2014 has gotten off to a “risk off” start, with the S&P 500 and EFA indices down about 3%. The  Barclay’s aggregate bond index is up about 1% year to date (YTD).  These moves are primarily due to mixed economic/earnings data, leading investors to question the strength of the global recovery, as well as some synchronized flare ups in emerging market economies; i.e. political instability in the Ukraine, currency depreciation in Turkey, and contracting manufacturing data in China.  The flare ups have resulted in a broad sell-off in emerging markets assets, sending the MSCI Emerging Markets Index down over 7% YTD.  We consider the concerns about China’s growth as the biggest risk to the emerging markets.

 

Fed tapering, while expected, could be a drag on the U.S. economy this year. A key statistic to watch, according to Paul Kasriel, our client and former Senior Economist at Northern Trust is bank credit expansion.  Some of this is needed to fuel further growth in the U.S.

 

In our last newsletter, we stated that “Our perspective is that the global economy will continue to grow at a steady pace.  The U.S. and the rest of the developed economies will be the primary drivers of this growth.  This is in contrast to the last several years when the emerging markets were the primary drivers of global economic growth”.

In the U.S., data has been mixed; retail sales and consumer confidence have been good, while housing and manufacturing data have disappointed. Data out this week on the U.S. Gross Domestic Productindicate the economy grew at 3.2% in the fourth quarter but initial jobless claims were higher than expected.   Over half of the companies reporting earnings have beat revenue and earnings expectations, however future guidance has generally been negative.Although the U.S. economic data and earnings have been mixed, none of the recent data has changed our long term perspective, and we continue to believe that the U.S and the developed economies of the world will be the primary drivers of global growth.

We do expect volatility in the equity markets to pick up from the low levels of 2013.  This will primarilycome from traders and investors taking profits, pension funds executing portfolio rebalancing and some folks raising cash to pay taxes.  When traders have gains in their positions, they are also quick to sell when they get a whiff of uncertainty.  For our clients, who are long term investors, this should not be an issue unless cash flow needs change.