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Market Monthly

An analysis of the economy and the markets

December 2013

Economic Expectations
The economies of Japan and Europe have left recession with positive implications for investors. However, in the U.S., most coincident economic indicators have weakened, especially on a year-over-year basis. Examples include GNP growth, industrial production (November industrial production growth largely driven by utilities because of cold weather), consumer spending, income growth, and employment. Recent tax hikes and the spending sequester are a concern. The U.S. continues to remain vulnerable to adverse shocks. Companies remain largely unwilling to add workers given the uncertain economic and policy environment in Washington.

Equity Market Strategies
The economy continues to struggle, and profit margins and earnings should continue to weaken accordingly. We therefore favor a more diversified portfolio that offers greater growth, with strong financial strength and attractive valuations. We believe these companies should outperform in this environment. Equity valuations in general appear, at best, fairly valued on a long-term basis; stocks are vulnerable in the near-term due to economic weakness and potential external shocks. The sharp rise in interest rates (in the absence of accelerating economic growth) poses significant risks. While Fed quantitative easing has helped financial assets temporarily, the underlying economic and company fundamentals will remain challenged.

Strengths:
  • International developed stocks attractively valued
  • Managements enhancing shareholder value through share buybacks and dividend increases.
Concerns:
  • Companies issuing negative earnings guidance
  • Earnings and revenue growth continue to weaken
  • Low consumer growth and savings bode ill for consumption
  • Home price growth and activity weakening
  • Exports/imports growth increasingly challenged

Fixed Income Strategies
Our fixed income portfolio is managed short duration relative to the benchmark, as Fed tapering concerns pressure the longer end of the yield curve. Investment-grade spreads are slightly below the historical mean, although concerns center around the interest rate sensitivity of the asset class. While high-yield spreads are below historical averages, we believe spreads can grind lower given the current low default rate and low interest rate environment. Along with a higher carry, the high-yield asset class has a shorter duration than investment grade, which is beneficial as rates rise.

Our non-U.S. fixed income (developed) allocation remains at strategic weight. We are also looking at optimal entry points to enter the TIPS and emerging market debt asset classes.

Strengths:
  • Fed on hold until inflation is greater than 2.5% and unemployment is less than 6.5% unless caused by falling participation rate; the FOMC could reduce target unemployment rate to 6% or below
  • Corporate credit fundamentals remain satisfactory
  • Growing pressure to reduce government debt/spending
  • Continued low inflationary pressures
  • New issuance remains healthy
Concerns:
  • Government policy uncertainty
  • High governmental debt/GDP
  • Increased shareholder-friendly activity
  • Outflows to other asset classes
  • Negative sentiment
  • Eventual Fed tapering; reduced asset purchases

Our Investment Strategy

  • We expect the balanced allocation to perform well in a variety of situations, including if the U.S. economy slows materially or if it merely maintains a stable lower growth pattern.
  • We are maintaining our strategic allocation to equities for all models. We are also recommending a tactical underweight to fixed income and a tactical overweight to diversifying assets for all models except the Fixed Income and Aggressive Growth models. Within diversifying assets, we have an overweight to alternative strategies.
  • Within the developed equity allocation, we recommend an overweight to international developed equities. We are maintaining an equal weight to both growth and value stocks.
  • The weighting to emerging markets equity is currently below the long-term target allocation.

 

The opinions expressed herein are those of the Sterling Advisory Solutions Team, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.

Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other government agency, and are subject to investment risk, including possible loss of principal invested.

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