Spring 2014

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Market Overview


After an initial drop in the stock market in January, losses were recouped in February and the S&P 500 is slightly up on the year through the end of March. Projections in general for stocks and the economy as a whole are still positive for 2014 as most analysts believe any negative effects of the tapering of the Fed’s “Quantitative Easing” programs are already factored into the value of the stock market. But there is a lot of uncertainty largely based on the Federal Reserve’s (the “Fed”) talk about pace of continued tapering and whether an increase in the Feds Fund Rate is around the corner. Increasing conflict in Russia and the Middle East and economic slowdown in China have also dominated media headlines and contributed to economic instability.

The cold weather conditions in the United States have slowed the economy during the first quarter. The Fed blamed reduced consumer spending, construction, and manufacturing on the snow storms. Agriculture was also harmed by the chill conditions while California’s drought only worsened the situation. California is the largest producer of agricultural products in the United States. Although the drought in California may continue, at least the harsh winter weather should be alleviated shortly.

Most recent headlines emphasize the resignation of Fed board member Jeremy Stein. With its fiscal policies, the Fed exerts vast influence on the financial markets. Its powerful Open Market Committee makes the decisions that shape the economy. The Open Market Committee is made up of twelve voting members. Seven of those twelve members come from the Board of Governors in D.C. With Stein’s resignation, there are only three left of the seven governors. Some analysts have pointed out that these three members include only one economist, Janet Yellen, while the other two governors are lawyers. Although that setup is not very comforting, it could be worse; the remaining board members could be CPAs.


Investment Strategies

As always, we believe in diversifying portfolios across asset classes to properly prepare for an unpredictable future. The following are a few thoughts on different asset classes based on the current environment.

Bonds - After producing lackluster returns last year, investment grade bonds have had a decent start on the year as prices have gone up and interest rates have stabilized. The general consensus is that interest rates will go up eventually, but we expect the increase to be gradual over the next one to three years. Our strategy has not changed from last year when we moved fixed income investments into unconstrained and multi-sector strategies to grant the managers any needed flexibility to shorten their maturity, increase credit risks if the reward warrants the risk, and even short bonds if warranted.

Enhanced-Yield Strategies - Returns for this asset class tend to be affected more by the economy than by interest rate changes. We typically do not have a large allocation to this asset class, but we continue to look for opportunities, including investments in private debt transactions with strong collateral. Energy and Infrastructure Master Limited Partnerships (MLPs) are the sector of this asset class that we continue to find attractive as we retain a bullish outlook due to their attractive yield and growth potential.

Stocks - Any investors that expected last year’s stock rally to continue into 2014 were disappointed. We were happy with our decision to carve off stock profits at the beginning of the year. We still believe that the stock market will end the year positive and maintain exposure to a diversified selection of stock managers.

Real Estate - With real estate prices almost back to 2006-2007 highs, it has become more challenging for our real estate managers to find attractive deals. The easy money has been made already. But what we have always liked about this asset class is that there are still opportunities out there for good managers and opportunistic investors with proper expertise and resources. We continue to focus on income producing properties in all sectors but are also looking at some deals that involve a component of development. We expect to sell much of our real estate holdings that were acquired after the Sub-Prime Meltdown and look to redeploying the cash into new opportunities. For instance, the Landsmith Appreciation Fund, which has been land-banking finished residential lots, sold several blocks of lots in the first quarter at significant gains. We expect this trend of selling to continue through the year.

Commodities/Managed Futures - Commodities have had a strong start to 2014 producing the highest returns year-to-date, led by mining stocks and precious metals. Our gold mining fund in particular saw impressive returns, but it has a way to go to make up for last year’s losses. Managed Futures continues to diversify our portfolios and provide non-correlation to the other asset classes. Unfortunately it also continues to struggle to produce positive returns relative to the other assets classes. We continue to use these asset classes to mitigate the risks of increased inflation expectations and a weakening dollar, as well as provide investments with low correlation to other asset classes.


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. The information provided herein from third parties is obtained from sources believed by Cornerstone to be reliable, but no reservation or warranty is made as to its accuracy or completeness.

Cornerstone Team Notes