Spring 2013

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Market Overview

The stock market has continued its annual first quarter rally this year. Now, with everyone waiting for a pullback to reenter the markets, the contrarian position is to believe that the rally may continue upwards into the second quarter without a serious correction. However, there are significant headwinds that have been forming around the world. U.S. Treasury rates recently had their best week since the November election as the 10-year Treasury rate has declined from above 2% to below 1.7%. The first quarter was a very good quarter for U.S. equities. Risky sectors did well, but so did many lower risk sectors such as Health Care, Consumer Staples, Utilities, and MLPs. The key to first quarter success was to be fully invested in anything except Gold, Treasuries, and Emerging Markets. Oh yeah, and Apple.

So maybe finally the U.S. markets are just adjusting to what commodities, emerging markets, and global companies have been telling investors for a time now–Growth in the U.S. may be improving, but the rest of the world is still struggling to find positive growth. We believe we will continue to be in a high-risk, low-growth environment. The unemployment rate fell again last week as more individuals stopped looking for employment. A lower unemployment rate due to individuals leaving the job market is a sign of continued job weakness. As we enter the corporate earnings season, we will be watching very carefully how many companies continue to revise downward their earnings estimates. Overall, the number of economic indicators beating estimates has declined recently.

For the first time in many years, D.C. has actually been a friend to investors. Having bypassed the debt ceiling, sequestration, and a government shutdown so far this year, it has been a welcome trend for everyone to see bipartisan legislation. If the warm fellowship continues into the summer, 2013 could be a good year for many asset classes. However, if gridlock in Washington entangles the economy over the recent budget proposals, the stock market could quickly correct off its current five-year highs.

Except for a headline scare after the Italian election in February, Europe had managed to stay off the radar until Cypress last month. Although Cypress is just a small drop in the bucket in the Eurozone economy, the precedent set is one few could have imagined. The government actually seized cash

deposits in banks. Although few believe this could happen in the U.S., it was a step few thought could happen in any European country before Cypress.

2013 Outlook

Below are a few bullet points from our outlook for 2013. Overall, they have not changed much from the prior newsletter, but we have added a few additional comments.

  • Ben Bernanke will continue to backstop the equity markets. The printing of easy money will continue, but it will be less effective than previous attempts at stimulating the economy. Once again, the notes of the latest Federal Reserve Board meeting stated that several members are worried about keeping interest rates too low for too long.

    However, there is a new wrinkle to this issue. Other countries’ Central Banks are now on the bandwagon with printing money as the United Kingdom, Japan, and others have turned their own printing presses to full throttle. Superior U.S. growth should support a rotation from bonds to equities and that will also strengthen the dollar. As the U.S. dollar had been weakening since 2009, many think the U.S. dollar could be on a multi-year uptrend as other countries now embark on their own printing schemes.

  • U.S. GDP will continue to stall around 2% into 2013 which means unemployment will not drop significantly. When the job market begins to gain steam, we would actually look for an increase in the unemployment rate as prospective employees reenter the market.

  • Bernanke stated he plans to keep interest rates low through 2015. We still believe in the premise that negative real returns for investors should bode well for hard assets such as precious metals and real estate. However, there are currently a variety of strong forces that are impacting currencies and therefore commodity prices.

  • Currencies will play a bigger role as the Fed wants to weaken the dollar, but the crisis in Europe could maintain the U.S. dollar as a safe haven investment. A strong dollar will also have negative effects on U.S.

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Disclosures: This commentary is submitted for the general information of Cornerstone Wealth Management, LLC clients and may not be distributed to other individuals. This commentary is not deemed to be investment advice and information contained herein may not be current. An investor should consider the investment objectives, risks, charges, and expenses of each investment carefully before investing. For more complete information, you may contact us at 858-676-1000. Past performance is no guarantee of future results. Individual performance may vary and investment performance numbers may not be audited.