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Market Insight - October 2014

Unwillingly investors took the ice bucket challenge in September. Momentum slowed, and global uncertainty, both financial and political, hit financial markets with a splash of cold water. Despite this, both markets and client investment returns remain in positive territory for 2014 to date. However, performance diverged in some important asset classes.


Large U.S. stocks, our core growth investments, marginally advanced in the third quarter. The Dow eked out a small 1.3% gain, and remained ahead 4.1% for the year, while the S&P 500 added fractionally in the third quarter, but held an 8.16% gain for the year. Mid-sized companies, measured by the S&P Midcap 400, are up 7.8% for 2014. Small companies, however, bore the brunt of investors’ concern, as the Russell 2000 and the S&P Small Cap 600 flirted with correction territory, and ended September down 4.3% and 3.6% respectively for the year.  Global market returns reflected heightened concern over events in the Ukraine, violence in the Gaza Strip, an ever worsening pace of the Ebola epidemic in Africa, and finally, the commencement of air operations against the rogue state of ISIL, now established in Iraq (and most frighteningly, in Syria as well.) Developed markets, measured by the MSCI index fund (EFA), have fallen a little more than 2% for the year; while emerging markets

were flat for US investors. The more visible emergence of violence and heightening concerns over global stability came hand in hand with some sobering economic developments; China’s GDP growth, always an engine of global demand, slowed alarmingly, with August numbers coming in at the lowest levels since the recession. Speaking of recessions, Europe is perilously close to recession again, which would be the third since 2008, and despite efforts of the central bank to stimulate the EU, they may have come too late. In retrospect, their early austerity policies wrong-footed the EU ‘s chances of a moderate recovery; now they seem alarmingly close to another deflation. 

Our alternate asset class, real estate , measured by returns of Cohen & Steers Realty fund, was a bright spot, gaining 13.5% year to date, while our focus investment in biotechnology, measured by IBB, the Nasdaq biotechnology index, surged over 20%.

As investors sought a safe haven, bonds and fixed income, for the most part, benefited.  High yield securities, however, sold off over concerns that Fed action on short term rates may come sooner than anticipated, but still retained a close to 3% gain for the year. Global bonds of developed markets ended the quarter mostly flat for the year, although emerging market bonds, measured by the  T. Rowe Price Emerging Market Bond Fund,  added nearly 6%.  U.S. Government bonds, measured by the Ishares 7-10 year Treasury Bond index, ended the quarter up 5.9%, while tax free municipals, measured by the Ishares AMT Free National Muni Bond Index MUB, added 7.75%.

Fear of a market pullback seems at times to have reached a fever pitch, and financial media, like the chorus in a Greek tragedy, endlessly intones its dire warnings every time the markets have a bad day. Should we really be so fearful of a market correction?  No, and for several reasons. First, markets pullbacks are much more common than we think, since we forget about them quickly when they turn out to be transitory and meaningless, which is the case most of the time. Second, if we have done our job and developed appropriate allocations for our clients’ portfolios, we should be able to weather these periodic declines without permanent damage, and in many cases, be able to rebalance and add to our investments at more attractive prices, “buying low.” Thirdly, while often gut wrenching, these pullbacks are absolutely necessary for financial markets to align themselves to fair value. This constant ebb and flow of prices, mediating among 

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