Market Monthly Jul 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

August 2014

Asset Allocation Update

  • We recently increased our equity allocation to the strategic (long-term) target for all models.
  • Within the equity allocation, we moved to our strategic target of 60% value and 40% growth across both developed and emerging markets from the previous 50/50 split. We also increased our allocation to emerging markets equity from 11% of total equity to 14%.
  • We reduced the weighting to alternative strategies for all models by the amount of the increase in the equity allocation. However, 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 continue to 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

  • The US economy bounced back from an upwardly revised 2.1% decline in the first three months of the year to grow at an annual rate of 4% in the second quarter. The stronger than expected report was largely attributable to an upturn in consumer spending and a rebound in business investment. The second estimate for US GDP is scheduled to be released on August 28th.
  • Much of the recent US economic data has been positive including ISM Manufacturing, ISM Non-Manufacturing, initial jobless claims (trend in 4 week moving average), consumer confidence, nonfarm productivity, industrial production and building permits. One notable exception was the July retail sales report which was the weakest in six months.
  • Economic results in the euro area have continued to disappoint as evidenced by the latest data on GDP, industrial production and employment.
  • The Conference Board Leading Economic Index for Japan fell for the fourth consecutive month in June, and is down 2.2% over the past six months. The Leading Economic Index for China increased 1.3% in June, and is up 5.2% over the past six months.


Equity Highlights

  • For the month of July, the global equity market posted its first negative return since January of this year. US small-cap stocks lagged large caps during the month, and have posted a negative return year-to-date as of July 31.
  • Emerging markets stocks continue to rebound this year, outperforming developed equity in July and over the year-to-date period (as of July 31). Relative valuations for emerging markets stocks have become much more discounted versus developed market equities over the past few years.
  • Interest rates remain low, but we believe 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 July, leading to underperformance versus the aggregate US bond market during the period. However, we continue to 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 slightly in July 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 relatively attractive over a one-year horizon.


Diversifying Assets Highlights

  • Alternative strategies outperformed global equities but underperformed fixed income in July. We expect alternative strategies to provide downside protection in the event of an equity market correction.
  • 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 performed extremely well relative to equities and fixed income in the first part of the year, but after a nearly 5% decline in July the broad index is now lagging 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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