We have seen the cracks begin to emerge in the equity story over the past week.  Earnings are beginning to come in and so far have been a disappointment.  The retail sector is showing signs that Q4 was weaker than originally expected, with store cuts announced by, Sears, J.C. Penney, and Macy’s and job cuts at Target.  Emerging markets have been roiled this week, with Argentina shifting policy, likely devaluing their currency, and other currencies plunging.  China surprised on Thursday with their purchasing manager’s index showing a contraction.  How quickly the tables have turned so far in 2014.  After posting a 30% return (on the S&P 500 index) in 2013, we have seen a 3% hit so far this year.

This equity reaction is not any surprise to us.  The Shiller P/E ratio now stands near 25, a level which has been breached only four times in the last 100 years.1

As we look forward, we see little in way of catalysts for equities to continue to rise in 2014, and so far, this is proving to be the case.  Cost cutting has played its course and now we are left with minimal top line growth.  Unemployment remains elevated and it has been a painfully slow recovery, with economic data going in fits and starts of improving and then weakening again. While there may be selective opportunities for stock pickers to make money, we believe that by and large the beta trade in equities will not be there in the year ahead.  What is there to drive equity prices going forward?

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