Market Update Through 3/31/2014

as of March 31, 2014
                                                              Total Return
Index 12 months YTD QTD March
Russell 3000 22.61% 1.97% 1.97% 0.53%
S&P 500 21.86% 1.81% 1.81% 0.84%
DJ Industrial Average 15.66% -0.15% -0.15% 0.93%
Nasdaq Composite 30.18% 0.83% 0.83% -2.45%
Russell 2000 24.90% 1.12% 1.12% -0.68%
EAFE Index 15.88% -0.18% -0.18% -0.43%
Barclays US Aggregate -0.10% 1.84% 1.84% -0.17%
Barclays Intermediate US Gov/Credit -0.13% 1.00% 1.00% -0.30%
Barclays Municipal 0.39% 3.32% 3.32% 0.17%
  Current Prior
Commodity/Currency Level Level
Crude Oil $101.58 $98.89
Natural Gas $4.37 $4.43
Gold $1,283.80 $1,379.00
Euro $1.37 $1.39

Mark A. Lewis

Director of Operations

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Happy 5th Anniversary, Bull Market!

That’s right, it’s the Wood Anniversary for the market, which hit bottom on March 9, 2009. Since then, it has come roaring back – the S&P 500 is up 174% for the 5-year period (that’s price change only, not total return). Not too shabby.

The WSJ has a nice article here showing the anniversary in five charts. According to one of the charts, this rally is the second-best since WWII (beaten only by the S&P’s 228% gain from 10/82 through 10/87). The article’s author thinks there is still room to go in the market recovery, saying that investors’ confidence in the rally will continue to fuel stock market inflows.

No one knows what the future will bring where the market is concerned, but the present is a far cry from five years ago. Happy Friday, happy bull market anniversary, and here’s to five more years!

Sarah DerGarabedian, CFA
Portfolio Manager

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North Carolina Tax Law Changes

After months of grappling with members of the state’s legislature, Governor Pat McCrory signed a bill authorizing the most significant changes to North Carolina’s tax code since the 1930s on July 15.

The new tax code reduces both personal and corporate income taxes and eliminates the estate tax. Early estimates indicate that taxpayers across the board will pay less in state taxes once the changes go into effect. Some of the other key provisions of the new law are:

• Deductions for mortgage interest on first homes will be capped at $20,000.
• Charitable contributions will remain fully deductible.
• The child tax credit will continue
• Social Security income will remain exempt from state taxes.
• The corporate tax rate will be cut from the current 6.9 percent to 5 percent by 2015.
• North Carolina’s gas tax will be capped until June 30, 2015.
• A deduction on retirement income is eliminated.
• Starting in 2014, the sales tax holidays for back-to-school and Energy Star products are eliminated.
• The deductibility of the first $50,000 of business income has been eliminated
• Service contracts will be subject to sales taxes
• Electricity will be taxed at a general sales tax rate of 7%
• Amusements, movie tickets, etc will be subject to sales taxes

This is only a small representation of the changes. And this information should not be considered tax advice. Individual situations may vary. And as always, please consult your tax advisor regarding how the laws may affect you.

Tracy H. Allen, CFP®
Financial Advisor

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Meditation and Miniskirts

I never thought I would be able to find a connection between yoga, finance, and short skirts, but my patience has finally paid off. Since it’s a beautiful Friday in June, today’s blog will feature a couple of excerpts from the fun and funky side of financial news:

Down Markets, Down Dog
Some advisors are combining yoga with financial planning as a way to bring mindfulness to investing. It may seem counterintuitive to pair an ancient practice associated with quieting the mind with the pursuit of material gain, but proponents claim it helps them remain calm during a financial crisis and refrain from making emotional decisions. Some even teach breathing techniques to clients to help them get through difficult financial situations. As one advisor puts it, “Investing is very emotional. Yoga keeps it all balanced.”

Up Markets, Short Skirts
Quite possibly the nerdiest girl band ever, Machikado Keiki Japan sings about Abenomics, Prime Minister Shinzo Abe’s plan involving fiscal stimulus, monetary easing, and structural reforms. The best part is the hemline indicator – the girls’ skirts vary in length with the level of the Nikkei. For every 1,000 yen increase in the stock price average, the skirts will get shorter at their concerts. Apparently, fashion’s link to the economy is not new – miniskirts became popular in the ‘60s as the economy boomed, hemlines lengthened in tandem with the oil crisis of ’73, and shortened again in the go-go ‘80s. Fashion as an economic indicator – does this mean I can ditch my copy of The Economist for Vogue?

Sarah DerGarabedian, CFA
Director of Research

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Gross National Happiness

One of the most commonly used measures by which we gauge the health of our economy is GDP growth. GDP, or gross domestic product, is defined by Investopedia as, “the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.” Economists look at GDP growth over time (quarter over quarter, year over year, etc.) to determine a country’s economic health and productivity. If you look at the definition, you can see that the implication is that more money = good. Nothing unusual there – most people tend to agree that more money = good, right? Take the recent winner of the $338 million Powerball jackpot. We all assume that whoever bought that ticket is about to be the happiest person on the planet. I can’t tell you how many times I catch myself daydreaming about what I would do if I won the lottery (note to my employers: I NEVER do this on work time, and it never involves me running out of my office without a backward glance). In talking with others about it we tend to agree that, while money can’t exactly buy happiness, a certain amount can provide the freedom to pursue what makes us happy, unfettered by the drudgery required to pay bills and feed our families. At least, that’s what we think.

I recently watched a documentary entitled, “Happy” which touches on the lives of various people around the globe, and seeks to discover what makes them happy. Surprisingly, some of the happiest people were also the poorest, financially speaking. A common theme among these self-described happy people was a supportive community of family and friends, as well as a sense of purpose in life. Researchers have found that money does affect happiness, up to a point – the point where basic needs are met. Beyond this, levels of happiness do not vary significantly between those making $50,000 a year and those making $5,000,000 a year (note to my employers: this does not get you off the hook for raises). Some of this is determined at a genetic level, almost as if we are all born with a “set point” for happiness, and no amount of good fortune or tragedy will cause a person to deviate from their set point for long.

Getting back to GDP – my favorite part of the documentary was about Bhutan, a country that has chosen to measure growth not by the monetary value of goods and services, but by the happiness of its citizens. Instead of a GDP index they have a GNH index, which stands for gross national happiness. According to the “short” (over 100 page) guide to the index I found online, “the GNH Index is meant to orient the people and the nation towards happiness, primarily by improving the conditions of not-yet-happy people. In the GNH Index, unlike certain concepts of happiness in current western literature, happiness is itself multidimensional – not measured only by subjective well-being, and not focused narrowly on happiness that begins and ends with oneself and is concerned for and with oneself. The pursuit of happiness is collective, though it can be experienced deeply personally. Different people can be happy in spite of their disparate circumstances and the options for diversity must be wide.”

One of my coworkers wrote a piece for our second quarter newsletter about the positive physical and emotional benefits we can reap by volunteering and giving back to our communities. The researchers interviewed for the documentary agreed that the happiest people tend to be the ones with strong ties to friends, family, and community, and who feel they have a sense of purpose in the world. As folks transition into retirement, I think it is especially important to remain active in the community and regularly get together with friends and family. Humans are social animals; we have evolved to thrive in groups and to enjoy helping others. That kind of happiness is free and available to everyone. But I’m still going to buy an occasional lottery ticket.

Sarah DerGarabedian, CFA
Director of Research

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Keep Calm and Carry On

While reading an article about the Nobel Prize award to two American economists, I spotted a headline to the right.  It featured a link to a story CNN wrote in honor of International Day of the Girl.  Titled “To my 15-Year Old Self:  Things I Wish I’d Known,” the writer posed that question to notable women in a variety of fields.  The link showed a picture of Oprah, because you always have to ask her those sorts of questions.

I find her rather annoying, so, naturally, I clicked the link.  The problem I have with her is she seems out of touch.  It is easy to talk about “living your truth” and “risking everything to pursue your passion” when you are a multi-billionaire for whom the risks brought great reward.  Do you think the person who just lost everything when his/her business collapsed feels happy and fulfilled because they “followed their dream?”  Doubtful.

Anyway, as I read the quotes from these highly successful ladies, it occurred to me that living in the past can be a dangerous thing.  Sure, it is good to look back and say, “Oh, I really wish I had not done that.”  On the other hand, you can become so paralyzed by fear of making the same mistake that you take no action at all.  The key is to learn from the mistake and get on with your life.

We can do that in our portfolios too.  There was a time when I was reluctant to invest excess cash in my portfolio because of current market conditions.  As a result, I missed out on some of the upticks in the market.  The lesson I learned is emotion has no place in investing. 

You may have similar feelings now with the upcoming election.  What happens if Obama is re-elected?  What would Romney do if he becomes President?  Will this country fall into a Great Depression or have a huge economic boom?  No one knows.  However, I would bet that, if you looked at previous elections, similar comments were said about the president and candidate then.  It happens with every election.  Work the crowd into a frenzy so they will watch the news.

We cannot change the past.  We cannot predict the future.  Let’s focus on what we can control (our behavior), keep calm, and carry on.

Cristy Freeman, AAMS
Senior Operations Associate

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Don’t Blame Me, I Voted for Kodos

“It makes no difference which one of us you vote for. Either way your planet is doomed, DOOMED!!”

This is one of my favorite quotes, from The Simpsons Treehouse of Horror VII – Citizen Kang episode. In it, news anchor Kent Brockman is interviewing presidential candidate Bob Dole, who is actually the alien Kang in disguise. Kodos, the other alien, is disguised as Bill Clinton. When their true identities are revealed, Kodos says, “It’s true, we are aliens! But what are you going to do about it? It’s a two-party system – you have to vote for one of us!”

I was reminded of this episode (well, I’m often reminded of this episode during election years, but most recently) when I came across an article from Knowledge@Wharton, entitled, “Back to the Future: What’s at Stake for the Economy in the Obama-Romney Contest.” In it, three Wharton faculty members say that, while we’re not exactly doomed, the future isn’t likely to look too different from the present, regardless of who wins in November. Basically, the problems facing the economy are too vast to be resolved quickly, and a divided government will keep either party from fully enacting its policies.

As depressing as that sounds, it was a relief to me when I read it, if only because it validated my own feelings about the current situation. Mainly, that a recovery will take time and that there are no quick fixes. The Federal Open Market Committee seems to agree that the recovery has a long way to go. Calling high unemployment a “grave concern,” Ben Bernanke and the Fed extended the bond-buying program with a third round of quantitative easing. They are now expecting to hold the federal funds rate near zero through mid-2015 (after previously saying it would remain low through late 2014). On the positive side, the committee increased its estimate for GDP growth to 2.5-3% in 2013 and 3-3.8% in 2014. The market, of course, loves the announcement of continued stimulus, with the S&P rising above its highest close since 2007 on the news. Of course, not everyone is so sanguine about QE3, fearing that it will fuel inflation at worst, or have a marginal impact at best.  Thus far, the stimulus hasn’t materially affected inflation expectations, according to Bernanke, who cited a Fed study that also indicates the asset purchases have raised the level of economic output by almost 3% and increased private employment by over 2 million jobs.

In the near term, the economic recovery may continue to limp along no matter who is elected in November. In the meantime, we can focus on the inspirational words of Kodos/Clinton, who said, “We must move forward, not backward; upward, not forward; and always twirling, twirling, twirling towards freedom!”

Sarah DerGarabedian, CFA
Director of Research

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A Crisis of Confidence

Self-fulfilling prophesy. You hear that term a lot regarding the stock market. It was coined by sociologist Robert K. Merton, father of economist and Nobel laureate Robert C. Merton, known for his work on options pricing models (Black-Scholes-Merton, anyone? Anyone? Bueller?). Of course, the idea of the self-fulfilling prophesy has been around for ages and is a popular plot device, from Oedipus and Macbeth to Star Wars and Harry Potter.  It’s a fascinating concept, whereby a prediction influences the behavior that indirectly leads to the fulfillment of the prediction. I was talking with some colleagues about the phenomenon as it relates to testing. A person can end up failing a test, not necessarily because they were unprepared, but because they were so worried about failing that their lack of confidence caused them to freak out and freeze up on exam day.

In fact, it’s lack of confidence in the economy that we’ve seen weighing on the stock market lately. Investors hear news of a possible Greek default and subsequent European financial crisis and they worry that it will cause a downturn in global markets. As a result, they sell their investments, which – guess what? – causes markets to go down! A self-fulfilling prophesy. Then, the news turns positive (a possible bailout of Spain) and markets rally as confidence improves and investors buy back in.

It’s interesting to watch the effect of human behavior on the markets, but it can make you downright seasick when you’re invested in the market and riding the waves of sociological phenomena.  I know we’ve said it a thousand times, but the best thing to do is sit tight. If you can resist the pull of the crowd, you can dampen its effect on markets in some infinitesimal way. More importantly, resisting the urge to time the markets has been shown to improve investment returns over the long run.


Sarah DerGarabedian, CFA

Director of Research

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Fill ‘er Up

So, what’s up? Oil prices, for one. Food prices, too. As Americans, we have gotten used to cheap fuel, both for our cars and our bodies. Recently, there have been calls to repeal federal subsidies to the oil industry, in hopes that it will encourage development of alternative sources of energy and lead to long-term relief from oil prices. Some believe that such an action would have the effect of raising gas prices in the short term, and they’re probably right.  I would think that the oil companies have to recoup losses somehow, and it usually winds up being the consumer who pays. As someone wedged smack in the middle of the middle class, I know I’m feeling the pain of higher gas and higher food costs, and I can’t say that I like it very much.  But if I step back and observe the situation in a more impartial light, I have to question the use of subsidies in both industries.

I’m no econ genius, to say the least. I remember the graphs showing supply and demand curves, and some mysterious shaded portion ominously called the “deadweight loss.” And there was something in there about subsidies being a negative, as they prevented markets from functioning at equilibrium levels because they artificially distort market prices. In the US, growers of certain crops receive government subsidies, which have the effect of encouraging farmers to grow a few primary crops in large quantities. These crops (mostly corn, soybeans, and wheat) are the building blocks of much of our processed, inexpensive foods, which are taking the place of more nutritionally dense foods in our diet. Large quantities of inexpensive food sounds like a good problem to have, and I’m sure the original intent of these subsidies was benevolent. However, the alarming growth rate of obesity and related diseases in our country may be due in part to an increase in readily available and affordable processed foods derived from our primary crops. In many cases, food’s affordability and nutritional value have an inverse relationship, so it would seem that we are, in fact, doing ourselves a disservice by making it easy to load up on nutritionally deficient food.

Subsidies to the oil industry are another head-scratcher. We know that fossil fuels are a natural resource in decline – we can’t wait around for organic matter to decompose over millions of years and create more hydrocarbons. Why are we always so surprised when the price of oil goes up? The Europeans laugh at our outrage over $4/gallon gas prices, which is nothing compared to what they’ve been paying for ages. Maybe we do need to take away the subsidies in order to feel the pain and provide the incentive to take the next steps and make the right choices. I’m not a big fan of paying more for gas and groceries, believe me, but I think it’s crucial to look at the big picture and take the long-term view.

Sarah DerGarabedian, CFA

Director of Research

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Decisions, Decisions…

I came across a most interesting article the other day about the burgeoning field of neuroeconomics, written by Robert Shiller. Researchers are attempting to use neuroscience to see how the brain makes economic decisions. Modern economic theory, on the other hand, is based upon the assumption that people are rational and make decisions that will maximize their utility. Rational? Seriously? Have you seen people? Let’s just take the recent events of Black Friday as an example, with the pepper spraying, shooting, and soccer-game-esque riots over bath towels. And what about the market? There’s a reason they call the VIX the “fear index.” As somebody with a background in hard science, I’ve always thought calling economics a ‘science’ is a bit of a stretch. How can you quantify behavior and emotion and all the myriad ways that a person or group of people will respond to a particular situation, when every situation is different? It’s not like testing the boiling point of water or the specific gravity of lead where the answer is always the same.

Neuroscientists are making headway into understanding brain function and the biological structures underlying thought processes, and recently have been collaborating with economists and psychologists to see if a there is a physical basis for economic decision making. Finally, something I can get on board with! Though still in the early stages, I think this is an interdisciplinary field that bears watching. It’s certainly popping up in universities all over the country – if I had to do it again, I’d consider enrolling. I have a recurring dream that I never actually graduated from college, and I’m back on campus to complete my credits. Maybe I can work in a way to study some neuroeconomics while I’m at it. In my dreams, right?

Sarah DerGarabedian, CFA

Director of Research

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