes
• Equity/fixed income• Housing• Credit and banking• Employment• Consumer behavior• Business and manufacturing activity
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Q1 2014: Equity Returns by Style
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Value Blend Growth
Large 3.02 2.05 1.12
Mid 5.22 3.53 2.04
Small 1.78 1.12 0.48
Source: Commonwealth Asset Management/Morningstar Direct
Large Growth
Large Blend
Large Value
Mid Growth
Mid Blend
Mid Value
Small Growth
Small Blend
Small Value
12.71 12.78 13.21
15.16 14.52 14.13
17.50 16.77 16.26
3-Year Volatility in Returns
Q1 2014: S&P 500 Sector Valuations
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Stock Price Averages: Dow Jones 30 Industrials, NYSE
Standard & Poor's 500 Stock Price Index
OCTSEPAUGJULJUN11
MAYAPRMARFEBJANDECNOVSources: Dow Jones, Wall Street Journal /Haver Analytics
13000
12500
12000
11500
11000
10500
1425
1350
1275
1200
1125
1050
Source: Commonwealth Financial Network/Bloomberg
Q1 2014: Global Equity Valuations
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Source: Commonwealth Financial Network/Bloomberg
Fixed Income
Q1 2014: Fixed Income Returns by Style
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
2009 2010 2011 2012 2013 Q1High-Yield
57.51High-Yield
15.19
U.S. Treasury
9.81
Emerging Markets18.62
High-Yield7.42
Emerging Markets
3.89
Emerging Markets28.78
Emerging Markets12.24
Corporates8.15
High-Yield15.59
Mortgage–1.39
Foreign Sovereign
3.16
Corporates18.68
Corporates9.00
Emerging Markets
8.02
Foreign Sovereign
13.97
Corporates–1.53
High-Yield3.00
Foreign Sovereign
11.64
U.S. Core6.54
U.S. Core7.84
Corporates9.82
U.S. Core–2.02
Corporates2.94
U.S. Core5.93
U.S. Treasury
5.87
Mortgage6.14
U.S. Core4.21
U.S. Treasury
–2.75
U.S.Treasury
0.51
Mortgage5.76
Mortgage5.67
Foreign Sovereign
4.78
Mortgage2.59
Foreign Sovereign
–4.05
U.S. Core1.84
U.S. Treasury
−3.57
Foreign Sovereign
4.05
High-Yield4.38
U.S. Treasury
1.99
Emerging Markets–6.45
Mortgage1.58
Source: Commonwealth Asset Management/Morningstar Direct
Mortga
ge
US Cor
e
Us Tre
asur
y
IG C
orpo
rates
High Y
ield
Foreig
n Sov
er...
Emergin
g Mar
...
2.292.85
3.49
4.56
6.50 6.80
8.33
3-Year Volatility in Returns
Treasury Yields
Yield up = Price down
10-Year Treasury Note Yield at Constant Maturity
Avg, % p.a.
MARFEBJANDECNOVOCTSEPAUGJULJUN13
MAYAPRMARSource: Federal Reserve Board /Haver Analytics
3.2
2.8
2.4
2.0
1.6
3.2
2.8
2.4
2.0
1.6
Direction of Rates?
1960 - Q4 1965 - Q2 1969 - Q4 1974 - Q2 1978 - Q4 1983 - Q2 1987 - Q4 1992 - Q2 1996 - Q4 2001 - Q2 2005 - Q4 2010 - Q2 2014 - Q40
2
4
6
8
10
12
14
16
10-Year U.S. Treasury Rate
Nominal GDP Y/Y Percent Change(10-year average)
Estimated GDP(CBO Projections)3%
Fixed Income
Past performance is no guarantee of future results.
High Yield SpreadBOA ML HY Master - 10-year US Treasury
131211100908070605Source: Haver Analytics
24
20
16
12
8
4
0
24
20
16
12
8
4
0
Fixed Income continued
Past performance is no guarantee of future results.
Announcement
Municipal Spread
(BofA Merrill Lynch Municipal Master - 10-year treasury yield)
131211100908Source: Haver Analytics
3.00
2.25
1.50
0.75
0.00
-0.75
3.00
2.25
1.50
0.75
0.00
-0.75
Housing
Housing: Prices and Supply
CoreLogic National House Price Index% Change - Year to Year NSA, Jan-00=100
1-family homes sold/1-family homes for sale
141312111009080706050403020100Source: Haver Analytics
20
10
0
-10
-20
3.5
3.0
2.5
2.0
1.5
1.0
0.5
r = 0.86
Housing: Prices and Supply continued
New 1-Family Houses For Sale: Months Supply
SA, Ratio
131211100908070605040302010099Source: Census Bureau /Haver Analytics
12.5
10.0
7.5
5.0
2.5
12.5
10.0
7.5
5.0
2.5
Housing: Prices and Supply continued
New 1-Family Houses: Median No of Months for Sale Since CompletionSA NSA, Months
131211100908070605040302010099Sources: Census Bureau /Haver Analytics
15.0
12.5
10.0
7.5
5.0
2.5
15.0
12.5
10.0
7.5
5.0
2.5
Credit and Banking
Credit and Banking: TED Spread
TED Spread
(3-mo LIBOR minus 3-mo t-bill)
13121110Source: Haver Analytics
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
European Crisis
Credit and Banking: Inflation
Velocity of Money: Ratio of Nominal GDP to Money Supply M2% Change - Year to Year Ratio
CPI-U: All Items, 1982-84=100Y/Y %Change
10050095Sources: MA/FRB/H, BLS /Haver
8
4
0
-4
-8
-12
-16
6
4
2
0
-2
-4
r = 0.46
Employment
Change in Nonfarm Payrolls
Source: Commonwealth Asset Management/Bloomberg
Strong!
Unemployment Rate
U-6 Unemployment Rate
SA,%
1312111009080706050403Source: Bureau of Labor Statistics /Haver Analytics
17.5
15.0
12.5
10.0
7.5
17.5
15.0
12.5
10.0
7.5
Average Weekly Hours
Average Weekly Hours: Total Private Industries
SA, Hrs
1312111009080706Source: Bureau of Labor Statistics /Haver Analytics
34.8
34.6
34.4
34.2
34.0
33.8
34.8
34.6
34.4
34.2
34.0
33.8
Business and Manufacturing
ISM Manufacturing
Robust!
ISM Mfg: PMI Composite Index
SA, 50+ = Econ Expand
13121110090807060504Source: Institute for Supply Management /Haver Analytics
67.5
60.0
52.5
45.0
37.5
30.0
67.5
60.0
52.5
45.0
37.5
30.0
Capacity Utilization
Capacity Utilization: Industry
SA, Percent of Capacity
13121110090807060504Source: Federal Reserve Board /Haver Analytics
84
80
76
72
68
64
84
80
76
72
68
64
Gross Domestic Product% Change - Year to Year SAAR, Bil.$
Commonwealth Labor Index% Change - Year to Year
1005009590Source: Haver Analytics
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
12
8
4
0
-4
-8
r = 0.81
Economic Expansion
Industrial Production
Industrial Production Index
% Change - Year to Year SA, 2007=100
13121110090807060504Source: Federal Reserve Board /Haver Analytics
10
5
0
-5
-10
-15
-20
10
5
0
-5
-10
-15
-20
Federal Surplus/Deficit
Federal Surplus/Deficit {-} as a Percentage of GDP
SA %
1005009590858075706560Source: U.S. Treasury/Bureau of Economic Analysis/Haver Analytics
4
0
-4
-8
-12
-16
4
0
-4
-8
-12
-16
Federal Debt
Federal Debt Held by Public as a Percentage of GDP
%
100500959085807570656055504540Source: Office of Management and Budget /Haver Analytics
120
100
80
60
40
20
120
100
80
60
40
20
Gross Federal Debt as a Percentage of GDP
%
100500959085807570656055504540Source: Office of Management and Budget /Haver Analytics
120
100
80
60
40
20
120
100
80
60
40
20
Conclusions
• Job growth was strong in Q1; unemployment fell to 6.7%.• Some softening on the ISM front, though still positive.• The housing recovery is still progressing, but pricing may slow
in the near term.• GDP growth is expected to continue, with 2014 projections
hovering in the 3% range. • Average weekly hours higher, fueling talk of wage inflation. • High-yield spreads are very tight. • Interest rates appear to be somewhat fairly valued.• Municipals witnessed strong rebound after lackluster 2013.
Looking Forward . . .
• Key themes to monitor– Yellen and tapering in 2014– Earnings season for Q1 (beat or miss estimates?)– Will the influx in housing inventory curtail price increases?– Is the ECB going to institute much-anticipated quantitative easing– Election season in the latter half of the year– Direction of Treasury over the near term– Tight credit spreads across the board– Are emerging market equities poised for a rebound?
DisclosureInvesting involves risks, including loss of principal amount invested due to market fluctuations. All indices are unmanaged, and investors cannot invest directly in an index. Past performance is not indicative of future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Bank of America Merrill Lynch US Corporate Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. The Merrill Lynch Municipal Master Index tracks the performance of U.S. dollar-denominated investment-grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. The Bank of America/Merrill Lynch High Yield Master II Index tracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. International investing involves special risks such as currency fluctuation and political instability. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. High-yield/junk bonds invest substantially in lower-rated bonds and are issued by companies without long track records of sales and earnings or by those with questionable credit strength. There is a greater possibility that adverse changes in the economy or poor performance by the issuers of these bonds may affect the ability to pay principal and interest. High-yield bonds involve substantial risks, tend to be more volatile, and, therefore, may not be suitable for all investors. Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income. Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation.
