Putting Market Corrections Into Perspective

Image Courtesy of FreeDigitalPhotos.net/Stuart Miles

Image Courtesy of FreeDigitalPhotos.net/Stuart Miles

After 2013, many investors had forgotten that stocks could actually decline. While 2013 was a banner year for stocks, it was very much a historical abnormality in which equities seemed to ignore bad news (including a federal government shutdown) and rallied most of the year. Now that we’re in 2014, investors have been reminded that market corrections do happen and we wanted to take the opportunity to discuss the recent pullback and what may come next.

Market Corrections are Normal

From its peak in January to a trough in the first days of February, the S&P 500 index declined nearly 6 percent.1 At the same time, other asset classes that performed poorly in 2013, such as bonds and gold, advanced. Some traders were caught off guard by this reversal, but they shouldn’t have been because corrections of 6 percent are not atypical.

Since 1928, the S&P 500 has generally experienced between three and four corrections of more than 5 percent each year; the recent pullback was the 19th decline of 5 percent or more in the current bull market.2 Declines of 10 percent or more are rarer, but are still seen nearly every 1½ years, and “bear market” corrections of 20 percent or more are seen roughly once every three or four years.3 Obviously, these are all averages and the performance of any single year can deviate significantly from historical norms.

A 2014 Correction Was Widely Predicted

After the blistering pace of growth exhibited by stocks in 2013, analysts all but knew that a correction had to come. Normally, as markets go up, some sectors and industries become overvalued, but there are still plenty of other areas that are still undervalued or fairly valued given the economic and market conditions. However, once equities get near market tops, traders become hard-pressed to find any upside, and savvy investors don’t want to add any new money to push the market higher, causing a pullback. How far equities decline depends on a lot of factors, including investor sentiment, corporate earnings, economic data, and growth prospects for the near future. While a currency crisis in emerging markets triggered the most recent selloff, domestic indicators and earnings reports show that the U.S. economy is still chugging along just fine.

We can look back at past market declines for hints of what we might expect going forward if markets follow historical trends. Since 2009, pullbacks of 5 percent or more have lasted an average of about a month, peak to trough, meaning that the recent downturn (which lasted 20 days) may not be completely over.4 As of February 14, domestic stocks have bounced back. The S&P 500 index has regained nearly all of its lost ground, gaining 5.6 percent since early February as investors have used the correction as an opportunity to “buy the dip.”5

Market volatility is still high and it’s unclear how emerging market issues may affect market performance in the coming weeks. That said, the U.S. economy is doing very well and some analysts expect GDP growth to accelerate to 2.8 percent in 2014 and 3.1 percent in 2015.6 While we can’t predict the future, we have high hopes for stocks in 2014.

Conclusions

Though market corrections are rarely welcome, they are a natural part of the overall business cycle and it’s important to take them in stride. Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.

As professional investors, we’ve learned to seek out the opportunities in market corrections and volatility. Declines often create openings for tactical investing and allow us to invest in high quality companies at attractive prices. While we can’t use the past to predict the future, history tells us that having the patience to sit out brief rough patches often benefits our clients in the long run.

We hope that you have found this information educational and reassuring. If you have any questions about market corrections or are concerned about how the recent pullback may have affected your portfolio, please give us a call; we’re always happy to speak with you.

Special Commentary on Janet Yellen and the Federal Reserve Weekly Update – February 18, 2014

Image courtesy of freedigitalphots.net/ddpavumba

The stock market ended an upbeat week on a positive note, buoyed by reassuring remarks by new Fed chairman Janet Yellen. Though the week saw reduced volume as some investors sat on the sidelines, stocks rallied impressively, giving us hope that markets have shaken off the January blahs. For the week, the S&P 500 and Dow both gained 2.3%, and the Nasdaq grew 2.9%.1

Investors were relieved this week to have dodged another round of brinksmanship about the federal debt ceiling. The Senate voted Wednesday to pass the House’s measure to allow the federal government to borrow enough money to pay its bills through March 2015. By raising the debt ceiling, lawmakers allowed the Treasury to return to normal operations and averted a default on U.S. debt.2

Janet Yellen and the Federal Reserve

You’ve probably been hearing the name Janet Yellen a lot lately, and we wanted to use this week’s commentary to talk about the new chair of the Federal Reserve and discuss the role she plays in global financial markets. While we’ve tried to keep this explanation brief, we hope you’ll find it useful in understanding the major functions of the Fed and why they mean something to you as an investor.

Janet Yellen replaced Ben Bernanke as Chair of the Board of Governors of the Federal Reserve System on February 3, 2014 and will serve for a four-year term. In plain terms, Yellen will determine the direction of arguably the most powerful central bank in the world and has the authority to make changes to monetary policy that will ripple across the global financial system.

The Federal Reserve System (known informally as the Federal Reserve or the Fed) is principally made up of 12 regional Federal Reserve Banks, a presidentially appointed Board of Governors, and the Federal Open Market Committee. While the Fed is responsible for duties like regulating the Federal Reserve Banks, administering credit protection laws, and monitoring the nation’s payments system, its most important role in markets is to analyze global financial and economic developments and determine U.S. monetary policy.3

Let’s back up for a moment and go back to Economics 101. In the U.S., fiscal policy is made by the federal government and is determine d by each year’s federal budget, which is proposed by the president and passed by Congress. Monetary policy is developed by the Federal Reserve and is used to achieve macroeconomic policy objectives like inflation control (through price stability), full employment, and stable economic growth. While the Federal Reserve System is considered an independent central bank and makes decisions independently of Congress or the White House, the Fed is subject to congressional oversight, and Congress has given the Fed the “dual mandate” of achieving maximum employment and maintaining stable prices.4

The principal tool of the Fed’s monetary policy is the Federal Open Market Committee (FOMC) a group within the Fed tasked with overseeing open market operations (i.e., the Fed’s buying and selling of U.S. Treasuries and other securities in financial markets). As chairman of the Fed, Yellen now heads up the FOMC and wields considerable authority over its decision-making process. This committee meets throughout the year and decides how to achieve short-term objectives like interest rate targets through their bond-buying operations. Part of Yellen’s job is to ensure that FOMC operations support long-term Fed objectives like economic growth, stable inflation, and high levels of employment.5

If you’ve been reading our weekly updates, you know that the FOMC undertook a program of bond-buying known as quantitative easing that was designed to lower interest rates (making it cheaper to take on loans), and boost economic activity. Now that the economy is on more solid footing, the FOMC has been tapering its historically high pace of bond purchases and slowly returning to normal operations.

By law, the chairman of the Board of Governors must report to Congress twice annually on the Fed’s activities and monetary policy. As the new chair, Yellen testified last week before the House Committee on Banking and Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs to outline her vision for the Fed and answer questions about Fed activities.

Yellen’s testimony before the House and Senate didn’t yield any shockers, and she stated that markets should expect the Fed to follow the low-interest-rate path laid out by her predecessor Ben Bernanke. Since Yellen served on the FOMC under Bernanke, this isn’t unexpected. She also emphasized that the Fed would continue to taper asset purchases so long as the economy continued to improve and that future decisions would be very data dependent.6

In the spirit of the Olympics, one commentator gave her Congressional testimony a “7 out of 10” because of a stumble in responding to an important legal question. Frankly, we’re inclined to be more generous with our appraisal since markets reacted well to her remarks and investors seem reassured by her promise to give markets more of the same. We know that the Fed is carefully monitoring employment reports, and we’re happy to hear that they intend to keep rates low even if the target 6.5% unemployment rate is reached. Economists widely expect the Fed to continue the taper at the next FOMC meeting in mid-March, and the economic outlook would probably have to take a serious wrong turn before the Fed considered a pause.7 In short, while we can’t predict how markets will react to future Fed moves, we can hope that investors will see the Fed’s support as an optimistic sign.

We hope you’ve found this foray into the details behind the Fed informative and useful. We hope to occasionally use this space to dig deeper into some of the important events and players behind market headlines.

ECONOMIC CALENDAR:
Monday: U.S. markets closed for Presidents’ Day Holiday
Tuesday: Empire State Mfg. Survey, Treasury International Capital, Housing Market Index
Wednesday: Housing Starts, Producer Price Index, FOMC Minutes
Thursday: Consumer Price Index, Jobless Claims, PMI Manufacturing Index Flash, Philadelphia Fed Survey, EIA Petroleum Status Report
Friday: Existing Home Sales

Data as of 2/14/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

2.32%

-0.53%

20.85%

24.47%

6.05%

Dow

2.28%

-2.55%

15.61%

21.16%

5.20%

NASDAQ

2.86%

1.61%

32.68%

35.32%

10.67%

U.S. Corporate Bond Index

-0.03%

1.39%

-2.61%

3.93%

0.51%

International

2.10%

-0.91%

13.50%

19.04%

7.49%

Data as of 2/14/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.01%

0.07%

0.11%

1.53%

2.75%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

U.S. consumer confidence stalls in February. Consumer sentiment was unchanged from January’s lowered reading as Americans tempered their optimism about the future. Economists have predicted that unusually cold weather across much of the U.S. has put a damper on consumer sentiments, leading to lower consumer confidence about their financial prospects.8

Cold weather freezes industrial output. U.S. manufacturing output fell unexpectedly in January and recorded the biggest drop since 2009 as cold weather disrupted production. Fortunately, these seasonal factors should drop off as the weather warms up.9

Chinese lending soars in January. Despite dire predictions of a slowdown in the world’s second largest economy, Chinese banks disbursed more loans last month than in the past four Januarys, crushing expectations and tripling December’s numbers. Economists caution that seasonal factors after the Chinese New Year could have distorted monthly numbers.10

Economists trim Q1 growth forecasts. Economists cut back their optimistic growth estimates for the first quarter of 2014 as cold weather and slow hiring affected the economy. On the other hand, economists expect Q2 growth to accelerate to 3.0%, pushing up annual growth to 2.8%.11


Markets Rally To Erase Some Losses Weekly Update – February 10, 2014

Image provided by FreeDigitalPhotos.net/ddpavumba

Image provided by FreeDigitalPhotos.net/ddpavumba

After several weeks of gloom, U.S. stocks rallied last week to erase some losses and post the best two-day gain in four months. Both the Dow and the S&P 500 had their best week of the year thus far, gaining 0.6% and 0.8% respectively, while the Nasdaq gained 0.5%.1

Friday’s employment situation report delivered some mixed news. On the payroll side, total jobs rose just 113,000, missing expectations of an 181,000-job boost. On the other hand, November and December job creation numbers were revised upward, for a net increase of 34,000 new jobs. The unemployment rate slipped downward another notch to 6.6% and labor force participation rebounded sharply after dropping significantly in December.2

The jobs report showed increased employment in construction and manufacturing, but declines in retail and government sectors. Despite some worries about slowdowns in factory activity, U.S. manufacturers stepped up hiring and added 21,000 new jobs last month, marking the sixth straight month of job gains in a sector that accounts for about 12.0% of the economy.3

As Q4 earnings season winds down, S&P 500 companies are on track to post earnings per share numbers nearly 10.0% higher while revenue is probably only going to be up 2.0% – 3.0%. While top line revenue numbers show that businesses are still struggling with demand, companies have delivered another quarter of strong bottom line results.4

New Fed Chair Janet Yellen’s first testimony before Congress is the big event for markets in the week ahead as analysts pore over recent economic data to see if the softness in January’s jobs report is really just about the bad weather. Yellen will be giving her first semi-annual monetary policy testimony before the Senate Banking Committee and the House Financial Services Committee.

Most analysts don’t anticipate a lot of fireworks from Yellen’s testimony, but rather expect her to emphasize the importance of letting the economic data guide her policy decisions. Unlike many other Fed officials, Yellen hasn’t been an active part of the speaking circuit, meaning traders will be watching carefully for any surprises in her remarks.5

While the latest employment numbers aren’t great, the six-month average is still trending between 130,000-150,000 new jobs per month, and analysts don’t think that the Fed will discontinue its tapering program. The Fed has cut back its bond purchases twice and is now buying just $65 billion in bonds each month in a program that’s expected to wind down before year’s end.6

 

ECONOMIC CALENDAR:

Tuesday: Janet Yellen Speaks 10:00 AM ET

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Retail Sales, Business Inventories, Janet Yellen Speaks 10:30 AM ET

Friday: Import and Export Prices, Industrial Production, Consumer Sentiment

 

Data as of 2/7/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

0.81%

-2.78%

19.06%

21.38%

5.73%

Dow

0.61%

-4.72%

13.27%

18.15%

4.91%

NASDAQ

0.54%

-1.21%

30.35%

31.84%

9.99%

U.S. Corporate Bond Index

0.08%

1.42%

-2.63%

4.05%

0.56%

International

2.37%

-2.95%

11.97%

16.22%

7.33%

Data as of 2/7/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.10%

0.09%

0.12%

1.47%

2.71%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

S&P cuts Turkey’s rating outlook. Standard and Poor’s reduced its guidance on Turkey’s credit to negative, citing risks from an economic hard landing and political uncertainty. While this isn’t as damaging to Turkey’s sovereign credit situation as an actual ratings cut, the organization is indicating that a cut may be imminent.7

Consumer credit use jumps in December. U.S. consumer credit grew in December by the greatest amount in 10 years as credit card use increased sharply, in a potentially positive sign for the economy. Since consumer spending contributes significantly to GDP, higher credit use could portend greater spending in 2014.8

Mortgage applications stuck despite falling rates. Despite sliding interest rates driven by investors fleeing emerging market securities, weekly mortgage applications have barely budged, according to the Mortgage Bankers Association. Rates below 4.0% may spur additional refinancing and mortgage activity.9

Cold weather demand and tight supply pushes oil prices up. Crude oil staged a furious rally last Friday and closed just shy of $100 per barrel. Tight North Sea oil supplies, persistently cold weather across the U.S., and rising gasoline and heating oil prices stoked the surge.10

February, 2014 Monthly Market Update

Here is this month’s market and economic update. Please note that I gave the wrong date for our 2014 State of the Markets Webinar. The webinar will be this Thursday, February 13th (not 14th) at noon. Please register for the webinar here.

Understanding Your Social Security Benefits

Courtesy of FreeDigitalPhotos.net/Stuart Miles

Courtesy of FreeDigitalPhotos.net/Stuart Miles

Social Security is a topic on many people’s minds these days and most retirees have questions about how and when they should begin taking Social Security benefits. This blog post aims to answer some common questions about Social Security and educate you about the different options that may be available.

When Am I Entitled to My Social Security Benefits?

The Social Security Administration (SSA) allows you to start claiming your retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount. If you were born between 1943 and 1954, your full retirement age is 66 and you would receive just 75 percent if you started taking benefits at age 62, 80 percent at age 63, and 93.3 percent at age 65.1

You don’t have to claim your Social Security benefits at your full retirement age. In fact, delaying benefits will increase your monthly benefit by between 3 and 8 percent each year until you become eligible for the maximum benefit at age 70. Waiting until age 70 could increase the size of your benefits by over 30 percent.2

Can I Continue Working and Still Claim Social Security?

You can continue working and still claim retirement benefits. If you are under your full retirement age, the SSA will deduct a portion of your benefits for every dollar that you earn above an annual limit, $15,480 in 2014, unless 2014 is the year in which you reach your full retirement age, in which case the limit is $41,400. If you have reached your full retirement age, you can receive Social Security benefits with no limit on your earnings.3

Social Security Benefits for Married Couples

Married couples have a number of benefit strategies available to them. For example, if you are the higher earner, you could opt to claim Social Security benefits at your full retirement age, but suspend actual payments until age 70. This would enable your spouse to draw spousal benefits immediately while allowing your retirement benefits to keep rising in value.

For many couples, maximizing survivor benefits is one of their primary considerations when evaluating when to take Social Security benefits. In many cases, this means that the higher-earning spouse should consider delaying claiming benefits until age 70. By deferring Social Security benefits, the higher earner can help ensure that the surviving spouse receives the largest possible survivor benefit if he or she dies first. Survivor benefits are usually worth 100 percent of what the deceased worker was entitled to collect at the time of death, including any credits for delaying benefits.4

When Should I Start Taking Social Security Benefits?

This is a simple question without a simple answer since it entirely depends on you and your personal circumstances. Some people choose to take reduced benefits early because they need the income. Others hold off so that they can collect the maximum benefit for the rest of their lives and pass on a larger survivor’s benefit to their spouse.

While waiting to claim benefits in order to receive a larger monthly check sounds like a better deal, it’s important to think carefully about factors like your life expectancy and income needs. Some retirees with low life expectancy or cash flow problems may be better served by taking their Social Security benefits early. Just about everyone else, especially those who don’t need those benefits for income early in retirement, would be better off by waiting until age 70.

Bottom line: There’s no perfect answer as to the right time to start taking your benefits and it’s very important to involve your financial advisor when making such an important decision. Here are a couple of basic rules that may help your decision-making process:

  • If possible, wait until your full retirement age (66 for most of our clients) to begin taking benefits. Doing so opens up the most options and benefit strategies like “claim and suspend.”
  • Age 80 is the break-even point for most Americans. If you expect to live longer than that, you may be better off by delaying your benefits until age 70. If not, then taking benefits earlier may be a better choice. If you’re part of a married couple, it makes sense to delay the higher earner’s benefits in order to ensure larger survivor’s benefits if you believe at least one of you will live past age 80.
  • If you’re counting on Social Security income immediately post-retirement, consider some options to “bridge” your income until age 70. We can help you evaluate your options.

Conclusions

Knowing when the best time to begin taking Social Security benefits is difficult. It’s a complex decision with many important elements to consider; once you factor in spousal benefits, survivor’s benefits, and other strategies, there are more than 70,000 different scenarios by which you can take Social Security.5 Making the right decision can be worth thousands of dollars over the course of your retirement.

As wealth managers, it’s our goal to make complex situations simple to understand and help you make informed decisions about your retirement. We are experienced at helping clients navigate Social Security and educating them about how their Social Security benefits fit into their overall retirement goal.

If you have any questions about the information we’ve presented or would like more information about your Social Security retirement benefits, please give us a call, we’re always happy to help.

Markets Sag on Emerging Market Currency Crisis

Courtesy of FreeDigitalPhotos.net/JSCreationzs

Courtesy of FreeDigitalPhotos.net/JSCreationzs

Markets had another rough week, with stocks driven lower by fears about the growing emerging market currency crisis. For the week, the S&P 500 lost 0.43%, the Dow fell 1.14%, and the Nasdaq declined 0.59%.1 The month of January also ended on a low note, with the S&P 500 falling 3.56%, the Dow losing 5.30%, and the Nasdaq sinking 1.74%.2

While it’s frustrating to start off the year with some poor market performance, some good news is that this decline is not being driven by domestic fundamentals. What could be happening is that the Fed’s tapering of its quantitative easing policies is driving currency selloffs in emerging markets.

Markets such as Brazil, Turkey, South Africa, and Indonesia became the darlings of international investors seeking higher returns over the last decade. These investors dumped billions of dollars into their fast-growing industries and delivered a much-needed boost to their economies. When the Fed announced its intentions to explore tapering options in May 2013, most emerging markets were caught off guard.

The problem is that these economies are fragile and when cracks are detected, investors will flee the local currency and buy dollars, putting a lot of pressure on emerging market currencies. This downward pressure risks stoking local inflation and weakening the economy.3 Currently, the central banks of the affected countries are working feverishly to halt the downward slide of their currencies, some with the help of the International Monetary Fund.

Should investors be worried? Perhaps not yet, but a burgeoning emerging markets crisis won’t be good news for the global economy. While the contagion hasn’t spread to the developed world yet, some U.S. and European companies may see their growth prospects for the year fall because they have been depending on sales in developing countries to drive profits.

On the U.S. front, the Fed voted to continue its tapering program unchanged, cutting back its monthly bond purchases by an additional $10 billion. In our opinion, this is a sign of strength and shows that the Fed is increasingly confident that the economy is growing modestly.4 In a way, the emerging market crisis is a big help to the Fed because it’s pulled a lot of money back into U.S. markets, much of it into bonds, which is pushing up long-term yields.

Earnings are also looking up, and with nearly half of S&P 500 companies having released reports; earnings currently stand at over 7%, the best showing since the 7.7% rise in Q4 2012. Thus far, 65% of the report beating expectations, and revenues are up 3.5% across the board.5

There’s an old Wall Street quote that says that “as goes January, so goes the year.” Since January was a down month for markets, this might be cause for worry about the rest of 2014. Fortunately, when we actually go back and dig through the numbers, we find that out of the 21 Januaries since 1960 in which stocks fell, 12 were followed by rallies in the subsequent year.6 In short, while we can’t predict markets, we’ve got as good a chance of having a great year.

 

ECONOMIC CALENDAR:

Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending

Tuesday: Factory Orders

Wednesday: ADP Employment Report, ISM Non-Mfg. Index, EIA Petroleum Status Report

Thursday: International Trade, Jobless Claims, Productivity and Costs

Friday: Employment Situation

 

Data as of 1/31/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

-0.43%

-3.56%

18.99%

23.17%

5.76%

Dow

-1.14%

-5.30%

13.26%

19.24%

4.97%

NASDAQ

-0.59%

-1.74%

30.61%

35.59%

9.86%

U.S. Corporate Bond Index

0.23%

1.34%

-2.58%

3.99%

0.56%

International

-1.91%

-5.20%

7.85%

17.21%

7.13%

Data as of 1/31/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.03%

0.06%

0.10%

1.49%

2.67%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Seahawks win Super Bowl XLVIII in blowout. The Seahawks defense was able to overwhelm QB Peyton Manning and the Bronco’s record-setting offensive side to bring the Lombardi trophy to Seattle for the first time in Super Bowl history. The final score was 43-8 Seahawks.

New home sales fell in December. Sales of new single-family homes fell more than expected in December, but tight inventories and steady price increases suggest that the housing recovery continues. Frigid temperatures and mortgage rate increases may have also contributed to the decline.7

Consumer sentiment dips in January. Despite some recent economic improvement, consumers felt less optimistic about their economic prospects in January. While upper income households reported improved confidence, lower income Americans lost some of their optimism about the economy. This could have negative consequences for consumer spending in Q1 2014.8

U.S. GDP grew 3.2% in Q4 2013. The U.S. economy continued to grow in the fourth quarter thanks to growth in consumer and business spending. Exports also picked up last quarter, giving hope that spending and export activity will drive growth in 2014.9

It’s Time To Review Your IRA Beneficiaries

Courtesy of Freedigitalphotos.net/Stuart Miles

Courtesy of Freedigitalphotos.net/Stuart Miles

As of January 31, 2014, all clients who have an IRA with Hixon Zuercher Capital Management should have received a 2013 Form 5498 in the mail. This form presents all 2013 IRA contribution information, fair market value of the IRA portfolio as of December 31, 2013, as well as the IRA beneficiary summary statement. It is wise to review your beneficiaries every year at this time to be certain you still desire the same primary and contingent beneficiary(s). If you wish to change your beneficiary(s), or are having trouble locating them on this form, please contact Hixon Zuercher Capital Management so we may assist you in accordance with your need.

Don’t miss Hixon Zuercher 2014 State of the Markets Webinar on Feb 13, 2014 12:00 PM EST at:

https://attendee.gotowebinar.com/register/6278631763793061633

Since March 2009, we’ve been reaping the benefits of a bull market, with the S&P 500 returning over 150%. At this point, many investors are wondering if the growth can continue. Facing the end of quantitative easing, another debt ceiling debate, and a number of geopolitical concerns, we think now is a good time to share our viewpoints with you. Please join us as we analyze what the indicators are pointing to, and discuss what could be in store for 2014. Your family and friends are also encouraged to attend.

After registering, you will receive a confirmation email containing information about joining the webinar.

Brought to you by GoToWebinar

Earnings Reversal Sparks Volatility

Image Courtesy of David Castillo Dominici/freedigitalphotos.net

Image Courtesy of David Castillo Dominici/freedigitalphotos.net

Markets ended the week mixed as markets responded to some lackluster Q4 earnings reports. For the week, the S&P 500 lost 0.20%, the Dow gained 0.13%, and the Nasdaq gained 0.55%.1

Earnings reports contributed to the volatility investors saw in markets last week. Though earnings season is still young, companies seem to be beating revenue expectations but missing on earnings, a reversal of the trend we saw in previous earnings seasons. So far, reports suggest that revenues were up 0.5%, and 67% of reports have beaten expectations, which is a positive sign. On the other hand, the profit picture isn’t as rosy. It seems that the effects of the government shutdown, a shortened holiday shopping season, and deep discounting trimmed profits last quarter.2

On the economic front, the weekly job report shows that unemployment claims fell for the second week in a row, suggesting December’s dismal results may be temporary.3 Consumer sentiment slipped in January, weighed down by lowered expectations among lower and middle-income families, who are worried about jobs and income growth.4 Though the Fed has been largely silent ahead of their late January FOMC meeting, it’s likely that they are carefully weighing the data to determine next steps when Janet Yellen takes the reins in February. If overall economic data remains positive, the Fed could announce another round of tapering at the next meeting.

In Washington, the Senate finally approved a $1.1 trillion spending bill that will fund the government through the current fiscal year-end and quells fears of another government shutdown.5 Though the Treasury debt limit is still suspended until February 7, once the suspension expires, the Treasury will run out of money by the end of February. Hopefully Congress will avoid last-minute drama that could hurt confidence in the economy and quickly come to a bipartisan agreement.6

Looking ahead, investors could see some more volatility around high profile earnings reports from major blue chip companies following the Monday holiday. While positive reports could result in a resumption of the 2013 rally, the volatility investors are experiencing can be described as the kind of correction we may expect to see after a sustained rally. With little economic news to move the markets as a whole, the individual forward expectations of each company will move stocks one by one, making it difficult to predict a trend.

ECONOMIC CALENDAR:

Monday: U.S. Markets Closed for Martin Luther King Jr. Day

Thursday: Jobless Claims, PMI Manufacturing Index Flash, Existing Home Sales, EIA Petroleum Status Report

 

Data as of 1/17/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

-0.20%

-0.52%

24.16%

23.26%

6.13%

Dow

0.13%

-0.71%

21.05%

19.75%

5.53%

NASDAQ

0.55%

0.50%

33.85%

34.89%

9.61%

U.S. Corporate Bond Index

0.02%

0.99%

-3.51%

3.53%

0.43%

International

N/A

-0.43%

14.77%

17.28%

7.94%

Data as of 1/17/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.01%

0.07%

0.11%

1.64%

2.84%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Housing starts drop in December. After months of sizzling growth, groundbreaking on new homes fell 9.8% in December, the largest drop since April 2013. The decline was less than economists expected and was largely driven by the volatile multi-family homes segment. For 2013, housing starts increased by 18.3%.7

U.S. industrial output surges in Q4. Industrial output rose at its fastest clip in 3-½ years, growing 6.8%, the largest quarterly increase since 2010. Factory output and overall industrial production rose in December, a positive sign for the economy in 2014.8

Global economy expected to grow in 2014. According to a Reuters poll of economists, the world economy will grow 3.6% in 2014, as compared to 2.9% in 2013. While developed economies will do better this year, some emerging markets may struggle with fiscal reform and deflation.9

Dollar rallies on economic data. The dollar surged against a basket of currencies, pushing the euro to a seven-week low after positive economic data suggests the Fed may stay on track with tapering measures.10

Stocks Stall on Jobs Data

Classifieds

Image courtesy of Gualberto107/ FreeDigitalPhotos.net

Markets stalled in the first full week of 2014, with major indices ending on a mixed note. For the week, the S&P 500 gained 0.6%, the Dow lost 0.2%, and the Nasdaq rose 1.03%.1

Friday’s December Employment Situation report showed that job growth slowed significantly in December, adding just 74,000 new jobs. This was well below consensus estimates, which expected a number in the neighborhood of 200,000 new jobs. At odds with the dismal jobs data, the household survey showed a very large drop in unemployment, causing the headline unemployment number to fall to 6.7%, very close to the Fed’s goal of 6.5%.2

Markets reacted nervously to the unexpectedly negative data, which is completely out of line with the generally positive labor trends of the past weeks and months. One way for unemployment to drop even as job growth declines is for people to quit searching for jobs, thus dropping out of the labor force. In December, the labor force participation rate dropped to its lowest in more than three decades. However, labor force participation jumped in November, so it’s possible that the December data is a statistical outlier.3 Divergences between the two surveys do occasionally happen and economists usually wait a month or so for revisions to be made that straighten out the data.

Bottom line: we’re getting very close to the Fed’s threshold rate of 6.5% unemployment, but the overall labor market is still weak. Given this weakness, the Fed will probably need to clarify its tapering plans and give guidance about how critical that 6.5% floor really is.

Looking ahead, earnings season will be kicking off this week. First up are several major financial firms; like JPMorgan Chase [JPM], Wells Fargo [WFC], Bank of America [BAC], Citigroup [C],4 and investors, will be taking a hard look to get a sense of how fourth quarter earnings season will go. If earnings continue their positive trend, investors could see further upside; if earnings disappoint, investors may decide to take some more profits off the table and wait for better news.

ECONOMIC CALENDAR:

Tuesday: Retail Sales, Import and Export Prices, Business Inventories

Wednesday: Producer Price Index, Empire State Mfg. Survey, EIA Petroleum Status Report, Beige Book

Thursday: Consumer Price Index, Jobless Claims, Treasury International Capital, Philadelphia Fed Survey, Housing Market Index, Ben Bernanke Speaks 11:10 AM ET

Friday: Housing Starts, Industrial Production, Consumer Sentiment

Data as of 1/10/2014

1-Week

Since 1/1/14

1-Year

5-Year

10-Year

Standard & Poor’s 500

0.60%

-0.32%

25.15%

21.39%

6.42%

Dow

-0.20%

-0.84%

22.02%

18.23%

5.72%

NASDAQ

1.03%

-0.05%

33.73%

33.13%

10.00%

U.S. Corporate Bond Index

0.78%

0.97%

-3.82%

3.64%

0.47%

International

1.26%

-0.43%

15.35%

14.76%

7.81%

Data as of 1/10/2014

1 mo.

6 mo.

1 yr.

5 yr.

10 yr.

Treasury Yields (CMT)

0.01%

0.06%

0.12%

1.64%

2.88%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

Yellen confirmed as next Fed chair. The Senate voted to confirm current Federal Reserve vice chairman Janet Yellen as the next Fed chairman. She will replace current chairman Ben Bernanke when his term ends at the end of January. A major focus of her tenure will be the unwinding of the central bank’s unprecedented quantitative easing programs.5

Wholesale inventories grew in November. Business inventories increased 0.5% in November, following a 1.3% increase in October. Inventory growth has been strong over the last few months, suggesting firms have confidence in consumer demand and that restocking could contribute significantly to Q4 economic growth.6

China exports slow.  Chinese exports declined more than expected in December, though the drop may be due to changes in how exports are calculated. Regulators clamped down on speculative trading activities disguised as export deals. Economists are optimistic that a brighter 2014 will cause export activity to pick up in the world’s second largest economy.7

Retailers cut forecasts. A disappointing holiday season led to several retailers cutting 2014 earnings forecasts. Despite aggressive actions to lure shoppers, a shortened shopping season, unseasonably cold weather, and anemic spending combined to hit retailer revenues hard.8

 

Monthly Market Review: Hixon Zuercher Analyzes January’s Stance

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