1st Quarter 2014
If one were to have tuned out at the end of
2013 and returned to open his or her first quarter statements, he or
she may reasonably have assumed that the markets were calmly
digesting the exceptional performance of last year. A closer look
under the hood reveals that the start of 2014 was anything but calm.
The Standard and Poor’s 500 (S&P 500) began the year with a total
return of 1.8%. After a nearly 4% decline in January, stocks
rebounded sharply in February and managed to hold their gains
through March. There was no shortage of tinder to feed fires of
market bears as lackluster economic data, geopolitical concerns in
Eastern Europe, new leadership in the Federal Reserve and persistent
concerns about Chinese growth all provided headwinds to stocks.
Thankfully, and somewhat surprisingly, Congress managed to stay out
of the limelight as midterm elections fast approach and the debt
ceiling was raised again in February almost without notice.
Stock strength was relatively broad during the quarter
as nine out of ten Standard & Poor’s sectors moved higher.
Traditionally defensive sectors took the lead during the quarter as
Utilities (+10.1%) and Healthcare (+5.8%) posted the strongest gains
while Industrials (+0.1%) and Consumer Discretionary (-2.8%) were
the notable underperformers. Time will tell how much of a lasting
impact the brutal winter conditions had on these more economically
sensitive sectors. Gold regained some of its luster and rose more
than 5% as physical demand in emerging markets ticked higher and
investors sought protection against a worsening situation in the
Hopes steadily built throughout 2013 that the U.S.
economy was on the verge of finally breaking out. Mother Nature
dashed some of those hopes as one of the harshest winters in history
caused a number of potholes on the road to economic recovery. Retail
sales, housing market data and manufacturing jobs all disappointed
during the quarter. The question now becomes how much of the decline
in economic activity can be attributed to the weather and how much
is actual economic weakness. Ultimately, it is probable expectations
got a little ahead of themselves and that a combination of
short-term weather related factors and a slight downshift in some
economic sectors will reset growth estimates to a more attainable
2.0-2.5% growth for the year. Longer-term, we have reason to be
optimistic given demographic trends and booming domestic energy
production coupled with the potential for more accommodative fiscal
policy and continuing monetary support.
Janet Yellen was confirmed as the new Chair of the
Federal Reserve in January. Her first official press conference
resulted in brief volatility in the bond markets as she seemed to
hint that the Fed could begin to raise rates somewhat sooner than
expected once the “tapering” of bond buying has been completed.
Bonds soon regained their footing as Ms. Yellen took steps to assure
the public that the Fed will not pull away the punch bowl too soon
and investors continued to grow more comfortable with the
aforementioned taper. The yield on the benchmark 10-year U.S.
Treasury note fell to 2.7% from 3.0%. Longterm U.S. Treasuries were
the best performers (+7%) and high-yield bonds slightly outperformed
investment grade corporate bonds (+3.07% and +2.94%, respectively).
Based on current valuations, we continue to view
equities as relatively more attractive than bonds for a long-term
investor but we believe it is prudent for most investors to take a
balanced approach given the investing climate. We agree with the
general consensus that the 30-year bull market in bonds will end
some day, but the first quarter served as an excellent reminder of
the importance of diversification across asset classes. While stocks
as a whole are not as “cheap” as they were a few years ago,
valuations are not alarming and we see room for companies to
surprise to the upside; particularly against the backdrop of sharply
reduced earnings expectations.
As investors with a long term focus, we continue to
invest in companies with sound balance sheets, strong cash flow,
attractive business outlooks and relatively inexpensive valuations.
We maintain our discipline of investing in companies where we feel
the market is underestimating the value of a business and avoiding
those companies where we believe expectations are too lofty. Within
the fixed income markets we remain selective and take advantage of
opportunities when they present themselves by focusing on both the
return of and the return on principal.
We welcome your comments or questions and thank you for your
The Newton Financial Network Team
W. Edward Newton Jr. CPA/CFP®
Troy C. Patton CPA/ABV
Steven C. Demas
John W. Rosebrough CFA
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results. The investment return and principal value of an
investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or
less than their original cost. Current performance of
the Fund may be lower or higher than the performance
quoted. Performance data current to the most recent
month end may be obtained by calling 800-238-7701
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