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 – – – – – – – – – – 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 • • • • • 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 – – – – – – – – 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.