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Market Commentary - 3.17.14

Just Like Your NCAA Bracket, Make Sure You Seek Some “Cinderella Stories” for Your Portfolios

March Madness has officially begun — that time of year when we complete our NCAA tournament brackets. The lessons learned from past NCAA tournaments may apply to your investments.

In March Madness, the goal is to the pick the winner of each basketball game for each round of the tournament. The 64 teams in the tournament are seeded from #1 to #16 for each of the four main regions. The four strongest teams are seeded #1 and the four weakest teams are seeded #16. Relative team strength helps to fill in the seedings between #1 to #16. While the top seeds are the strongest teams and tend to reach the finals, upsets do occur when a so-called “Cinderella story” team advances beyond expectations. When completing NCAA brackets, astute fans tend to emphasize top seeds though they will mix in some occasional “Cinderellas.” Or in other words, they will diversify their final picks.

Diversifying final picks also applies to investing in today’s market environment. As we have noted in previous market commentaries, we expect the combination of a normalization of monetary policy (i.e. the Federal Reserve undertaking “tapering” to reduce quantitative easing), a gradual pickup in business spending, and an economic recovery continuing outside the U.S., to result in a gradually rising global GDP growth rate. In this environment, our four top seed “investments” or market opportunities include:

  • Equity allocations in line with long-term investment objectives.
  • Focus on domestic equities, but opportunistically increase exposure to international stocks.
  • Prepare for gradually rising interest rates by incorporating less interest rate sensitivity (i.e. lower duration) and a focus on non-Treasuries (i.e. spread product such as corporate bonds).
  • Increase overall diversification by adding an allocation to commodities and liquid alternatives.

However, just like adding upsets to your March Madness bracket, it is prudent to add smaller “Cinderella story” investments to your portfolio. “Cinderella story” investments are those that are not likely to fully benefit from our economic and market forecast, but instead these investments offer exposure in case the unexpected occurs. For example, some “Cinderella story” investments include the following:

  • Conservative domestic small cap exposure. While we prefer large cap domestic companies, due to their less economic sensitivity, a stronger than expected economic environment could benefit this “upset” asset class.
  • Emerging markets exposure. Despite a strong economic growth foundation, this asset class has suffered from increasing geopolitical risk, mutual fund outflows, and concerns about growth in China. A reversal of these negatives could benefit this “upset” asset class.
  • Some longer term fixed income exposure. We believe interest rates will continue their trend higher. However, in the case of an unexpected negative market event, a flight-to-quality rally could benefit this “upset” asset class.

Overall, our top seed investments are those that we believe have the strongest chance of winning in the current market environment. However, just like your NCAA tournament bracket, there is no guarantee that these top seeds will pan out and it is therefore prudent to sprinkle some “Cinderella story” investments into your diversified portfolio. Just like a last-second game winning three-pointer, a phantom foul call, or lackluster play from a top basketball player, there could be many market surprises this year.

This information is compiled by Cetera Financial Group. 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 update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

Securities and insurance products are offered by Cetera Investment Services LLC (doing insurance business in CA as CFGIS Insurance Agency), member FINRA/SIPC. Cetera Investment Services is not affiliated with the financial institution where investment services are offered. Investment products are: * Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by any federal government agency.

All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.