Market Monthly January 2014

Monthly Update

An analysis of the economy and the markets

January 2014

Asset Allocation Update

  • 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 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.
  • Accommodative Fed policy may continue to support risk assets in the near term, but stocks may be vulnerable to a correction given relatively expensive valuations and rising yields.
  • Within fixed income, we continue to recommend a tactical overweight to U.S. aggregate fixed income and a strategic weighting to international fixed income (hedged). We are awaiting a more favorable entry point for the TIPS and emerging market debt asset classes.
  • Within diversifying assets, we have a tactical overweight to alternative strategies.


Economic Highlights

  • By a 9-to-1 vote, the Fed decided to trim its asset-purchase program by $10 billion to $75 billion per month starting in January. The decision was largely based on the Fed's perception that the improvement in labor market conditions will continue.
  • Developed market central banks continue to be accommodative, while emerging market central banks have a tightening bias. Recent significant policy changes include a 50 basis point increase in Brazil (Nov ‘13) and a 25 basis point increase in India (Oct ‘13).
  • An improving economic outlook in the euro area is positive for the global economic outlook, and may be a tailwind for the U.S. economic performance due to increased exports.
  • The most recent data for the U.S. housing market showed significant slowing, as sales were likely impacted by higher mortgage rates.


Equity Highlights

  • The pace of the Fed’s tapering of asset purchases is a significant risk factor for global equities.
  • U.S. equity correlations have moderated over the past year, which has created a more favorable environment for active managers.
  • Rising interest rates should provide a tailwind for high-quality equity relative performance.
  • The underperformance of emerging markets equities over the past few years has led to more reasonable relative valuations versus developed equities. However, there are significant risks for the asset class including tightening monetary policy and inflation concerns.


Fixed Income Highlights

  • The Fed’s decision to taper asset purchases appears to have been largely priced in by bond markets. As of January f15, the U.S. Treasury 10-year yield is roughly in-line with its pre-announced level.
  • While high-yield spreads are below historical averages, we believe spreads can grind lower given the current low default rate and low interest rate environment.
  • Emerging markets debt spreads are well below the historical average.
  • Inflation concerns in the U.S. remain muted; 10-year TIPS breakeven rates are near the historical average.


Diversifying Assets Highlights

  • Alternative strategies lagged a 60/40 stock and bond portfolio in 2013 as the Fed’s accommodative posture supported a rally in risk assets.
  • 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 continue to 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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