presented by ruth matt 22 free street, suite 201 portland , me 04101 (207)899-0531
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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.
Presented by Ruth Matt22 Free Street, Suite 201
Portland, ME 04101(207)899-0531
Third Quarter 2013Market Overview
Economic Summary: Third Quarter 2013
• Milestones– Equity markets hit all-time high (again)– U.S. government begins partial shutdown– BlackBerry agrees to be taken private in $4.7B deal– Merkel scores decisive victory in German election– Fed continues bond-buying program– Verizon’s $49B bond deal sets record in Vodafone acquisition– SEC approves advertising for hedge funds and private offerings– Europe agrees on further aid tranche for Greece– Housing recovery appears strong despite rise in rates– Detroit declares bankruptcy– Syria overshadows economic issues at G-20 meeting
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
• Equity/fixed income• Housing• Credit and banking• Employment• Consumer behavior• 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.
Q3 2013: S&P 500 Index and Dow Jones Industrial Average
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Stock Price Averages: Dow Jones 30 Industrials, NYSE
Standard & Poor's 500 Stock Price Index
OCTSEPAUGJULJUN11
MAYAPRMARFEBJANDECNOVSources: Dow Jones, Wall Street Journal /Haver Analytics
13000
12500
12000
11500
11000
10500
1425
1350
1275
1200
1125
1050
Stock Price Averages: Dow Jones 30 Industrials, NYSE
Standard & Poor's 500 Stock Price Index
SEPAUGJULJUN13
MAYAPRMARFEBJANDECNOVOCTSources: Dow Jones, Wall Street Journal /Haver Analytics
15750
15000
14250
13500
12750
12000
1800
1725
1650
1575
1500
1425
1350
Q3 2013: Equity Returns by Style
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
Value Blend Growth
Large 3.94 6.02 8.11
Mid 5.89 7.70 9.34
Small 7.59 10.21 12.80
Source: Commonwealth Asset Management/Morningstar Direct
Large Growth
Large Blend
Large Value
Mid Growth
Mid Blend
Mid Value
Small Growth
Small Blend
Small Value
12.56 12.74 13.3515.15 14.59 14.29
17.9617.14 16.53
3-Year Volatility in Returns
Q3 2013: Fixed Income Returns by Style
Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.
2009 2010 2011 2012 Q3High-Yield
57.51High-Yield
15.19
U.S. Treasury
9.81
Emerging Markets18.62
High-Yield2.29
Emerging Markets28.78
Emerging Markets12.24
Corporates8.15
High-Yield15.59
Foreign Sovereign
1.33
Corporates18.68
Corporates9.00
Emerging Markets
8.02
Foreign Sovereign
13.97
Emerging Markets
1.11
Foreign Sovereign
11.64
U.S. Core6.54
U.S. Core7.84
Corporates9.82
Mortgage1.08
U.S. Core5.93
U.S. Treasury
5.87
Mortgage6.14
U.S. Core4.21
Corporates0.82
Mortgage5.76
Mortgage5.67
Foreign Sovereign
4.78
Mortgage2.59
U.S. Core0.57
U.S. Treasury
−3.57
Foreign Sovereign
4.05
High-Yield4.38
U.S. Treasury
1.99
U.S. Treasury
0.10
Source: Commonwealth Asset Management/Morningstar Direct
2.092.82
3.59
4.55
6.627.15
8.28
3-Year Volatility in Returns
Fixed Income
Treasury Yields
Yield up = Price down
10-Year Treasury Note Yield at Constant Maturity
Avg, % p.a.
SEPAUGJULJUN13
MAYAPRMARFEBJANDECNOVOCTSource: Federal Reserve Board /Haver Analytics
3.00
2.75
2.50
2.25
2.00
1.75
1.50
3.00
2.75
2.50
2.25
2.00
1.75
1.50
Net Flows into Bank Loan Funds
Source: Morningstar Direct/Haver/Commonwealth Investment Research
Fixed Income
Past performance is no guarantee of future results.
High Yield Spread
BOA ML HY Master - 10-year US Treasury
OCTSEPAUGJULJUN13
MAYAPRMARFEBJANDECNOVSource: Haver Analytics
5.6
5.2
4.8
4.4
4.0
3.6
3.2
5.6
5.2
4.8
4.4
4.0
3.6
3.2
Fixed Income continued
Past performance is no guarantee of future results.
Announcement
BofA Merrill Lynch Municipal Master Index: Yield to Worst
%
1312111009080706050403Source: Bank of America Merrill Lynch /Haver Analytics
6
5
4
3
2
6
5
4
3
2
Housing
Housing: Prices and Supply
CoreLogic National House Price Index% Change - Year to Year NSA, Jan-00=100
1-family homes sold/1-family homes for sale
131211100908070605040302Source: Haver Analytics
20
10
0
-10
-20
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Housing: Prices and Supply continued
Composite Housing Affordability IndexMedian Inc=Qualifying Inc=100
Contract Rates on Commitments: Conventional 30-Yr Mortgages, FHLMC%
1005009590858075Sources: NAR, FRB /Haver
240
200
160
120
80
40
20
16
12
8
4
0
Credit and Banking
Credit and Banking: TED Spread
TED Spread
(3-mo LIBOR minus 3-mo t-bill)
1312111009Source: Haver Analytics
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Credit and Banking: Inflation
Velocity of Money: Ratio of Nominal GDP to Money Supply M2% Change - Year to Year Ratio
CPI-U: All Items, 1982-84=100Y/Y %Change
10050095Sources: MA/FRB/H, BLS /Haver
8
4
0
-4
-8
-12
-16
6
4
2
0
-2
-4
r = 0.44
Employment
Change in Nonfarm Payrolls
Source: Commonwealth Asset Management/Bloomberg
Strong!
Unemployment Rate
U-6 Unemployment Rate
SA, %
10050095Source: Bureau of Labor Statistics /Haver Analytics
12
10
8
6
4
12
10
8
6
4
Marginally Attached Workers
Persons Not in LF: Want a Job, Searched, Available to Work Now
12-month %Change NSA, Thous
10050095Source: Bureau of Labor Statistics /Haver Analytics
60
40
20
0
-20
-40
60
40
20
0
-20
-40
Business and Manufacturing
ISM Manufacturing
ISM Mfg: PMI Composite Index
SA, 50+ = Econ Expand
10050095Source: Institute for Supply Management /Haver Analytics
67.5
60.0
52.5
45.0
37.5
30.0
67.5
60.0
52.5
45.0
37.5
30.0
ISM Nonmanufacturing
Strong move!
ISM Nonmanufacturing: NMI Composite Index
SA, 50+=Increasing
100500Source: Institute for Supply Management /Haver Analytics
65
60
55
50
45
40
35
65
60
55
50
45
40
35
Capacity Utilization
Capacity Utilization: Industry
SA, Percent of Capacity
13121110090807060504Source: Federal Reserve Board /Haver Analytics
84
80
76
72
68
64
84
80
76
72
68
64
Gross Domestic Product% Change - Year to Year SAAR, Bil.$
Commonwealth Labor Index% Change - Year to Year
1005009590Source: Haver Analytics
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
12
8
4
0
-4
-8
Economic Expansion
Conclusions
• Job growth was strong in Q3; unemployment fell to 7.3 percent.• Inflation is not a large concern, for now.• ISM indices hit post-recession highs in some cases.• Treasury rates moved aggressively higher across the curve,
prompting bond outflows.• Dividend sectors, especially utilities, saw pricing pressure as
rates moved higher.• The housing recovery is still progressing, but pricing may slow
in the near term.• GDP growth is expected to continue but could see a headwind
as the government shutdown ripples through the economy.
Looking Forward . . .
• Key themes to monitor– Nomination of Yellen as new Fed Chairman– Impact of government shutdown on broader economy– Earnings season for Q3 (beat or miss estimates?)– Will the rise in mortgage rates curb the housing recovery?– Europe and economic outcome– Ongoing debt ceiling debate– Emerging markets manufacturing in Q3– Fed “tapering” and direction of Treasury rates
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 tax-exempt 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.
Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, they offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
Investments in floating-rate securities are subject to significant credit, interest rate, valuation, liquidity, and inflation risk. Floating-rate securities tend to attract investors during periods when interest rates are rising but may be less attractive when interest rates are falling. Floating-rate securities have a variable interest rate that will go up and down, or ‘float,’ to reflect changes in current market rates.
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