Market Monthly October 2013

Market Monthly

An analysis of the economy and
the markets

October 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, 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. The Fed appears intent on “tapering” its quantitative easing, which has resulted in higher interest rates despite the weakening economy and lack of inflation pressures. Certain Chinese economic growth indicators such as industrial production have spiked over the past two months, but they are primarily driven by government infrastructure spending, not private or market driven economic activity. Thus, overcapacity remains a concern.

Equity Market Strategies
We favor a diversified portfolio that offers growth with strong financial strength and attractive valuations. We believe these companies should outperform in this environment. Equity valuations in general appear fairly valued on a long-term basis; stocks are vulnerable in the near-term due to economic weakness and potential external shocks. 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.
  • Fed’s decision not to taper
Concerns:
  • Higher interest rates
  • Earnings and revenue growth weakening
  • Exports/imports growth increasingly challenged
  • Housing price growth moderating
  • Low consumer income growth and savings bode ill for consumption

Fixed Income Strategies
Our short-term portfolios are managed neutral to slightly 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 positioned short of benchmark duration, as Fed tapering concerns pressure the longer end of the yield curve. We remain underweight Treasury exposure in favor of spread product such as corporate bonds, CMBS securitized product and taxable municipal securities. We have moved our tax-exempt portfolios to slightly short benchmark duration.

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 satisfactory
  • Growing pressure to reduce government debt/spending
  • Continued low inflationary pressures
  • Weak global economic environment
Concerns:
  • Government policy uncertainty
  • Structural budget deficit imbalance
  • Increased shareholder friendly activity
  • Outflows to other asset classes
  • Negative sentiment

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 a tactical 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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