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Learning From A Market Drop

Markets closed a volatile week on a bearish note as the first earnings reports trickled in. For the week, the S&P 500 lost 2.65%, the Dow fell 2.35%, and the Nasdaq dropped 3.10%.[1] One bright spot: Despite the dismal stock performance, economic fundamentals are looking up. What lessons should we take away from last week? We’ll get to that in a moment. First, let’s review the factors that contributed to last week’s performance.

Most of last week’s market decline came as a result of investors positioning themselves for a challenging earnings season. Many analysts had predicted a market reversal in 2014 as investors paused to take the pulse of last year’s big winners, and that is precisely what we’re seeing. Most of the sectors that have been hit hard this year were high fliers in 2013.[2]

On the economic front, consumer sentiment reached its highest level since last July as improvements in the labor market boosted optimism about the economy. [3] However, since sentiment tends to mirror equity performance, if markets don’t improve, we may see that optimism wane in coming weeks. The week’s unemployment report was also very positive as new unemployment claims fell to the lowest level since May 2007.[4]

The crisis in Ukraine continued to simmer last week as the Ukrainian army sought to eject pro-Russian separatists from a complex near the eastern border.[5] Tensions increased as Russia raised the price of natural gas exports to Ukraine by 80% and Ukraine retaliated by halting payments, pushing the two sides closer to another “gas war.”[6] If Russia makes good on its threat to shut off the gas pipeline through Ukraine, EU states that depend on supplies from the Ukraine could be affected.

Recent market troubles offer a teachable moment for investors: Don’t buy the hype. Let your long-term personal and financial goals drive your investment strategy and choose solid investments that suit your needs. Market volatility will always challenge investors, but we believe that a prudent investment strategy and active risk management can ultimately lead to better long-term outcomes.

Another important lesson is the need to tune out emotion and stick to a disciplined investment plan. Plenty of investors are looking glumly at their portfolio values, not realizing that a) recent losses may provide opportunities to cherry-pick solid stocks at attractive prices, and b) that economic fundamentals point to a rosier second quarter, giving us hope that equities will rally soon. The real losers will be those who gave in to greed and bought high-performers on the upswing, and who panicked and sold near the bottom.

ECONOMIC CALENDAR
Monday: Retail Sales, Business Inventories
Tuesday: Consumer Price Index, Empire State Mfg. Survey, Treasury International Capital, Housing Market Index
Wednesday: Housing Starts, Industrial Production, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims, Philadelphia Fed Survey
Friday: U.S. Markets Closed for Good Friday Holiday

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and  Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES

Gold prices log weekly gain on Fed hopes. Sagging risk appetites and hopes that the Fed will hold interest rates steady until next year pushed up gold prices. However, analysts expect gold prices to head lower this year as economic fundamentals improve.[7]

IMF issues hard-landing warning for China. The International Monetary Fund warned that though the risk of a sharp decline in China’s economic growth was small, overinvestment and structural issues in the financial system pose global risks.[8]

Producer prices edge up. Companies paid more for goods and services last month as wholesale prices rose. This may squeeze company profits this quarter as slack demand makes it hard for retailers to pass those costs on to consumers.[9]

Food prices on the rise in 2014. Drought and harsh winter weather has sent food prices higher by as much as 20%, according to some estimates. While U.S. consumers may not be affected greatly, since growing costs account for only 15% of retail prices, consumers in poorer nations may be hit hard.[10]

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

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The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

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[1] Source: Yahoo! Finance

[2] http://www.cnbc.com/id/101575864

[3] http://www.bloomberg.com/news/2014-04-11/michigan-u-s-sentiment-index-increased-to-82-6-in-april-from-80.html

[4] http://www.usatoday.com/story/money/business/2014/04/10/jobless-claims/7541515

[5] http://www.nbcnews.com/storyline/ukraine-crisis/warning-violence-ukraine-confronts-pro-russia-rebels-n79096

[6] http://www.reuters.com/article/2014/04/03/ukraine-crisis-gas-idUSL5N0MV2WL20140403 http://www.reuters.com/article/2014/04/12/ukraine-crisis-idUSL6N0N407F20140412

[7] http://www.cnbc.com/id/101574545

[8] http://www.rappler.com/business/economy-watch/55040-imf-world-growth-outlook-2014-2015

[9] http://www.usatoday.com/story/money/business/2014/04/11/producer-price-index/7587131

[10] http://www.bloombergview.com/articles/2014-04-11/food-price-shock-2014-edition

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