Investment Commentary – October 1, 2014
Dow – 16,804.71 (10/1/14 close)
S&P 500 – 1946.16 (10/1/14 close)
10-year Treasury – 2.40% (10/1/14 close)
  • Last week stocks suffered their worst pullback since the summer.
  • Analysts do not believe the pullback reflects a fundamental shift in market conditions, but it does point to 3 important lessons to be mindful of going forward.  Those are:
  1. Volatility is starting to rise
  2. Not all market segments are responding similarly
  3. Valuations are likely to matter more as markets rely less on momentum.
  • U.S. large- cap stocks are down barely 3% from their peak versus small- cap stocks which are down roughly 10% and have never managed to eclipse their February 2014 top.
  • One of the reasons small-cap names have been struggling is that their valuations are considerably more stretched than those of their large-cap cousins.  Based on current earnings, U.S. small-cap stocks trade at around a 60% premium to large caps.  That large premium – the result of multi-year momentum-driven gains – appears to be hurting the sector.
  • Interest rates – Though the Fed continues to show extreme caution about rate increases, the expectation is that policy will move in that direction sometime next year.  Though stocks (as measured by the S&P 500 index) often suffer a sharp drop when rates first begin to rise, such setbacks usually dissipate quickly, no doubt because the Fed tends to push up rates when the economy and earnings are growing.
  • Analysts think the global economy remains, at least somewhat, in the crisis that began in 2008.  Central banks around the developed world are trying to fight disinflationary or deflationary trends and spur economic growth. However, they believe the fundamentals supporting the U.S. recovery are in place and provide a backdrop for better sentiment and spending from here.
  • Heightened geopolitical risk in areas such as the Mideast and Russia/Ukraine lingers to some degree in market Sentiment, but the ill effects from recent flare-ups have been short lived and commodity prices have moved lower, not higher.
  • Analysts like the U.S. market versus Europe and Emerging Markets which have been underperforming.
  • Analysts continue to like master limited partnerships (MLP’s) in the Energy Sector.
The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.