Market Monthly Jul 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

January 2015

Asset Allocation Update

  • We currently recommend our strategic (long-term target) weighting to equities for all models.
  • Within the equity allocation, we recommend a tactical overweight to non-US developed equity, and a small tactical underweight to emerging markets equity. We remain at our target allocation of 60% value and 40% growth across both developed and emerging markets.
  • 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 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 added 252,000 new jobs in December and the unemployment rate fell to 5.6% from 5.8%. The unemployment rate is at its lowest level since June 2008.
  • US retail sales decreased 0.9% in December which was well below economists’ expectations and the largest decline in nearly a year. Excluding gasoline stations, retail sales were still down a disappointing 0.4%.
  • Energy prices continued to tumble in December as oil (WTI) and natural gas lost 19 and 29% respectively, for the month.
  • The eurozone economy has officially entered deflation as the flash estimate for annual inflation came in at -0.2% in December. However, excluding energy, annual inflation was 0.6%.
  • In China, operating conditions deteriorated for the first time since May according to December HSBC Manufacturing PMI which came in at 49.6.


Equity Highlights

  • The global equity market posted a negative return in December. Emerging markets led the decline with a return of -4.7% for the month, and non-US developed stocks declined 3.0%.
  • Within the US, small-cap stocks outperformed large-cap by over 300 basis points over the one-month period, and by over 500 basis points over the trailing three months (as of 12/31/14).
  • Forward price-to-earnings ratios suggest that both non-US developed and emerging markets stocks are attractive relative to US stocks.
  • The current environment continues to pose difficulties for active management within equities.


Fixed Income Highlights

  • US high-yield spreads widened throughout the month of November. While the fundamental backdrop remains largely unchanged, the impact of oil prices has weighed on the asset class. Prior to the recent sell off, energy accounted for more than 15% of the high yield market. High-yield spreads are roughly in-line with the long-term average.
  • Emerging markets debt spreads widened in November but remain below the long-term historical average. The impact of lower energy prices, combined with a strengthening US dollar, has put pressure on the asset class.
  • Based on our TIPS forecast model, which incorporates breakeven rates and changes in the unemployment rate, US TIPS are attractive over a one-year horizon.


Diversifying Assets Highlights

  • Alternative strategies underperformed global equities but outperformed fixed income in December. We expect alternative strategies to provide downside protection during periods of equity market weakness, and to reduce total portfolio volatility over a complete market cycle.
  • 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 posted another negative monthly return in December due largely to the big declines in oil and natural gas prices. Oil (Brent & WTI) and natural gas constitute approximately 24% of the broad index.


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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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