Q4 2013 Market Commentary
David Y. Sun, CFA®

2013 was an incredible year for domestic equities with various indices reaching record highs.  The DJIA closed out the year at 16,500+, far exceeding our 2013 target of 13,800 based on 2013 fundamentals/earnings.  As a matter of fact, year-end market levels actually exceeded our 2014 target of 15,400 based on 2014 earnings projections.  Like many other investment professionals, we feel that domestic equity markets are trading at a premium relative to fundamentals.  Due to increasing media coverage regarding a market pullback, many of our clients continue to ask about downside risk.  We remain consistent with our perspective of the market using our 2014 target of 15,400 on the Dow as our initial support level.  Breaking below this level would present more attractive entry point opportunities for the long term.  We have mentioned that as long as gold and bonds are not perceived as “flight to safety” vehicles, equities can maintain premium pricing levels that are not deemed excessive.

Many companies are doing well in the current economic environment, but we have concerns with analysts overlooking weak fundamentals for some well-known companies that we have referred to as ”industrial duds”.  It has been a challenge finding fundamentally strong companies at reasonable prices.  Out of the 43 companies we currently track, only 6 to 8 of them are considered “buys” at current price levels.  In seeking reasonable valuations we have redirected our attention overseas.  With positive signs of economic life in various parts of the world, including Europe, we have decided to increase our overall allocation to both foreign developed and emerging equity markets.  This increase will be limited to a maximum of 15% of portfolios where deemed appropriate based on allocation targets.

To “taper or not to taper” created a significant level of volatility in the fixed-income universe.  We believe that volatility was driven more by the uncertainty than the actual action itself.  Once the Fed decided to taper based on their outlook of the economy, the markets rationalized the news as positive believing the Fed’s decision was attributed to a strengthening economy.  We will continue to monitor the direction of the economy very closely and see how it will impact earnings adjustment trends.  These trends provide us with a better indication of how fundamentals will support market levels; will earnings adjustments exhibit more positive trends to support current levels or will they turn negative providing a fundamental reason for a market downturn?

Since we opened in April of 2012, our significant growth has been driven by our network of business contacts and client referrals.  The process is truly passive in nature which allows us to focus on our infrastructure & operations, vital parts in fulfilling our commitment to our clients.  As we enter the New Year, we would like to express our appreciation to all who have supported us and helped us grow.  We will be finalizing our schedule of events for the year within the next few weeks where clients and referrals will have the opportunity to meet and interact with members of our team.  Your consultant will keep you informed of these events. We look forward to seeing you in the near future.

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