CI Outlook - Archives

April 2014

What a fitting time for the opening of baseball season.  Like a baseball no-hitter the quarter ended with the market unchanged.  So we could be forgiven for assuming nothing happened.  But as in baseball, nothing could be further from the truth.  In January the market fell 6% bringing out excited bears who began forecasting a 50% drop in the market.  But by mid-February the market bottomed and at the end of March we had rallied back to unchanged.  That is a lot of volatility for nothing having happened, and reflects some important changes in investment outlooks for this year.

One of the biggest shifts has been in corporate earnings expectations.  Many analysts began the year predicting a large gain in profits for this quarter, but are now looking for break-even reports.  Excuses will be anything from the polar vortex to Federal Reserve policy.  And although lower forecasts may seem to be a negative, this actually sets up an environment where most companies will now be able to exceed earnings expectations.  Most market professionals are aware of this corporate “sand bagging” phenomena and will mostly ignore earnings reports for the first quarter, focusing instead on corporate guidance for the rest of the year. 

Better earnings later in the year will depend on a better economy.  And shifting market patterns indicate investors are expecting this expansion in economic growth.  Evidence of this can be found in the recent strength of consumer cyclical stocks like Ford Motor and industrial cyclical stocks like Dow Chemical.  Consumption represents 70% of US GDP.  And consumers are stronger than ever.  They are benefitting from a sturdier housing market and a thirty year low in the ratio of debt to disposable income.  Both items buttress consumer balance sheets.  At the same time corporations are primed to expand.  Currently corporate cash at an all-time high and corporate debt is nearly nonexistent

As the market has rotated from emphasizing defensive holdings we have rotated with it.  Anticipating that rotation we purchased Dow Chemical.  Expecting consumer participation we added Ford Motor to your portfolio.  If companies start predicting a better economy and higher earnings these companies should benefit.  And as these and other cyclical stocks begin to participate more fully, the markets should continue to rise with them. 

As always we will continue to monitor your investments and the markets.  We will make portfolio adjustments as necessary.  Thank you for the opportunity to continue assisting you with your investments.

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