Feb 11, 2014 - Recent Market Commentary by James Investment Research

Stock Market Analysis

Conclusions: First the Super Bowl and now the Olympics – isn’t it great to have something to take our mind off the stock market. Last week, large cap stocks, as represented by the Dow Jones Industrial Average managed a gain of 0.61%. However, small cap stocks fell 1.27%. The mixed results were reiterated in the advance/decline numbers as well as the new high/new low results. Advancing stocks only edged out falling stocks and we had more stocks set new lows than new highs. This is a major turn from the recent past.

I spent part of last week at the Kingdom Advisor’s National Conference and the title of it was Walk Wisely. I can think of few things more important when it comes to money, wealth and investing. First, there is so much information and knowledge when it comes to investing, it is hard to know the right course of action. Having wisdom helps us to sort through all of this to the core items needed for making good decisions. Where does this wisdom come from? Study, experience (making mistakes), others more experienced, and if you believe the scriptures, the higher power who put all of it in motion. Our family prays for wisdom at our staff meetings, because we want to serve our clients well and do what is right for them.

Looking at the market, we are starting to see the kind of changes in sentiment which could lead to a good buying opportunity. While some of the major sentiment readings, like stock to gross domestic product values and record levels of margin debt point to problems, others are more sanguine. We are seeing some shifts in surveys and in trading patterns that show more caution. In addition, less sophisticated investors have turned more fearful, often a good sign.

Our leading, intermediate term indicators remain somewhat positive. Unfortunately, intermediate term market bottoms are more frequently seen with positive ratios much higher than today. What this means is the correction is doing what it should do, deflate risk. Unfortunately, this doesn’t mean we are done with the correction and we may well have further to fall before risk is low enough to advise adding equities. We would remain modestly invested and try to be at the lower end of equity target ranges.

Barry R. James, CFA, CIC

Bond Market Analysis

Conclusions: Pete Seeger recently passed, but I always loved his song To Everything There is a Season. The key phrase was of course “Turn! Turn! Turn!” It is nice to see that with bonds this year. After being punished last year, they have had an astounding turn around. Longer term treasury bonds are up 4.9% this year, even after slipping a little this week. All other bond indices are also up, but in a change from last year, high yield bonds are the worst performers.

It was a volatile week as lots of economic reports continue to point to a sluggish economy. The ISM report on Monday was much weaker than expected and on Tuesday Factory Orders slipped. Another positive for bonds were the Productivity and Unit Labor Cost figures. Productivity surged 3.2% in the fourth quarter, while Unit Labor costs fell. Lastly, the employment report on Friday showed how tepid the labor market remains. While the unemployment rate slipped, the number of jobs created was disappointing.

The bond market has taken Fed tapering in stride and rates have actually fallen since it began. This is in keeping with research we have shared in the past. Our research showed rates rose during Quantitative Easing but fell after it ended. It should be no surprise that bonds would rebound some after the beating they took last year. Still, the bond market has favorable conditions like slow growth and low inflation. This could be the year for bonds.

Our indicators are favorable and we have increased durations. We would take advantage of last week’s pull back to buy bonds for underinvested accounts.

Barry R. James CFA, CIC