MBA / FEATURE
Financial Observations By Michael J. Foster
H
opefully Spring will be here shortly as everyone that I know has had enough of Winter. Just like the weather, the financial markets have been somewhat volatile and unpredictable. After a very strong performance in 2013 when equity securities were up more than 25%, investors are concerned that the markets have risen too quickly over a short period of time and are due for a pullback in price. This actually started to occur in January, but the markets reversed course in February with no obvious catalyst and are hovering near all time highs. In reality, earnings have been strong enough and values seem to be fair by all historical measures that stock prices could be stable with low interest rates. The conventional wisdom going into the year was that economic growth would slowly improve and market interest rates would begin to increase. Actually, the economic growth has reflected signs of sluggishness and again the weather has impacted the economy. Intermediate interest rates have actually decreased over the last several months and investment funds have flowed into both stocks and
bonds. Some worldwide geopolitical events have caused some funds to look to US Government bonds for safety but we know from experience that these political events tend to have short lived effects on the markets. I would expect that the coming months will lead to improved economic growth and spending, and will be positive for corporate earnings. Such improvement will be more positive for stocks versus bonds, and intermediate interest rates will increase which will hurt the performance of bonds. The Federal Reserve will continue the reduction of their bond buying program – this seems to be expected by the markets. The new head of the Federal Reserve has been accepted without too much emotion so far, but she is still in the early stages. I would recommend that investors continue to overweight stocks versus bonds, but no one should expect that the 2014 performance could match the 2013 results. Almost all stocks were up in 2013 and I would expect that this year will be more discriminatory towards those companies that are executing and performing better. Thus, stock selection is
more important than ever and the better management teams and business models will win the race. There is a cost for safety and that is the low interest rates being earned on fixed income instruments. There is actually a social concern here as those investors who cannot accept the risk of stocks are being adversely affected by low returns and inflationary issues. We are probably facing several more years of lower interest rates on fixed income instruments that will effectively help stocks to continue to outperform. Everything we consider is on a worldwide basis and we should be happy to see some improvement in the European Union economic condition. Most experts agree that the worst of their economic decline has passed and that slight improvement is being felt throughout the continent. The area of concern should be what appears to be weakness in the growth statistics of China and other emerging markets of India, Turkey and Brazil. These are all very important markets which are going through some political and economic challenges. Overall, there are many reasons to be optimistic that the bull equity market will continue into 2014, although at a slower pace. An investor always needs to be aware of the economic climate and react to risk when it is increasing. At higher stock valuations, volatility is normal. I can always be reached at 610-687-6800.
This article and any other features in SIDEBAR are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed are Michael Foster’s own and not necessarily those of Valley Forge Asset Management (VFAM), and there is no implied endorsement by VFAM of any advice or trading strategy. Securities, insurance products, and investment advisory services are offered through Valley Forge Asset Management, an SEC-registered investment advisor and a registered broker-dealer (Member FINRA/SIPC), and a licensed insurance agency. Susquehanna Wealth Management is a registered service mark of Susquehanna Bancshares Inc. (SBI). Valley Forge Asset Management is a non-bank affiliate of SBI. Securities and insurance products are: Not FDIC insured • May lose value • Not bank guaranteed • Not a deposit • Not insured by any federal government entity. SIDEBAR
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SPRING 2014