Capital Markets Flash Summary Third Quarter 2014 Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for investment, accounting, legal and tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only. The views expressed are those of Strategic Asset Alliance. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.
SAA Capital Market Commentary – 3 rd Quarter 2014 GLOBA OBAL FINANCI NCIAL MARKE KETS TS Despite a challenging September, global equities (+0.9%) eked out a modest gain, for the ninth consecutive quarter of positive returns. Ongoing geopolitical tensions in Ukraine and the Middle East, Portuguese banking woes, European economic malaise, and the prospect of an accelerated US Federal Reserve (Fed) interest-rate-hike time line all conspired to stall the five-year old global stock rally. In addition, China’s property slump and poor GDP readings in Japan and the Eurozone raised the specter of a slowdown in global economic growth. Nevertheless, there were several positive developments during the quarter: The European Central Bank (ECB) increased its accommodative monetary policy to spur growth, the People’s Bank of China (PBOC) eased monetary conditions to reduce financial fragilities and lower the risk of a hard landing, and the US corporate-earnings season painted a generally encouraging picture. Despite these upbeat events, many market participants found ample reason to reassess their risk appetites, given the strong bull market in recent years. Global fixed income markets reflected a relatively cautious tone during the third quarter amid rising geopolitical tensions and renewed concerns about global growth. The flight-to-quality rally, combined with expectations for continued easy policy by major central banks fueled by a weakening global recovery and falling inflation, led to a decline in global government bond yields. Divergence of economic performance and monetary policy between the US and the rest of the world led to rising volatility and a broad US-dollar rally in the currency markets. U.S. FINA NANCI NCIAL MARKE KETS TS The 10yr U.S. Treasury yield fell 4.2 bps to 2.49% during the quarter. Longer-term interest rates in the U.S. declined, aided by demand for safe-haven assets, while shorter-dated Treasury yields rose in anticipation of tighter Fed monetary policy. US inflation-linked bonds returned -2.0% as headline and core inflation in the US fell during the quarter. Spread-sector performance was mixed on a total-return and duration-equivalent basis, as spread widening offset falling yields in many cases. A bit of a rollercoaster ride, but US equities (+1.1%) rose for the seventh straight quarter. The S&P 500 Index reached an all- time high around mid-September but sold off nearly 2% during the final eight trading days of the quarter. Fear gripped the market and looks to continue into Q4 as heightened geopolitical risks, a potential Portuguese banking crisis, and worries of Fed tightening took center stage. 1 Sources: SAA, Wellington, Bloomberg
Key Capital Market Index Returns Index Asset Class Jul-14 Aug-14 Sep-14 Q3-2014 YTD Alerian MLP Master Limited Partnerships -3.55% 8.19% -1.56% 2.73% 19.48% Dow Jones Industrial Average U.S. Equity -1.44% 3.60% -0.23% 1.87% 4.60% Barclays Capital Municipal Bond U.S. Fixed Income 0.18% 1.21% 0.10% 1.49% 7.58% S&P Composite 1500 Growth U.S. Equity -1.63% 4.38% -1.40% 1.24% 8.26% S&P 500 U.S. Equity -1.38% 4.00% -1.40% 1.13% 8.34% S&P Composite 1500 U.S. Equity -1.76% 4.10% -1.79% 0.44% 7.49% Merrill Lynch US Treasury Master U.S. Fixed Income -0.15% 1.22% -0.63% 0.43% 3.65% Barclays Capital U.S. Aggregate U.S. Fixed Income -0.25% 1.10% -0.68% 0.17% 4.10% Citigroup 3-month T-bill Cash/Cash Equivalent 0.00% 0.00% 0.00% 0.01% 0.03% Barclays Capital U.S. Credit U.S. Fixed Income -0.06% 1.44% -1.44% -0.08% 5.60% Credit Suisse Leveraged Loan Index U.S. Fixed Income -0.04% 0.23% -0.52% -0.33% 2.43% S&P Composite 1500 Value U.S. Equity -1.90% 3.79% -2.21% -0.44% 6.65% BofA Merrill Lynch US Convertibles U.S. Convertible Bond -2.04% 3.52% -3.03% -1.66% 7.70% Barclays Capital U.S. Corporate High YieldU.S. Fixed Income -1.33% 1.59% -2.09% -1.87% 3.49% Barclays U.S. Treasury: U.S. TIPS U.S. Fixed Income 0.03% 0.44% -2.50% -2.04% 3.67% MSCI World Index World Equity -1.57% 2.24% -2.67% -2.05% 4.33% Dow Jones U.S. Select REIT U.S. Real Estate 0.21% 2.79% -5.82% -3.00% 14.69% Citigroup WorldBIG Index World Fixed Income -0.88% 0.54% -2.67% -3.01% 1.62% MSCI EM (EMERGING MARKETS) International Equity 2.02% 2.29% -7.39% -3.36% 2.75% S&P MidCap 400 U.S. Equity -4.27% 5.08% -4.55% -3.98% 3.22% MSCI World Ex. US Index World Equity -1.78% 0.09% -4.07% -5.69% -0.25% MSCI EAFE Index International Equity -1.96% -0.15% -3.81% -5.83% -0.99% S&P SmallCap 600 U.S. Equity -5.49% 4.30% -5.37% -6.73% -3.72% Stocks ultimately advanced across Q3 2014 with the S&P 500 closing at a new peak of 2,011.36 on September 18. Still, the 3-month gain of the index was minor at 1.13%. A raft of indicators showed the economy in reasonable health, but not so healthy that the Federal Reserve was motivated to alter its exit plan for QE3. Home sales were up and down in the quarter; prices of key commodities fell. Overseas manufacturing gauges left Wall Street unimpressed; performance of foreign stock indices varied greatly. Questions emerged about how well the aging bull market might fare with oncoming shifts in U.S. monetary policy. Indices sorted by Q3 performance. 2 Source: WSJ, Zephyr StyleAdvisor
Fixed Income Sector Yields & Returns While rates for the majority of fixed income spread sectors increased during the quarter, municipal credit spreads tightened in the third quarter as credit conditions improved generally across state-issued general obligations bonds and fundamentals continue to remain positive across essential service revenue bonds. 3
Fixed Income Sector Total Returns / Duration 4 Source: Bloomberg
U.S. Equity Market Focus: Earnings vs. Revenue Growth How much more market appreciation is there with limited revenue growth? Dividend yield and dividend growth strategies pose a better value proposition in this type of environment. 5 Source: The Economist
Fixed Income Market Focus: Who owns U.S. Treasuries? As the Fed tapering programs ends, how long will the cost of U.S. government debt service continue to benefit from low world government yields and the appetite of foreign buyers? 6
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