Summer 2014

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Market Overview


Headlines this year have largely focused on political crisis around the world and political criticism within the U.S.A. The European economy is still struggling, Japan’s economy is barely hanging on, and China is facing slower growth. It has been five years since the Great Recession officially ended, but we’re still feeling the repercussions. Nevertheless, economic data in the U.S. seemed to have improved recently. Unemployment rate decreased, the Dow Jones Industrial has reached a new high, and the crippling winter storms that have hampered the economy at the beginning of the year have long subsided. The current unemployment rate is at 6.1%. That’s the lowest rate since September 2008. Based on these facts, several economists are optimistic about the future of the U.S. economy. Expected economic growth rate for the rest of the year is at 3%. In addition, the U.S. is now the largest oil producer in the world, surpassing Saudi Arabia and Russia this year.

However, compared to historical numbers, the unemployment rate is still high. The working portion of the country’s population is the lowest in thirty years. That’s an indication that many unemployed individuals have simply stopped looking for work. This means that the lower unemployment rate could be credited to decreasing numbers of individuals looking for work and not necessarily to increased employment opportunities. In addition, many of the new opportunities that have been created are lower wage jobs and not highly sought-after positions.

Irrespective of what you credit for improved economic data in the U.S., our country does appear to be recovering more quickly that most of the rest of the world. Proposed reasons for why the U.S. seems to be recovering better than other nations around the world include an aggressive Central Bank, healthier banks because of early government intervention, a more flexible economy, and cheaper energy prices because of increased domestic oil production.

Many analysts believe that interest rates will not substantially go up until mid-2015. However, the current situation may change these expectations. The Fed has indicated that they intend to stop quantitative easing in October of this year. It originally intended to continue to keep interest rates low. But it appears opinions inside the Fed are now split because of the improved economic numbers and interest rates could start going up sooner. We currently tend to favor the views that don’t expect a significant upswing for at least another year. However, we don’t attempt to predict the future and will stick with our strategy of preparing for multiple possible outcomes.


Investment Strategies

The following are a few thoughts on different asset classes based on the current environment.

Bonds - Investment grade bonds have had a good year so far. Barclay’s Aggregate Bond Index is up 3.8% year-to-date. As mentioned above, the Fed announced that they will probably end quantitative easing in October of this year which could drive interest rates up. We continue to favor unconstrained and multi-sector strategies as well as some credit plays. We feel these areas are better equipped to withstand an interest rate increase than most other fixed income investments because of their ability to shorten maturities if needed, to even short bonds, and to increase credit risks if the reward warrants the risk. Our Roundtable Speaker this month, Len Templeton, expressed his opinion that he expects interest rates to stay relatively low for the foreseeable future due to slow economic growth and unfavorable demographic trends.

Enhanced-Yield Strategies - Energy and Infra-structure Master Limited Partnerships (MLPs) are the sector of this asset class that continues to outperform. MLPs are already up about 25% year to date. High-yield debt, both public and private, continues to be a source of strong yields in the current interest rate environment, although they have suffered a pullback in the last month losing 0.5%.

Stocks - Stocks haven’t quite kept up with last year’s rally, but after surviving a volatile first quarter and being up 7% year to date, we’re more than content with the performance. We will be anxiously watching stocks as they approach October and November—the Fed’s targeted date to end quantitative easing. We still believe that the stock market will end the year positive and maintain exposure to a diversified selection of stock managers.

Real Estate - Our managers continue to find opportunities to call and deploy capital but at a much slower pace than we’ve seen over the last 18 to 24 months. They’re kissing many more frogs in order to find the “princes.” Besides spending more time looking for deals, our managers are also taking advantage of current prices leveling at all-time highs to sell existing inventory and capture profits if they feel they maximized the internal rate of return and multiple. For instance, Virtu manages a property in Texas that we’ve owned for almost 7 years. Virtu feels now is the right time to sell this property in that market. However, in order to do so they must perform some deferred maintenance on the property. The maintenance will require a $500,000 infusion of capital into the project through a preferred note structure. This structure will allow Virtu to complete the maintenance in the next 90 days and have the property on the market by October to facilitate a sale by year-end. We expect to see more tactical activity such as this from our managers through the remainder of the year to take advantage of a strong market and low interest rates for buyers.

Commodities - Commodities continue to have a strong performance in 2014 producing the highest returns year-to-date, led by energy, mining stocks and precious metals. We’ll see what effect current climate trends will have on this asset class through the remainder of the year.

Managed Futures - Managed Futures continues to be the stagnant asset class, and not just with our managers, but the asset class as a whole has been struggled to generate returns. Looking at historical cycles, managed futures have been due to experience an up-cycle. But government involvement in the markets has made it difficult to rely on historical numbers. We continue to maintain our position, but similar to stocks, we are anxiously awaiting October and November when the Fed expects to complete the tapering process and allow markets to normalize without government involvement.


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