Investment Commentary – October 22, 2014

Dow – 16,614.81 (10/21/14 close)
S&P 500 -1,941.28 (10/21/14 close)
10-year Treasury – 2.21% (10/21/14 close)

  • Stocks recouped some of their losses since last Friday after the recent market selloff. Volatility as measured by the VIX index traded at its highest level since December 2011 and equity markets experienced their worst 3 day stretch in years last week.
  • Market corrections happen all of the time. Since 1980, there has been a greater than 5% correction in markets every year but one (1995) and yet markets are up 11.8% per year over that time period. Still, they are never fun. But market cycles typically end with elevated valuations, complacency, and an inverted yield curve (higher short-term rates versus long term rates).
  • As was the case in prior weeks, the selling derived largely from fears over economic growth. Consistent with the past few months, much of the worry remains centered on Europe. Last week brought more evidence of the slowdown in the Eurozone when the German Economic Ministry cut its 2014 and 2015 growth estimates.
  • While investor sentiment has clearly shifted, economic fundamentals remain relatively stable say analysts.
  • This suggests the recent sell-off in stocks could present opportunities for long-term investors.
  • The recent decline in oil prices is largely due to an increase in global oil supply, as continued increases in U.S. and Libyan oil production have not been matched by offsetting declines in other OPEC output. While the fall in oil prices also reflects weaker demand and a moderation in global growth, there are some offsetting benefits that have come as a result of lower oil prices. One of these is the impact of lower gas prices; this is particularly positive for U.S. consumers, as less money spent on gas means that more money can be spent elsewhere. In addition, lower gasoline prices have a disproportionately positive effect on long-suffering lower-income households, as these individuals tend to devote a larger percentage of their income to filling up their cars. Thus, in a consumption-based economy like the U.S., lower gas prices should provide a tailwind for consumer spending, and therefore overall economic growth, over the coming months.
  • Analysts continue to favor large and mega-cap stocks. They have held up better than their small and mid-cap counterparts in the last few weeks, providing a bit of cushion from the volatility. And with the recent sell-off having made them more attractively valued, we suggest investors continue to emphasize larger caps, particularly with more volatility likely on the horizon.
  • Analysts also like MLP’s and the healthcare sector.
  • In fixed income, analysts continue to favor credit over treasuries given the health of corporate balance sheets, low default probabilities and our expectations for continued U.S. economic expansion.

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.