Summer Client Letter {Part I}

Below please find the first installment of our most recent client letter originally dated July 25, 2014:

Stocks staged a late spring rally that took the S&P 500 up nearly six percentage points by the time the dust settled on the 2^nd quarter.  The market fought off a small correction in February and an internal rotation out of more aggressive names in the spring.  Otherwise it has been a steady grind higher for stocks. That’s not to say that there weren’t surprises along the way.  Consensus Wall Street thinking was that interest rates would rise this year as the Federal Reserve began to tighten monetary policy.  Instead even as the Fed pulled back on its bond purchases, rates fell.  This led to outperformance by many interest rate sensitive sectors.  Utilities were the top-performing sector in the S&P. Total return strategies also did well.  Emerging markets and foreign-based assets finally turned in solid performance after shaking off a two-year period where not much went right for those markets.  I’ve long thought this area would finally wake up and we saw inklings of that in the first half of the year.  All of these returns were hardly consensus in January, which is a powerful argument for asset allocation across portfolio strategies.

Our longer-term view of the markets remains positive and is roughly the same as it has been for the past few years.  We believe that there is still compelling evidence that the US economy continues to expand. Job growth looks to finally be on track as evidenced by the June payroll data.  Consumption continues to expand.  Car sales for example are still showing solid gains.   We are still of the opinion which we have reiterated in the past that positive demographic trends, coming energy independence {the US will soon be exporting oil for the 1^st time since the 1970s}, advances in productivity as rooted in the efficiencies of the knowledge based economy and the continuing age of innovation that we have dubbed the “era of miniaturization” are all longer term positives for the economy. 

We believe there are still pockets of value in stocks, which we will attempt to exploit, given our overall outlook and client parameters.  That being said in regards to the broader picture, we are a bit more cautious about the short-term direction for the markets as we head into late summer.  Here I’ll define short term as the next one-four months or until we get through the November elections.  I’m also assuming there will be no event that changes our longer term view of things during this period.  Even as I am positive about the economy and the markets going forward, I try to call things as I see them and I currently believe there are a few areas of concern worth noting as we move forward. 

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.