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Investment Letter

1st Quarter 2014

Mother Nature’s beautiful Spring awakening is underway across much of the country after the harsh Winter of 2013…and what a welcome site it is to behold.  The famous poet Anne Bradstreet may have stated it best when she penned the following:  “If we had no winter, the spring would not be so pleasant; if we did not sometimes taste of adversity, prosperity would not be so welcome.

The economy and stock market are certainly no strangers to adversity.  After an outstanding 2013, the performance of the market during the first quarter of 2014 was tame even as the economy sputtered.  The Dow Jones Industrial Average (DJIA) suffered a significant decline at the end of January and spent much of the next month regaining its lost footing.  As the quarter ended, the DJIA had gained back almost all that it had lost and finished the quarter at 16,457.66.  A decline of 0.15% in the DJIA is not too bad considering the uncertainty in the stock market three months ago.  The S&P 500 Index also experienced a similar decline and subsequent rebound during the quarter.  However, this broader measure of the stock market returned a positive 1.81% to finish the quarter at 1,872.34.

The chart below recaps the 1stQuarter performance of other major indices:


Asset Class


 1st Qtr. 2014 Total Return


ML Three-Month U.S. Treasury


U.S. Bonds

Barclays Intermediate-Term Treasury


U.S. Large Co. Stocks

S&P 500 Total Return


U.S. Small Co. Stocks

Russell 2000 Total Return


International Stocks

MSCI EAFE (net div.)


Real Estate

DJ Select Real Estate Securities Total Return



Source: Morningstar


Overall, it was a tough quarter for many areas of the market.  Cash returns were minimal, short to intermediate-term bond returns were anemic, and most stock asset class returns (while still positive) were disappointing.  A surprising bright spot for the quarter was real estate.  One of the indices we use to gauge the performance of this asset class returned a positive 10.35% for the first three months of 2014.  This is a definite good start to the year for those investors who include real estate as a diversifying asset class.  After analyzing the data for the market as a whole, it appears there were several issues that contributed to its overall lackluster performance.  First, harsh winter conditions across much of the country during the 1stQuarter played a significant role in slowing down the economy.  Early economic data showed weak numbers in vehicle sales, housing activity, industrial production, and employment growth.  Another contributing factor to the economic uncertainty during the quarter was the concern over global economic health. Slower growth in emerging markets and weak economic data from China brought out the Nervous Nellie’s as markets declined.  A third contributing factor could be the lack of investor faith in the current bull market.  After celebrating the fifth anniversary back in March, the current upward run has already surpassed the average length (56 months) of most bull markets.  Many investors are worried that the end is near and they are prepared to jump ship at the first sign of trouble. 

The Federal Reserve confirmed the mixed bag of economic data in their latest Beige Book report.  While conditions across the country varied, the Fed stated the following about conditions in most districts. Retail sales were weak; travel and tourism conditions were generally strong; demand for nonfinancial services was mixed; transportation activity was mixed as the weather was disrupting supply chains and delaying shipments in many areas; manufacturing activity expanded at a moderate pace, but there were areas where the weather created negative sale and production results due to utility outages, disrupted supply chains, and production schedules; the residential real estate market continued to improve (albeit modestly); low inventories of housing and home price appreciation continued; commercial real estate leasing expanded and commercial real estate construction was mixed; winter weather conditions were adversely affecting the reports on agriculture and energy production was up due to the extra demand for fuel during the colder months; banking conditions were mixed as loan demand and volume softened; inflation remained largely unchanged.[1]

Despite the mixed economic data, the Fed concluded that conditions remained supportive of economic growth.  There were no surprises in the statements from the Federal Open Market Committee (FOMC), and new Fed Chair Janet Yellen’s testimony to Congress emphasized continuity and solidified expectations of the FOMC’s dual mandate of maximum employment andprice stability.  As a result, the Fed planned to further reduce the pace of the Committee’s asset purchase program by $10 billion starting in April, and they decided to maintain the federal funds rate at zero to 1/4 percent.  The Committee stated they will monitor conditions over the coming months to determine if further reductions in the asset program are appropriate, and they will consider a change to the federal funds rate as the economy approaches the objectives of maximum employment and 2% long-run inflation.  

Our outlook for the economy has not changed much since last quarter.  Over the short-term, we expect economic conditions to show additional improvement, but we also believe that the improvement will be a slow and steady increase.  We believe the soft patch of economic data during the 1stQuarter was a temporary setback and now that warmer temperatures are back, we think conditions will start to normalize.  Over the long-term, our outlook for the economy remains positive.  We believe there is still plenty of slack in the economy to feed the expansion, and many of the headwinds that have plagued the economy over the last couple of years are gone.  Growth will continue to be low and slow for the foreseeable future, and this should provide a favorable environment for stocks.  2013 was a great year for the equity market, but we think investors will have to be content with a return that is less spectacular and closer to historical averages this year.  Since the market bottom on 3/9/2009 at 677 points through the record high close on 3/7/2014 at 1,878 points, the S&P 500 Index was up 177%.  It is understandable for investors to question the market’s resilience after this type of run.  Investors have already seen two major downturns over the past 13 years, and the recent record highs have the skeptics proclaiming the stock market bubble is ready to pop.  While we don’t have a magic crystal ball that predicts the future, we do believe sufficient economic evidence exists to suggest this aging bull market has a little more life left.

Some of the more obvious risks to our economic prosperity have diminished lately, but we are concerned that the Fed’s monetary policy timetable may have been accelerated with the recent change in leadership.  We anticipate a continuation/intensification of the Fed’s Taper policy, and if conditions keep improving, we expect that the FOMC would consider an upward adjustment to the federal funds rate by the end of 2014.  We anticipate GDP to be between 2.5% and 3.0% for the remainder of the year, but depending on the timing and advance notification by the Fed, a monetary policy adjustment move could have a substantial impact to domestic economic growth.  A few international risks are still out there that could cause a significant interruption to our domestic progress.  First, Europe’s sovereign debt issue lingers.  While conditions have improved and many of the headwinds have weakened, the recession in the Eurozone was deep and the region’s weak economic growth should continue to hold the global economy back.  Japan’s deficit problems also pose a significant risk to the global economy.  Their solution of a national sales tax hike will probably not resolve the problem but should help ease the risk to the global economy.  Additionally, China’s slower than expected growth is alarming; some economists believe the reduced growth is a precursor to an economic down turn.  This could be a significant risk to the global economy if China’s economic stability crumbles quickly.   Furthermore, geopolitical uncertainty in the Middle-East and increased tensions with North Korea and Russia are sure to add economic pressure going forward.  Of course, an unforeseen act of terrorism is an immeasurable risk with an unknown global economic impact. 

As I have often stated, our investment philosophy remains based on the fundamentals. The day-to-day price volatility of the stock market is unavoidable and can be deeply influenced by domestic and international variables.  Investors need to manage their expectations of the stock market accordingly.  We believe that it is time---not timing---that matters most.  That is why we believe the successful long-term investor is patient, weathers market swings, and adheres to a disciplined investment process that includes a diversified asset allocation strategy based upon a tolerance for risk and need for return. In other words: Don’t use your emotions to make investment decisions; separate your money from your moods.

See the list below for some interesting market facts.

 · MOSTLY IN ONE DAY- The S&P 500 produced a +1.8% return performance (total return) in the 1st quarter 2014, the lowest 1st Quarter return for the stock index since 2009. The best single trading day for the S&P 500 YTD was a +1.5% total return gain achieved on Tuesday 3/04/2014. (source: BTN Research 4/7/2014)

 ·  STOCK MARKET MILESTONES- The S&P 500 took 4,790 days to go from 1500 to 1600 during the “Lost Decade”. 90 days to go from 1600 to 1700.  Another 113 days to top 1800 and as of 3/31/2014 was 27 points away from passing 1900. (source: USA Today 4/3/2014, Shell A.,What to Watch, 6B.)

 · THE ECONOMY- The U.S. economy grew by +1.9% in 2013. In the last 50-years (i.e., 1964-2013), the U.S. economy has grown by an average of +3.1% per year. The U.S. economy has contracted in size 7 years in the last 50 years, most recently in 2008 and 2009 (source: BTN Research 3/31/2014)

·  AVOIDING A CORRECTION- As of 3/31/2014, the S&P 500 has gone 909 calendar days (i.e., from 10/03/2011 through and including 3/30/2014) without a 10% or greater drop in the index, the 5th longest stretch without a double-digit pullback in the last 50 years. (source: BTN Research 3/31/2014)

·  APRIL ROCKS - The S&P 500 has averaged a gain of +1.77% (total return) during the month of April over the last 24 years (i.e., 1990-2013), ranking April as the 2nd best performing month during that period. The month of December, up +2.03% on average is the top performing month. The month of August, down 0.80% on average has been the worst performing month. (source: BTN Research 3/31/2014)

· WHEN INTEREST RATES GO UP- The last time the Federal Reserve began a series of interest rate hikes was almost 10 years ago. Over the 2-year period from 6/30/2004 to 6/29/2006, the Federal Reserve raised short-term interest rates 17 times. (source: BTN Research 4/7/2014)

I would like to announce that during the quarter, a redesign of our company website was completed.  Please visit our website at www.whcfa.com.  As you probably noticed, we also completed a redesign of our company stationery to reflect a more modern and readable look.  We hope that the new designs are appealing, and we welcome any comments or suggestions. 

Additionally, I was pleased to be included in Memphis Magazinelist of Five Star Wealth Managers for the fifth consecutive year, and I was also included in the 2013 Medical Economicslist: Best Financial Advisors for Doctors.

In closing, I want to thank you for the opportunity of working with you and for your continued confidence and trust.  Please contact me if you have any questions.  Enclosed you will also find the William Howard & Co. Financial Advisors, Inc. Privacy Policy.


With kindest personal regards, I am


Very truly yours,



[1]Source: Federal Reserve System. 2014 Beige Book Report. 5 March 2014. http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201403.htm



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