Market Monthly February 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

February 2014

Asset Allocation Update

  • We currently recommend a tactical underweight to equity versus our new long-term targets for all models (except the Fixed Income Model). The tactical underweight to equity is consistent with our quantitative global equity forecast model which incorporates changes in equity valuations and changes in the U.S. 10-year Treasury yield.
  • 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 the developed equity allocation, we recommend a tactical overweight to international developed equities. We are maintaining an equal weight to both growth and value stocks.
  • 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.
  • Within diversifying assets, we continue to recommend a tactical overweight to alternative strategies.


Economic Highlights

  • Recent U.S. economic data has been mixed. Although the most recent headline nonfarm payrolls number was disappointing, markets reacted positively to the more upbeat aspects of the employment data such as an increase in the labor force participation rate and an improving U-6 unemployment rate.
  • U.S. real disposable personal income was down 2.7% year-over-year as of December 31, and U.S. retail sales unexpectedly fell 0.4% in January. December existing home sales were down 0.6% from a year ago, but sales for all of 2013 were up 9% from 2012, which was the strongest showing since 2006.
  • The economic outlook in Europe, based on leading economic indicators, continues to improve. Leading economic indicators in Japan continue to decelerate.


Equity Highlights

  • For the fourth quarter of 2013, total earnings for the S&P 500 are on track to reach a new all-time quarterly record, and earnings growth is on track to be the highest of the year. However, the number of companies that have issued fourth-quarter earnings guidance below analyst estimates has jumped to its highest level since at least 2006.
  • U.S equity correlations have moderated over the past year, which has created a more favorable environment for active managers.
  • Interest rates remain low, but rising rates would likely provide a tailwind for high-quality relative performance.
  • Emerging markets equity valuations have become more discounted relative to developed equity. However, there are significant near-term risks for the asset class including tightening monetary policy and inflation concerns.


Fixed Income Highlights

  • High-yield spreads remain below historical averages, but we believe spreads can grind lower given the current low default rate and low interest rate environment.
  • Emerging markets debt spreads have widened over the past month but 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 are relatively attractive.


Diversifying Assets Highlights

  • Alternative strategies, which typically perform well on a relative basis in down markets, outperformed equities by a wide margin in January. Market neutral managers performed particularly well for the month.
  • REITs are still reasonably attractive based on their dividend-yield advantage versus Treasuries. REITs are also reasonably priced on a current net asset value (NAV) basis, but may be pressured should U.S. interest rates trend higher.
  • Commodity prices tend to be very sensitive to the economic growth outlook in China, and this dynamic may remain a significant risk factor in the near-term.


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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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