First Quarter 2014 Commentaries

Dear Clients,

It seemed that we have had a volatile three months in the stock market. By the objective measure of the S&P 500 volatility index, the VIX, it really isn’t so. At this year’s peak, the VIX was barely over 20 and in most years, readings over 30 or 40 are frequent. Alas, that reading of 21.44 on Feb 3, 2014 was higher than all of 2013. Placing within the context of an exceedingly reticent 2013, we are indeed moving toward a noisier mean.

Despite the down month of January, S&P 500 managed to eke out a positive return of 1.8% for the first quarter of 2014. While certainly not like the double digit return of Q1 2013, it is still quite gratifying considering above average valuation, mediocre corporate earnings and weak economy data.

As March brings April, spring inevitably tags along even for those who live on the other coast. Much of first quarter’s economy data had been blamed on an unusually harsh winter. Now that the ground has been thawing, we are looking forward to economic indicators that are not tainted by wintry conditions.

We are reluctantly optimistic about the market. We believe the first quarter may very well be a microcosm of the year to come. While we think the market may move higher over time, but not significantly so. The reason for our optimism lies with our belief that the US economy is strong enough to maintain respectable earnings growth; yet not strong enough to wean from the succor of the Federal Reserve.

To state that the Fed has been the key to this bull market is of course stating the self-evident. Yet it is bear repeating so we don’t overthink our investment strategy and change course prematurely. Two weeks ago, the new Fed chairwoman Janet Yellen caused quite a stir when she stated that interest rate may rise mere six months after the end of Fed tapering. Of course, as the Fed’s vice chair under Ben Bernanke, she must be well aware that the Fed doesn’t commit to firm timelines, or in the habit of throwing haphazard surprises to the market. Quickly, she redeemed herself. During a press conference on March 31, she elucidated the crowd with the usual Fed vagueness and stated that Fed won’t raise rates so long as the economy still needs the support. One Wall Street observer called it the most dovish speech he had ever heard. Since then, stock market has rallied three days in row.

Despite subpar economic growth and constant downward revision to estimates of corporate earnings, stocks have managed to move higher because the Fed has remained unwavering. So as long as the Fed remains supportive, we will maintain our optimism.

Dong Hao Zhang
President & Chief Investment Officer Evla Hills Investment Management