Value Sought Amid Current Market Turmoil

OCEAN CITY — After uncommonly smooth sailing last year, investors in U.S. stocks felt some ill winds in the first quarter. The harsh winter weather contributed to weak reports on the U.S. economy, while news from China and other Emerging Markets produced similar chilling effects. Another cross current earlier in the quarter arose from uncertainty over the change in leadership at the U.S. Federal Reserve (Fed).

For the first quarter, U.S. broad market fixed income outperformed domestic and global equities, and the biggest winners were commodities and gold.

With help from the bitterly cold weather in the U.S., commodities rose 7%. In an unexpected turn for most investors, gold finished up 6.5% for the quarter, after falling 28% in 2013. In our view, the outlook for gold remains challenged in 2014. Several drivers of gold prices, such as Fed easing and the interest rate outlook, are going through a transition this year. As such, we see fewer catalysts to drive prices higher. Our colleagues in Bank of America Merrill Lynch (BofAML) Global Commodities Research believe that gold will remain range bound for the duration of 2014.

politicians were less acrimonious and companies armed with cash and growth prospects were beginning to spend. After years in which growth was disappointing, analysts believed it could finally surprise to the upside.

Mother Nature had other plans. Severe weather across much of the country started to visibly suppress economic activity. Job growth slowed significantly in December and January. Manufacturing and housing activity also disappointed, leading economists to trim their expectations for the year. However, with the better weather there is reason to believe activity will bounce back. Recent reports show that consumers remain confident and job growth has improved.

We believe that U.S. economic growth will improve here and inflation will remain muted. A healthy and growing private sector is one reason for our conviction.

Our 2014 outlook continues to look for better economic growth in the U.S. and better growth and more liquidity for Europe and Japan. This supports our main 2014 themes — equities outperform bonds; higher interest rates in the U.S.; a stronger U.S. dollar; and higher volatility than in 2013.

(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)