Market Commentary - 4.16.14

Finding Tomorrow's Mustangs

In 1965, shortly following its 1964 launch, Ford parked a white Mustang on the roof of the Empire State Building to promote the model which would go on to become an iconic part of American history and pop culture. Today, to commemorate its 50th anniversary, Ford did it again. This morning, visitors to the Empire State Building's Observation Deck were greeted by a shiny yellow 2015 Ford Mustang convertible. How crews managed to get the vehicle up to the roof within the narrow 5 hour window afforded them between the 2am closing and 7am opening of the observation deck this morning is a story for another day, but this publicity event brings up another interesting point - that the original Mustang almost didn't make it to market. The model and its production process went through several redesigns to broaden market appeal and optimize cost efficiency before coming to market, and it took the vision and influence of Lee Iacocca to appreciate the potential value of the project and bring it to fruition. While many sports cars have come and gone, the Mustang remains a classic-like fundamental investing.

In recent quarters, the markets have responded to monetary stimuli, such as quantitative easing, by rewarding companies best positioned to benefit from easy money. As money flowed into the equity markets, stocks rallied and aggressive investors won big, investing in these lower quality equities. However, as talks of tapering bring the reality of the coming end of quantitative easing to the forefront, and as investors take profits and rotate out of the winning sectors, we see correlations between sectors and stocks decreasing and spreads between valuations increasing. With this backdrop, active bottom-up, fundamentally-focused managers are eagerly anticipating that the turn of the tide will carry out the lower quality stocks, allowing the strongest and best quality companies to command the premiums they deserve.

Recently, many companies have been traded in groups, lumped together by theme, region, or sector, and have traded in sympathy with other, dissimilar companies, affected by macroeconomic events or geopolitical issues. This is particularly evident in areas such as smaller capitalization domestic companies, international and emerging market regions where the information on specific companies available to investors is less accessible or of lower quality. Much like Iacocca, however, successful active, fundamental managers have a demonstrated ability to find opportunities overlooked by many others.

Following a big 2013, where domestic equities reported returns of 30-40% for the year, many investors are wondering whether the end of the bull market is near or not, and where the growth is going to come from. Active fundamental managers we have spoken to believe that great opportunities still exist for both growth and value equity investors, but that the market will begin to differentiate more acutely between the winners and the losers. Furthermore, they assert that as economies around the world return to more normalized states, it will become increasingly important to focus on individual companies with strong competitive positions and the fortitude to withstand the elevated volatility environment which we anticipate for this year.

Opportunities exist on both the growth and value sides of the market, but we believe these opportunities will become increasingly more difficult for most investors to discern. We continue to receive positive data indicating the recovery is well underway, but in addition to proper diversification, we believe investors will be well served by strong active managers with track records of success in finding and investing in tomorrow's Mustangs. It is also worth noting that $2,368, the cost of the original Mustang in 1964, invested in the stock market as represented by the S&P 500, would be worth $202,150 today, underscoring the importance of staying invested for the long term.Given market weakness and increased volatility, investors should remember to be diversified in their portfolios. A diversified investment strategy strives to smooth out portfolio returns so that the positive performance of some investments will neutralize the negative performance of others. For U.S. investors, diversification did not work in 2013 as U.S. equities far outperformed nearly every other global asset class. Unfortunately, many investors moved away from this strategy and have struggled as last year's laggards, including international equities, emerging markets equities, commodities, and REITs, have outperformed domestic equities during this current weakness.

The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This does not represent any specific product. It is not possible to invest directly in an index.

This information compiled by Cetera Financial Group is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment.

No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

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