Market Monthly Jul 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

October 2014

Asset Allocation Update

  • We currently recommend our strategic (long-term target) weighting to equities for all models.
  • Within the equity allocation, we recommend a tactical overweight to non-US developed equity, and a small tactical underweight to emerging markets equity. We remain at our target allocation of 60% value and 40% growth across both developed and emerging markets.
  • We continue to recommend a tactical overweight to alternative strategies versus our long-term target. Commodities and REITs remain at their long-term target allocations.
  • We recommend a modest tactical underweight to fixed income. Within fixed income, we recommend a tactical overweight to US aggregate fixed income, and strategic weightings to international fixed income (hedged), US high yield, and US TIPS. We are awaiting a more favorable entry point for emerging markets debt.

 

Economic Highlights

  • A number of important US economic indicators weakened over the past month (ISM Manufacturing, ISM New Orders, consumer confidence, building permits). However, ISM Manufacturing, Non-Manufacturing and New Orders remain well above 50, and trends in employment have been positive (nonfarm payrolls, initial jobless claims, U-6 unemployment rate).
  • US retail sales provided a cautionary sign for the strength of consumer demand with a 0.3% decline in September. Core retail sales, which strip out automobiles, gasoline, building materials, and food services, declined 0.2% for the month.
  • Economic results in the euro area have continued to disappoint as evidenced by the latest data on industrial production, leading economic indicators, and unemployment rate. Euro area annual inflation came in at 0.3% according to the September flash estimate.
  • The Conference Board Leading Economic Index for China increased 0.7% in August, and is up 6.2% over the past six months. The Leading Economic Index for Japan continues to decelerate, and the six-month percent change is now at -3.5% as of August 31.

 

Equity Highlights

  • For the month of September, the global equity market suffered its largest monthly decline since January. Emerging markets stocks underperformed developed markets, and small-cap stocks were the worst performers within US equity.
  • Forward price-to-earnings ratios suggest that both non-US developed and emerging markets stocks are attractive relative to US stocks.
  • High-quality outperformed low-quality in 3Q14 and over the trailing one-year period. We continue to believe that rising rates would provide a tailwind for high-quality relative performance.
  • The current environment continues to pose difficulties for active management within equities.

 

Fixed Income Highlights

  • US high-yield spreads widened materially in September, leading to underperformance versus the aggregate US bond market. However, we expect the asset class to perform relatively well in the near to intermediate term based on the low interest rate environment, low default rate, and investors’ continued appetite for yield.
  • Emerging markets debt spreads widened in September but remain well below the historical average.
  • Based on our TIPS forecast model, which incorporates breakeven rates and changes in the unemployment rate, US TIPS remain attractive over a one-year horizon.

 

Diversifying Assets Highlights

  • Alternative strategies outperformed global equities by a significant margin in September, and performed roughly in-line with fixed income (Barclays US Aggregate Bond Index). We expect alternative strategies to provide downside protection during periods of equity market weakness.
  • REITs are still reasonably attractive based on their dividend-yield advantage versus Treasuries. A rise in inflation expectations could potentially pressure REITs, but the asset class has historically performed well when US interest rates have trended higher due to higher expected economic growth.
  • Commodities posted another negative monthly return in September. The broad index continues to lag equities and fixed income on a year-to-date basis.

 

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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.

The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indexes are unmanaged and are shown for illustrative purposes only. Indexes do not represent the performance of any specific investment. An investor cannot invest directly in an index.

The indexes selected by Sterling Capital Management to measure performance are representative of broad asset classes. Sterling Capital Management retains the right to change representative indexes at any time.

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