Investment Commentary – October 14, 2014

Dow – 16,315.19 (10/14/14 close)
S&P 500 – 1,877.70 (10/14/14 close)
10-year Treasury – 2.21% (10/14/14 close)

· The S&P 500 index has lost 6.6% since its September 18th record closing high and is now up just 1.6% for the year, while the Dow is down 1.6% since December 31, 2013.

· Global equities are now down roughly 8% from their summer highs, with emerging market stocks, U.S. small caps and oil all in correction territory (in other words, they have declined 10% or more).

· The selloff has been driven by a host of negative influences including the potential spread of Ebola, the effect of global economic weakness on U.S. earnings and plunging oil prices.

· In recent weeks, investors have been contending with 2 trends: anxiety over a change in Fed policy and evidence of a slowdown in the global economy.

· Economic reports from Europe are universally ugly. Germany’s economy, until now the major source of strength in Europe, declined during the 2nd quarter. The Italian economy also declined. France, Europe’s 2nd largest economy, has stagnated. Perhaps even more threatening than the prospect of a generalized recession are the inflation figures. Inflation prices across Europe have risen 0.3% during the past 12 months, far below the 2% ideal identified by the European Central Bank (ECB) and perilously close to deflation, a frightening condition widely associated with Japan’s more than 2 decades of economic decline.

· While global growth is likely to remain below historic norms, it is not collapsing. This suggests that investors should be positioned for a slow growth environment, not another recession.

· A strong U.S. economy continues to suggest a Fed tightening sometime in the 1st half of 2015. At the same time, the rest of the world appears to be decelerating, with a few notable exceptions, such as India.

· Analysts suggest looking for assets that can still do well in a slow-growth environment, such as large and mega-cap companies.

· In fixed income, analysts like high yield bonds. Recently high yield had sold off and now looks more attractive. The yield difference between high yield bonds and higher-quality, lower-yielding U.S. Treasuries (known as the spread), has widened out to the highest level in a year. This indicates high yield bonds offer better value and yields now than just a few weeks ago. Given that corporate America remains strong and default rates low, high yield now looks likely to provide a reasonable level of income relative to the rest of the fixed income market.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.