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Stocks still the asset class of choice; correction afoot?

by Caldwell Trust
Screen_Shot_2014-12-03_at_8.57.52_AMWith three quarters of 2014 complete and the beginning of a market correction materializing, we are reminded of how resilient the U.S. economy has been this year, despite signs of weakness in Europe and China. This is against the backdrop of the Federal Reserve Board unwinding its bond purchases while giving us little that is definitive regarding when it will raise interest rates. The Fed says, “It will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends.”
We in Caldwell’s investment department have asked one another, “How long is ‘a considerable time’?” Naturally the answers varied widely and often began with “Well, that depends.” Nonetheless,
spending time on such rhetoric is futile.We have said previously that our strategy for 2014 is to use the
year to set up portfolios for success in 2015 and beyond. You may ask, “Why are you saying this? And what does it mean?” Before we get to that, let’s be clear on the present situation: we are still vigilant about a correction in stock prices in 2014. The length of the current U.S. stock rally has been the longest since the secular lows in March 2009. We believe that a protracted selloff is a matter of when, not if.

Looking ahead and back
Looking ahead, we still see stocks outperforming bonds on a real-return basis. Looking back, we review history to gain a sense of what might be in store, recalling a humorous quote from an unknown source (some credit Mark Twain): “History does not repeat itself, but it rhymes.”

The chart presented here (courtesy of our friends at Ned Davis Research) is a composite of a cycle projecting what U.S. stocks might do in 2015 and beyond. It blends three cycles into the line, all going back to 1928: the one-year seasonal, the four-year presidential and the ten-year decennial cycles. Although we aren’t sure why, this chart has been a good indicator of major turning points in U.S. stocks.

Adding to what history says might be in the cards for stocks, in our view the seeds of economic growth were planted long ago for the cycle composite that the chart projects. Let’s not forget the burgeoning energy sector here at home. The U.S. has the ability to supply not only the globe but also our own manufacturing sector with cheap energy. Furthermore, the probability has risen that pro-growth policies might actually come from Washington after the upcoming mid-term elections. Finally, with interest rates at
generational lows, the likely direction for rates is firmly in the “up” column, making bonds riskier than they have been in the past.

CONCLUSION: Despite a correction being afoot in U.S. stocks, we are using 2014 as a year where portfolios can reap the rewards of relative stock outperformance versus bonds. We will view weakness in markets as an opportunity to add to stock exposure where appropriate, and we will be buying the dips. We remain focused on our indicators to guide us in our actions, and we remain flexible in our views.

About Caldwell Trust Company

Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $800 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.

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