Market Monthly March 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

March 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 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

  • U.S. GDP was revised down from 3.2% to 2.4% for the fourth quarter of 2013 due largely to a downward revision to the estimate for personal consumption expenditures. The government will publish its third GDP growth estimate for the fourth quarter on March 27.
  • The euro area economy expanded a better than expected 0.3% (quarter over quarter) in the fourth quarter of last year, and the United Kingdom expanded by 0.7%. Japanese GDP growth was revised down from 1% (annualized) to 0.7% for the final three months of 2013.
  • Relative weakness in China has affected sentiment related to global equity markets generally and emerging markets in particular. Economic conditions in China, the world’s second largest economy, have significant implications for global growth.


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 for the quarter is on track to be the highest of the year. However, guidance has overwhelmingly been negative in recent quarters, and the trend has remained in place during the Q4 reporting season. As a result, estimates for 2014 Q1 and beyond have been coming down.
  • U.S equity correlations continue to moderate, which is a positive for active management in our view.
  • Interest rates remain low, but we believe rising rates would provide a tailwind for high-quality relative performance.
  • Year-to-date in 2014, emerging market equities have underperformed developed market equities, continuing the trend that existed throughout much of 2013. The conflict in Ukraine has negatively affected sentiment related to Russian equities in particular


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. The prospect of slower earnings growth and increasing leverage are concerns.
  • Emerging markets debt spreads have narrowed over the past month 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 are relatively attractive.


Diversifying Assets Highlights

  • Alternative strategies, which typically lag equities in strong up markets, underperformed in February. As of 2/28/14, alternative strategies were roughly in-line with global equity returns year-to-date.
  • REITs are still reasonably attractive based on their dividend-yield advantage versus Treasuries. However, REITs may be pressured should U.S. interest rates trend higher. REITs have outperformed global equities by a wide margin year-to-date.


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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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