Market Monthly Jul 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

July 2014

Asset Allocation Update

  • We continue to recommend a modest tactical underweight to equity versus our long-term targets. The tactical underweight to equity is consistent with our global equity forecast model which incorporates changes in equity valuations and changes in the U.S. 10-year Treasury yield.
  • Within the equity allocation, we are maintaining a tactical underweight to emerging markets equity and a tactical overweight to developed equity. Within the developed equity allocation, we recommend a tactical overweight to non-U.S. developed equity. We are maintaining an equal weight to growth and value stocks within our U.S. and non-U.S. equity allocations.
  • We recommend a modest tactical underweight to fixed income. Within fixed income, we continue to recommend a tactical overweight to U.S. aggregate fixed income, and strategic weightings to international fixed income (hedged), U.S. high yield, and U.S. TIPS. We are awaiting a more favorable entry point for emerging markets debt.
  • We continue to recommend an overweight to alternative strategies, and strategic weightings to commodities and REITs.


Economic Highlights

  • The third and final estimate of first quarter GDP showed that the U.S. economy experienced its sharpest contraction since the first three months of 2009, as GDP fell at a 2.9% annualized rate. The revision was largely due to a smaller than previously estimated increase in personal consumption and a larger than previously estimated decline in exports.
  • There have been a number of recent U.S. economic reports that point towards strong second quarter results (nonfarm payrolls, ISM manufacturing new orders, existing home sales, consumer confidence). However, there have also been reports which suggest that growth may fall short of expectations (retail sales, durable goods orders).
  • Economic results in the euro area have continued to disappoint as evidenced by the latest data on industrial production and manufacturing growth (PMI), and also by continued high unemployment.
  • The Conference Board Leading Economic Index for Japan fell for the fifth time in six months in May, and is down 2.4% over the past six months. The Leading Economic Index for China increased in May, but continues to decelerate.


Equity Highlights

  • U.S. small-cap stocks bounced back in June by significantly outperforming large and mid-cap stocks. Small-caps are still lagging year-to-date, however.
  • Emerging markets stocks continue to rebound this year, outperforming developed equity over the year-to-date period. Relative valuations for emerging markets stocks have become much more discounted 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

  • asset class to perform well relative to the aggregate U.S. bond market based on the low interest rate environment, low default rate, and investors’ continued appetite for yield.
  • Emerging markets debt spreads narrowed in June, and remain well below the historical average.
  • Based on our TIPS forecast model, which incorporates breakeven rates and changes in the unemployment rate, U.S. TIPS remain relatively attractive over a one-year horizon. U.S. TIPS are among the best-performing fixed income asset classes year-to-date as of June 30.


Diversifying Assets Highlights

  • Alternative strategies underperformed equities but outperformed fixed income in June. 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 U.S. interest rates trended higher due to higher expected economic growth.
  • The broad commodity index was positive in June. Commodities have outperformed global equities and fixed income year-to-date as of June 30.


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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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