Commentaries

PMC Market Commentary: March 28, 2014

A Macro View – Time for a Portfolio Checkup

As the first quarter of 2014 draws to a close, we are left largely where we were at the beginning of the year. In January, we suggested that a period of relative calm or stasis might be in the offing after a very strong 2013 for equities and after several years of pronounced volatility. The first three months of the year have provided just that.

Of course, it’s only one quarter, and as we know from past experience, calm is easily shattered. There have already been a few bouts of volatility this year, with an uneven January, with the crisis over the Ukraine and Crimea in March, and even with the reaction to new Fed Chair Janet Yellen suggesting that the Fed might raise short-term interest rates by the middle of 2015, a tad sooner than some expected. In addition, the last two weeks of March saw some pretty sharp selling of high-flying equity names such as Tesla and Priceline along with many biotech companies and other internet darlings.

Still, a rotation out of high-octane growth names and some fluctuation of interest rates has not been extreme enough to alter what has been a rather calm and flat period for financial markets. The S&P 500 is little changed on the year, and there has not been much movement in interest rates even with the start of the Fed tapering of its bond-buying program. The 10-year Treasury has traded within a 30 basis point band since mid-January, and much of the volatility in emerging market bonds has subsided after a wild period in 2013.

Periods such as these are opportune times to debate and assess. There are a fair number of investors who believe that equities are overvalued and that significant organic revenue growth is needed if stocks are to go higher. Others counter that with interest rates globally hovering so low, it makes sense that stocks trade at some higher multiples.

The next month, as companies report their quarterly earnings, will be a preliminary test of these contrasting views, and a first read on the effect of Fed tapering. None of these will be conclusive, though that won’t preclude partisans from claiming that their thesis is proving true. Rather than jumping on either bandwagon, we’d rather watch and assess what companies report about revenue growth as well as earnings and then add that to the mix of a world characterized by modest growth and no significant inflation.

Barring sharp surprises for better or worse, therefore, this remains an unusually good time to tweak or rebalance portfolios, build position in stocks or bonds, individually or via funds. Those tasks are much harder in periods of sharp momentum and volatility. And given that none of us know how long these periods of calm will last, best not to squander them. It may not be as satisfying to wade through sideways markets, but we have been long due.

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Zachary Karabell
Head of Global Strategies, Envestnet, Inc., Consultant to Investment Committee*

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