CIO Market Update Audiocast Series​

Chris Hyzy:                This is Chris Hyzy, Chief Investment Officer, for the market update for January 18. Heading into this week there were many questions surrounding not just market trends, but also the overall direction of the economy as evidenced by the latest gauges. When we think about this next two weeks or so up ahead of all earnings announcements finishing out towards the second week of February, we call this time of the marketplace to begin the year the vortex, not just because of the cold weather hitting much of the country but also the market trends are basically at this juncture across major averages in decline. Today most major averages are down more than 1.5% to start the week. As we look at volatility, up above 22 on the CBOE, Chicago Board of Option Exchange VIX Index, the repositioning in the marketplace continues from the high growth, very little profit areas that are harmed by rising bond yields to the areas that are most stable, higher quality, and in many regards a little bit more cyclical in value. Having said that, that part of the market is not large enough to keep the averages from falling as we have seen recently. So what is in store coming down the pike? We see that revenues and earnings are still beating handsomely as expected but investors are waiting this out. They’re choosing to act now - take profits, in other words, form the extraordinary gains over the last almost two years and ask questions later as it relates to the overall direction of the economy as well as the corporate sector’s profit stream. When we think about the last few weeks, it has been dominated again but that repositioning but what has happened recently is that bond yields have had their march higher. The 10 year treasury yield is now at 1.825%, on its way slightly higher as evidenced by less bond buying by the Federal Reserve and is a more hawkish stance. However, what’s more interesting to begin this week is now West Texas Intermediate Oil prices are at $85.00 a barrel, showing very little signs of calming down. Higher oil prices crimps the consumer. Higher yields can have an outsized effect eventually on the consumer. If you get higher yields, higher oil prices, that could call into question the growth trajectory for the remainder of the year. We’re not there yet. We actually still believe that economic growth and corporate profit growth should surprise to the upside however, that is not what investors are suggesting right now. We believe that two things are more than likely to occur through the earnings season. When all is said and done, earnings seasons should be stellar in our opinion. It should see a revenue beat as well as a profit beat above what consensus is expecting to stable the markets/to calm down the volatility in the markets in our opinion, and then once repositioning is fully exhausted, which we expect to occur in the next two to three weeks, we should see a little bit more of an upward drift in the equity markets. Earnings are still the number one bedrock or foundation for us for this year and that has not shown signs at this point of going in the other direction. So from our perspective, we remain equity overweight. We do believe that rising bond yields drifting higher, not shooting higher, elevated oil prices overall, and a cyclical repositioning is the name of the game in the next few weeks. Having said all that, the equity repositioning should slow down as we head into the February month and we would begin to use weakness to reposition portfolios to a higher equity overweight if you’re still below your tactical targets. Equity overweight over fixed income still with a US bias given our belief that the dollar has yet to enter a full weakening trend relative to the non-US marketplace. Cyclical bias, value bias however, we believe that the old or established technology sector of the overall technology sector is an area that is becoming very attractive. They have been selling off with the unprofitable area within technology and we would be using weakness in that area of technology the more stable, higher quality, more established technology firms with better revenue streams, better profit streams, and less volatility as a buying opportunity. That’ll do it for today. Thanks for listening.

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