CI Outlook - Archives

Feburary 2014

Early in January we wrote you characterizing this year’s market as the year of the “Reluctant Bull”.  We believed the market would be more volatile than last year’s and investment confidence would be more strongly influenced by corporate earnings and interest rate related news.  So far we have not been disappointed.  Dollar strength, stemming from Federal Reserve tapering of the QE program, has unsettled currency markets and disrupted trading in the smaller highly leveraged emerging markets.  A selling panic in those markets and ETF’s has been the order of the day.  Additionally, any company whose earnings outlook failed to fulfill anticipated guidance had its price crushed.  Apple Computer’s price slide was one of the more spectacular examples.   And although the market has fallen sharply most commentators are predicting further selling.  The most negative prognosticators, such as Richard Russell and Bob Prechter, are calling for a loss of 50% or more in the market averages.  Their sensationalist predictions designed to sell newspapers and television airtime assume economic conditions are still as fragile as they were in 2008.  We however disagree.

Since the financial meltdown of 2008 much of the damage to the world’s credit markets has been repaired.  Banks in the United States and now Northern Europe are on much sounder footing.  Financial conditions in southern Europe, especially Greece, Spain and Italy, are still unsettled but far more stable.  The Euro is much stronger and the US dollar is still considered a safe haven.  Even Japan has participated in the growing world economy.   China remains the mystery, and speculation about its economy will continue to influence all markets.  Overall we feel the system is stable enough to absorb the normal shocks and disappointments of the business cycle.

The stock market however has not yet normalized from last year’s extraordinary expansion.  We believe this decline is an attempt to do so.  In our opinion much of the price appreciation in the last few months of 2013 were brought forward from this year’s growing earnings.  But, that high level of expectation is always dangerous.  And last month’s slight earnings disappointments showed that by translating into rapid price declines.  Still we remain positive about the rest of the year.  We continue to believe we are in a long term secular bull market.  Part of the evidence lies in the character of the recent selloff.  The current market decline fulfilled all three conditions for a bull market correction.  It should be sudden, sharp and frightening.  The recent quick decline was sharp, sudden and frightening.  Frightening enough to bring out the super bears mentioned above.  It has also pushed prices down sharply and so rapidly that a rally attempt is not out of the question.  Most likely that rally will fail as most first attempts at stabilization tend to do.  However we will watch the quality of this and subsequent rallies to determine when to commit capital from your recent sales back into the market.  Until we receive that signal we will watch as events unfold and make portfolio adjustments as they become necessary.

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