Market Monthly May 2013

Market Monthly

An analysis of the economy and the markets

May 2013

Economic Expectations
U.S. Economy
– We are witnessing continued economic weakness in the U.S., and year-over-year payroll growth, despite upward revisions after Hurricane Sandy, has dropped to a new one-year low. Most coincident economic indicators have weakened considerably, especially on a year-over-year basis. The Fed hopes its quantitative easing measures will improve employment and boost core inflation expectations (from current deflation concerns), but the economic impact has largely already played out. Recent tax hikes and the potential spending sequester are a concern, and the U.S. continues to remain vulnerable to adverse shocks. Corporate America has taken advantage of record low interest rates to lever up from a low base, leaving it more vulnerable as earnings (and revenue) pressures continue to mount. Companies remain largely unwilling to add workers given the uncertain economic and policy environment in Washington. Consumer real incomes and savings rates remain below historic levels. Meaningful economic improvement, however, hinges on global policy makers shifting to a pro-growth stance, staunching the European crisis, and the global economic downturn running its course. Housing, a recent bright spot, is showing signs of moderating.

European Economy – While recent ECB measures in Europe to reduce peripheral countries’ interest costs were a step in the right direction, the continent will remain in recessionary territory for the foreseeable future. The Cyprus situation highlights the risks of policy mistakes.

Equity Market Strategies
The U.S. is vulnerable to shocks such as the European crisis or tensions in the Mideast and Asia. We therefore favor a more diversified portfolio that offers greater growth and defensive exposure, with strong financial strength and attractive valuations. We believe these companies should outperform in this environment. While equity valuations in general are fairly valued on a long-term basis, stocks are vulnerable in the near-term due to economic weakness and external shocks. While Fed quantitative easing has helped financial assets temporarily and weakened the dollar, the underlying economic and company fundamentals will remain challenged.

Strengths:

  • Higher quality companies reasonably valued on a long-term basis, though the short term is fraught with risk
  • Dividend yield for many equities relatively attractive in current low interest rate environment; prospective dividend growth increases return potential
  • Federal Reserve is accommodative; QE3 recently announced; good chance QE3 will be increased and extended

Concerns:

  • Earnings and revenue growth quickly weakening as slow growth in the U.S. and recession in most of the developed world begin to sting
  • Weak consumer income and savings bode ill for consumption
  • Exports/imports growth increasingly challenged
  • Housing growth will moderate

Fixed Income Strategies
Our short-term portfolios will be managed long relative to benchmark duration, as we believe the front-end of the yield curve will remain anchored by accommodative monetary policy. Intermediate and long-term taxable portfolios are currently managed .25 short to benchmark duration. Using the 10-year Treasury yield as a guide, we believe rates will remain between 1.50 percent and 2.25 percent, and we will adjust the portfolios duration to take advantage of rate movements toward these extremes. We remain underweight Treasury exposure versus corporate and securitized products as well as underweight government-related in favor of municipal bonds.

Based on attractive relative value for the municipal sector, our tax-exempt portfolios remain slightly long duration compared to the benchmark.

Strengths: 

  • Fed on hold until inflation is greater than 2.5% and unemployment is less than 6.5% unless caused by falling participation rate
  • Corporate credit fundamentals remain healthy
  • Growing pressure to reduce government debt/spending
  • Continued low inflationary pressures
  • Weak global economic environment

Concerns:

  • Government policy uncertainty
  • Large budget deficit
  • Low absolute yields
  • Increased shareholder-friendly activity
  • Potential outflows to equity market

Our Investment Strategy

  • The balanced allocation should 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. It will tend to underperform if the economy (and company earnings) grows at a much stronger clip, an unlikely occurrence in our opinion.
  • We are maintaining our strategic allocation to equities, fixed income, and diversifying assets.
  • We continue to recommend a 60/40 mix between U.S. and international developed equities, and we are maintaining an equal weight to both growth and value stocks.
  • The weighting to emerging markets 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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