Third-Quarter 2014
Market Overview
Presented by Ruth M. Matt, CFP ®
Fore River Financial, 22 Free St, Suite
201, Portland, ME 04102
207-450-5032
Commonwealth Financial Network® does not provide legal or tax advice.
You should consult a legal or tax professional regarding your individual situation.
Securities offered through Commonwealth Financial Network ®, Member
FINRA/SIPC, a Registered Investment Adviser.
Economic Summary: Third-Quarter (Q3) 2014
• Milestones
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Equity markets pause ahead of global slowdown uncertainty.
Pro-democracy protests break out in Hong Kong.
Ukraine to seek full EU membership by 2020, president says.
Global trade to grow less than forecast, WTO reports.
Alibaba goes public, the largest IPO in history.
Scotland votes to stay in the UK.
ECB readies asset-buying program.
EU and U.S. resume trade talks following NSA spying.
Russian sanctions increase.
Bond prices grind higher despite taper and end of easing.
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates,
projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks
and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Economic Themes
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Equities/fixed income
Housing
Credit and banking
Employment
Business and manufacturing activity
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations,
estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve
certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Equities
Q3 2014: Equity Returns by Style
Value
Blend
3-year volatility in returns
Growth
16.14
13.10
Large
−0.19
0.65
1.49
Mid
−2.65
−1.66
−0.73
Small
−8.58
−7.36
−6.13
11.09 10.78 10.98
Large
Growth
Large
Blend
Large
Value
Mid
Growth
15.22
14.63
12.27 11.80
Mid
Blend
Source: Commonwealth Asset Management/Morningstar Direct
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Mid
Value
Small
Growth
Small
Blend
Small
Value
20
19.42
20.18
19.76
19.93
15.29
16.55
14.61
18.09
15.63
17.23
17.04
16.25
12.88
12.42
10
0
Q3 2014: S&P 500 Sector Valuations
S&P 500 sectors (using 10-year averages)
35
PE_Ratio
30
Stock Price Averages: Dow Jones 30 Industrials, NYSE
25
Standard & Poor's 500 Stock Price Index
20
13000 18.73
19.77
18.59
20.85
1425
19.03
19.26
17.49
17.34
17.04
15.50
15
13.81
14.05
12.57
17.64
15.54
12500
13.24
16.47
1350
17.54
16.59
High
13.36
Current
Median
10
Low
12000
1275
11500
1200
11000
1125
5
0
10500
1050
NOV DEC JAN FEB MAR APR MAY JUN JUL
11
Sources: Dow Jones, Wall Street Journal /Haver Analytics
AUG SEP OCT
Source: Commonwealth Financial Network/Bloomberg
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Q3 2014: Global Equity Valuations
Equity asset classes (using 10-year averages)
70
PE_Ratio
60
50
40
High
30
Current
Median
22.10
20
23.59
21.32
23.29
21.03
23.57
19.42
20.18
19.76
21.52
20.91
23.82
22.26
19.93
15.29
16.55
14.61
17.23
17.04
10
0
Source: Commonwealth Financial Network/BloombergS&P 500 sectors (using 10-year averages)
35
PE_Ratio
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
30
Low
18.09
15.63
16.25
12.88
12.42
Fixed Income
Q3 2014: Fixed Income Returns by Style
2009
2010
2011
2012
2013
Q3
High-Yield
57.51
High-Yield
15.19
U.S.
Treasury
9.81
Emerging
Markets
18.62
High-Yield
7.42
U.S.
Treasury
0.34
Emerging
Markets
28.78
Emerging
Markets
12.24
Corporates
8.15
High-Yield
15.59
Mortgage
−1.39
U.S. Core
0.17
Corporates
18.68
Corporates
9.00
Emerging
Markets
8.02
Foreign
Sovereign
13.97
Corporates
−1.53
Mortgage
0.15
3-year volatility in returns
8.02
6.49
5.58
4.47
Foreign
Sovereign
11.64
U.S. Core
6.54
U.S. Core
7.84
Corporates
9.82
U.S. Core
−2.02
Corporates
−0.07
U.S. Core
5.93
U.S.
Treasury
5.87
Mortgage
6.14
U.S. Core
4.21
U.S.
Treasury
−2.75
Emerging
Markets
−0.89
Mortgage
5.76
Mortgage
5.67
Foreign
Sovereign
4.78
Mortgage
2.59
Foreign
Sovereign
−4.05
Foreign
Sovereign
−1.61
U.S.
Treasury
−3.57
Foreign
Sovereign
4.05
High-Yield
4.38
U.S.
Treasury
1.99
Emerging
Markets
−6.45
High-Yield
−1.92
2.23
Mortgage
2.79
2.67
US Core
Us
IG
High Yield Foreign Emerging
Treasury Corporates
Sovereign Markets
Source: Commonwealth Asset Management/Morningstar Direct
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Treasury Yields
Where Are Rates Headed?
High-Yield Spread
Past performance is no guarantee of future results.
Municipal and Corporate Yields
Announcement
Past performance is no guarantee of future results.
Housing
Prices and Supply
Supply
Down Payment Percentage
Credit and Banking
TED Spread
European Crisis
Inflation
Employment
Change in Nonfarm Payrolls
Source: Commonwealth Asset Management/Bloomberg
Strong!
Unemployment Rate
Average Weekly Hours
Business and Manufacturing
ISM Manufacturing
Robust!
Leading Indicators Index
Economic Expansion
Conclusions
• Job growth was strong in Q3; unemployment fell to 5.9 percent.
• Economic indicators are strongly positive.
• The housing recovery is still progressing, but price increases
may slow in the near term.
• GDP growth is expected to continue, with 2014 projections
hovering in the 3.5-percent range.
• Average weekly hours moved higher, fueling talk of
wage inflation.
• Fixed income yields continue to move lower.
• Municipals witnessed a strong rebound after a lackluster 2013.
• Diffusion index shows strong labor growth in all sectors.
Looking Forward . . .
• Key themes to monitor
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Is the taper no longer an issue?
Earnings season for Q3 (beat or miss estimates?)
Will influx of housing inventory curtail price increases?
ECB and quantitative easing
Will the strong dollar hurt growth domestically?
Election season
Credit spreads move higher but still low compared with averages
Equity valuations retreat to long-term averages from
multiyear highs
– Oil price decline and impact on domestic energy boom
Disclosure
Investing involves risks, including loss of principal amount invested due to market
fluctuations. All indices are unmanaged, and investors cannot invest directly in an index.
Past performance is not indicative of future results. The S&P 500 Index is a broad-based
measurement of changes in stock market conditions based on the average performance
of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted
average of 30 actively traded blue-chip stocks. The Bank of America Merrill Lynch US
Corporate Index tracks the performance of U.S. dollar-denominated investment-grade
corporate debt publicly issued in the U.S. domestic market. The Merrill Lynch Municipal
Master Index tracks the performance of U.S. dollar-denominated investment-grade taxexempt debt publicly issued by U.S. states and territories, and their political subdivisions,
in the U.S. domestic market. The Bank of America/Merrill Lynch High Yield Master II
Index tracks the performance of U.S. dollar-denominated below-investment-grade
corporate debt publicly issued in the U.S. domestic market. International investing
involves special risks such as currency fluctuation and political instability. The
commodities industries can be significantly affected by commodity prices, world events,
import controls, worldwide competition, government regulations, and
economic conditions.