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Top 10 Market and Economic Variables to Watch…and 3 to Ignore – Part I

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At its core, investment management involves researching thousands of variables and data points. Careful analysis is required of all of these variables and data points to create a “mosaic of information” in order to draw a conclusion on market and economic directions. With the 24/7 news cycle, investors have more data, surveys and reports in front of them than ever before.

In the spirit of a classic David Letterman Top Ten, we’ve put together our own list, but with a twist at the end. KC visited The Street and The Hays Advantage on Bloomberg Radio to share his insights.

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ListenKC Mathews on the Hays Advantage

Below are the first two market and economic variables to watch in order to make sound decisions. In the next parts of this series, we’ll bring you more variables and three that perhaps, should be ignored. Let us worry about the rest of the noise.

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10. Earnings Momentum

We are fundamental investors and believe that the primary driver of equity prices is earnings. Regardless of short-term noise that may move markets, sooner or later earnings and earnings momentum will determine market direction.

There is a 77 percent positive correlation between earnings and equity prices. Occasionally you will see equity prices deviate from earnings growth due to various reasons. Since 1955, however, earnings have grown 6.5 percent annually, and the S&P 500 has increased about the same, growing 7 percent on average. In 2014, earnings were up 5 percent and valuations increased by 25 percent, resulting in the S&P 500 posting a 32 percent return.

We expect earnings growth to be in the 4 to 6 percent range this year and continue to expect positive returns in equities. We would not be surprised, though, if we experience a meaningful correction to get earnings and market performance back in line.


9. High Yield Spreads

High yield spreads will usually precede or confirm a material correction in the equity market.  We define a material correction as a decrease of 10 percent or more and haven’t seen this type of a correction since June 2012. Market corrections are a normal and healthy part of a secular bull market. As the domestic equity markets continue to increase, the probability of a meaningful correction also increases. Historically, changes in high yield spreads have either signaled or confirmed a correction in the equity market. For example, in early 1998, high yield spreads widened 65 basis points suggesting an oncoming correction. As expected, a 15 percent mid-year correction followed.  Again, spreads widened by 90 basis points in the summer of 2007, right before the peak of the S&P 500.

In the past two years we have seen smaller corrections ranging from 4 to 7 percent with virtually no widening of high yield spreads. This tells us the meaningful correction has not yet occurred, nor is a correction on the near-term horizon.

Remember to check back for the rest of the variables to watch (and ignore) next month!

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

DISCLOSURE AND IMPORTANT CONSIDERATIONS:

UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals.  UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.

Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.

Securities and Insurance products are:

NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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If the economy was a movie, “The Sequel” would be better than the original

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Find out why 2014’s economic forecast is looking promising

2014 the Sequel

The beginning of a new year means it’s time to hit the road – literally. Every January and February the UMB Private Wealth Management division visits nearly a dozen cities to deliver UMB’s annual economic forecast presentation to clients. The theme of this year’s presentation is “The Sequel.” Never short on drama, the economic story this year draws a parallel to a movie sequel, although, we believe it will be better than the original (2013’s forecast).

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Last year’s economic theme, “The Policy Basin,” predicted slow or low, basin-like growth. Most companies weren’t ready to begin hiring yet; capital expenditures were mainly on hold and consumer spending was noticeably low – clearly still on the defense from the Great Recession of 2008. And, that is exactly how the economic picture played out last year.

As an extension to last year’s theme, this year’s economic picture is slowly but surely looking better. We predict real GDP will improve from 1.9 percent in 2013 to 2.7 percent this year. This will be driven by the following factors:

  • There will be an increase in consumption as consumers perhaps end the deleveraging phase and enter the re-leveraging phase.
  • Increased spending in state and local governments is expected, as these entities will benefit from a boost in property, sales and other tax revenue. All but seven states have indicated that they intend to increase spending from 2013.
  • We believe better economic growth in 2014 will generate close to 200,000 additional jobs per month, which is up from 185,000 per month last year. This growth in additional jobs should reduce the U.S. unemployment rate to 6.0 percent by the end of the year, down from the 6.7 percent at the end of 2013.

We are looking forward to 2014 delivering more employment, improved consumer sentiment and strong GDP growth. And while this year’s economic story might not be a blockbuster, we believe it will be a positive year with good storylines for consumers and businesses, and if managed correctly, for investors as well.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Investment Products Offered Through UMB Financial Services, Inc

Member FINRA, SIPC

NOT FDIC INSURED/ NO BANK GUARANTEE/ MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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Janet Yellen: The Next Chairperson of the Federal Reserve

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Janet who? Janet Yellen, the seemingly-unknown current vice-chairperson of the Federal Reserve(the Fed), was nominated by the President to succeed Ben Bernanke after several White House favorites were first considered. Bernanke, the current chairman of the Fed, is vacating the position he has held since 2006 at the end of January 2014.

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Yellen now awaits the Senate confirmation process, which she should easily glide through as the Republicans appeared to support her as a candidate while the President sought alternative contenders earlier in the process. She appears to have a very good track record on judging appropriate policy. Whether a dove (low rates and inflation) or a hawk (inflation a threat), what’s important is supporting the appropriate policy at the appropriate time…which she has done. She is battled-tested, having worked in key policy roles through both the Asian financial crisis in 1997and the recent global financial crisis.  She has spent most of the past two decades as a leading voice within the Fed, initially as a member of the Federal Reserve Board of Governors, then as president and chief executive officer of the San Francisco Federal Reserve Board, and over the past four years as vice chairman of the Federal Reserve.

We think Yellen, like Bernanke, may view the risk of the economy becoming stuck in a low-to-moderate growth path great enough to provide ongoing risk insurance, such as delaying the tapering of quantitative easing or even, if necessary, providing additional stimulus.

Yellen is characterized by those who know her as a brilliant thinker who focuses on the human side of economics.  As vice chair of the Fed, she was credited with forming the Fed’s communication policy including the chairman’s quarterly press conference. This press conference – and communication in general – may become more critical as we transition from a period of large-scale asset purchases to one of strong “forward guidance” from the Fed. Yellen has also been a proponent of maintaining the Fed’s zero interest rate policy and continuing the Fed’s asset purchase program.

If confirmed, she will be the first women to lead the Fed.  We think she is extremely qualified and will do an exceptional job.  We don’t expect much change with respect to the current Fed policy, and neither does the market. Upon her nomination in early October, the market let out a big yawn; markets didn’t move much then and haven’t since.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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Federal Reserve Exit Plan

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UMB Bank’s Chief Investment Officer KC Mathews and his team recently gathered for a round table discussion regarding the Federal Reserve’s exit plan. The Fed’s decision not to begin tapering the stimulus was a largely unanticipated move for the financial markets. As explained in detail during this podcast, the Fed based this decision on data correlated with employment, inflation, the debt ceiling and housing recovery.

Learn what this latest move means for investors.

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UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Investment Products Offered Through UMB Financial Services, Inc

Member FINRA, SIPC

NOT FDIC INSURED/ NO BANK GUARANTEE/ MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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GDP Goes Hollywood

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Did you know that every five years the statistics that determine the Gross Domestic Product (GDP) are reviewed and modernized as the U.S. economy changes? The GDP is one of the main indicators used to measure the health of our economy, so this review is very important.

Earlier this month, the Bureau of Economic Analysis (BEA) conducted a comprehensive revision of the GDP statistics from 1929 through 2013. This time around, the revisions included changes to intangibles, including books, movies TV shows, music, photographs and even greeting cards. Specifically, “intellectual property products” (an idea for a movie franchise) were moved from expense to investment classifications. This includes research and development; entertainment, literary and artistic originals; and software. They will be considered fixed assets to account for their ongoing contributions, such as royalties authors receive for their book sales.

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Including specific works and ideas from the ever growing “knowledge economy” was done to fill a void because these intellectual property products had not been labeled as an asset until now. Check out this recent New York Times piece, Getting Creative with the GDP, to learn more about these recent additions to the GDP.

These changes are important in making sure the GDP calculation stays relevant and current.  Since the recent revisions created only a minimal statistical change to the GDP, the general consensus to date seems to be that the findings do not change the overall picture.

What it does change is the outlook on creativity and innovation. For example, research and development is often viewed by most companies as an expense and not an asset. It’s difficult to place a continuing value on it because sometimes it’s successful and sometimes it’s not. The goal is not to place a specific number value on each individual intangible. Instead this change in GDP reporting is a paradigm shift in how we view the overall value of imagination and the creative process.

 

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Investment Products Offered Through UMB Financial Services, Inc

Member FINRA, SIPC

NOT FDIC INSURED/ NO BANK GUARANTEE/ MAY LOSE VALUE

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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The Calm after the Storm? Or the Eye of the Storm?

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Recently UMB Bank Chief Investment Officer KC Mathews and his team connected with clients to discuss some of the market’s most pressing issues. The Fed tapering, our interest rate forecast, the recent movements in the municipal bond market and an updated economic outlook were discussed.

Interested in what was discussed? Listen to the podcast here.

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UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Investment Products Offered Through UMB Financial Services, Inc

Member FINRA, SIPC

NOT FDIC INSURED/ NO BANK GUARANTEE/ MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.

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