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Financial Road Signs, Potholes, And Speed Bumps

U.S. stocks declined in January, their steepest monthly decline since May 2012. For the last 40 years or so, some investors have talked about the “January barometer” or indicator. Specifically, “if the January stock market is down, then the stock market will be down for the rest of the year,” and “if the January stock market is up, then the stock market will be up for the rest of the year.” That is a generalization that perhaps should have more years of data to rule out the coincidence of “a down year following down a January.” After all, good years have followed “down Januaries” over 50% of the time.

Looking ahead to the “road signs” that may have an impact on the U.S. economy in 2014:

  • February 1st - Janet Yellen becomes head of the Federal Reserve, replacing Ben Bernanke. How similar to and different from the Bernanke stewardship will the Yellen policies be?
  • Early March - the U.S. Government once again hits the debt ceiling, and Washington posturing may well give talk radio and television programs countless sound bites.
  • March 31st – The close of the open-enrollment period for the first year of the insurance exchanges created by the Affordable Care Act. Time will tell what the impact of this will be on the healthcare stock sector.
  • March 31st – A second jury trial begins between Apple and Samsung; Apple was essentially successful in their first patent trial in the summer of 2012. The outcome of this trial is expected to impact the technology sector.

And the U.S. has little control over other events:

  • April 1st – Japan raises its sales tax from 5% to 8%. Can Japanese citizens afford this and will the Japanese economy slow?
  • May 31st – India has national elections. India’s weakening economy in the last 6 months is a threat to the U.S.-India strategic Partnership. It will decide if it is taking a pro-business approach or supporting pro-welfare programs for 400 million people.
  • June 4-5th  – The G-8 world leaders meet in Sochi, Russia. Main topics are how to deal with terrorism, drugs, and disasters.
  • July 9th – Indonesia holds Presidential elections. There is an emerging tug of war between the U.S. and China for influence in Indonesia.
  • August – Turkey holds Presidential elections. Turkey is a candidate for membership in the European Union, but Europeans are divided on its membership.
  • September 18th – Scotland holds a referendum on independence. The economy is the primary issue, with greater public spending and tax spending per person in Scotland in comparison to England. North Sea oil revenue is central to the issue.
  • October - China hosts the Asia-Pacific Economic Summit (APEC) in Beijing. The 21 APEC countries (including the U.S.) account for almost half of the world trade.
  • October 5th – Brazil holds Presidential elections. Brazil is an important member of the economic block “BRICS” (Brazil, Russia, India, China, and South Africa), and relations between the U.S. and Brazil have recently cooled because of the NSA (National Security Agency) spying.
  • November 4th – The U.S. holds House and Senate elections for governors in 36 or 72% of the states. Given “breaking news” in the U.S. media, one might think that the only important elections in 2014 are in the U.S.
  • November 15-16th  – The G-20 Summit in Brisbane, Australia. Stronger economic growth with resilience during future economic shocks is a major theme of this meeting.
  • December 31st – the U.S. military mandate expires in Afghanistan. Will this affect an increase in terrorism and cause jitters in domestic and world stock markets?

As of January 1st, there were some hopeful signs for the U.S. economy. The monthly civilian rate of unemployment fell to 7%. According to the S&P/Case-Shiller composite index of home prices in 20 cities, home prices are up almost 15% since 2010. Consumer spending is growing at a faster rate, and household net worth, quarterly and adjusted for inflation, has rebounded. At the end of last year, automobile sales increased at the fastest rate since 2007.

After a significant gain in 2013, however, the S&P 500 declined 5% since the beginning of the year. Several “potholes and speed bumps” may explain the recent decline in the markets.

·      “Tapering” more than likely has played a role in the recent decline. Until December 2013, the Federal Reserve used Quantitative Easing (the purchasing of government and mortgage bonds) to depress long-term interest rates and put liquidity into the market. In December, it reduced the rate of these purchases, and this is called “tapering”.

·      Emerging market countries are having problems. There are political crises in the Ukraine and Thailand. In Turkey, the main interest rate has been raised from 7.75% to 12%. South Africa is dealing with mining strikes. China is importing less, and this has had a negative impact on the Indonesian and Brazilian economies. A downgrade of either of these economies by the rating companies Fitch or Standard and Poor’s would add to a global economic downturn. Remember Greece in 2009?

·       There are questions among economists about the $6 trillion dollar China shadow banking system, some of which is regulated by the Chinese government and some of which involves private citizens loaning their own savings to companies that need cash.

·       Investors removed $900 million from “junk bond” funds during the last week in January ‘14. This helped to create jitters in the stock market. Junk bonds are investments in riskier corporate debt. It should be noted that Heaphy Investments does not invest in “junk bonds.”

But there are ways in which one can cushion these stock fluctuations and declines.

  • Investing in stocks of large companies that have strong earnings and good dividends. Appreciation with dividends helps to offset market decline.
  • Investing for the long-term; this is basic to the philosophy of Heaphy Investments. Heaphy Investments is not a day-trader and collects no fees for itself when it trades equities.Investing in very short-term bond investments that have a minimal risk to rising interest rates and avoiding investments in long-term bonds.
  • Investing in select sectors. Because of necessary infrastructure upgrading, technology companies are expected to invest in data centers, computers, and computer networks. Pharmacology, biotechnology, and healthcare companies are expected to adjust and invest because of the Affordable Care Act. As the market closes down 2.3% on February 3, 2014, it is worth noting that the only Dow Jones stock that is up is Pfizer, up 0.7% due to positive Phase II results for a breast cancer treatment.
  • Investing in short-term, below-par Treasuries with a return comparable to some CD’s.
  • Having a safe haven of cash.

To help to offset the possible volatility of the stock market, Heaphy Investments continues to believe that investing in well-managed, dividend paying major domestic and international companies and short-term fixed income is appropriate in this financial climate. The recent downward turn and volatility of the stock market is a reflection of uncertainty. In spite of the negative “breaking news” and Federal government dysfunction, we are optimistic for the future; a few percentage points on the downside are not surprising given the strong market of the last several years. We at Heaphy Investments are committed to our goal of preserving your portfolio with investments that are based on researched, factual information and that are appropriate for your risk tolerance and personal financial needs.

February 2014

DISCLOSURES: Investment advisory services provided through Heaphy Investments, LLC. Heaphy Investments, LLC is an investment adviser registered with the Commonwealth of Massachusetts. You should not assume that any discussion or information contained in this website serves as the receipt of, or as a substitute for, personalized investment advice from Heaphy Investments, LLC. It is published solely for informational purposes and is not to be construed as a solicitation nor does it constitute advice, investment or otherwise. To the extent that a reader has questions regarding the applicability of any specific issue discussed herein to their individual situation, they are encouraged to consult with the professional advisor of their choosing. A copy of our written disclosure statement regarding our advisory services and fees is available upon request. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Past performance is no guarantee of future returns.

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