28 Oct

What Do You See?

With just over two months remaining in the calendar year we are reminded that the one constant is change. In last quarter's letter we discussed "euphoria" and that investor sentiment had come a long way over the last 6 years, and how one of the next stops on the emotional train could be bliss. This could also represent a dangerous emotion as investors become complacent. Our vantage point is that investing remains a challenge and it is not likely to get any easier.


The third quarter of 2014 produced another positive return for US equity markets as measured by the S&P 500 Index® (+1.1%). This is the seventh consecutive quarter of positive returns and the US was the only country in the world with positive returns. At the end of the quarter and continuing into October, we have witnessed a return of volatility. Security prices for risky assets such as stock and high-yield bonds (perhaps a misnomer since higher risk bonds do not provide 'high yields' in today's market) have weakened early in the month while US Treasuries (presumably the 'safe' asset) rallied, from what arguably were high prices, to even higher prices. The rally of recent days stems from the perceived containment of Ebola (with no thanks attributed to media sources) and a decent earnings season but with divergent price direction depending on guidance for future periods.

There are many theories to explain recent market activity but most can be summed up by the October 7th release of the IMF's semiannual World Economic Outlook. Their forecast for economic global growth for 2014/15 declined and stock prices followed suit.

Interpreting the report, an optimist would emphasize the revised projection for 3.8% growth for next year remains an impressive figure especially when you consider where we are in the economic cycle. The pessimist's reading of these same facts would stress the direction of the change and that revised downward expectations at market tops are indications that a recession may come before the next leg of expansion. There is no shortage of data to support the notion that a recession is coming but we feel the US and Asia are far from one. Granted, Europe continues to face many systemic issues which will hinder sustained economic growth in that region.

We remain vigilant and recognize that we no longer enjoy a market characterized by cheap valuations and growing profits. Today, the risks appear far more balanced when profits and opportunities are judged against fiscal and political realities. Our holdings have reported mostly solid results for the quarter and we look forward to reviewing their outlook and expectations for 2015 and beyond.

As the end of the year approaches, we are reminded that it is not necessarily what you make, but what you keep that really matters. To this end, it is important to review opportunities to reduce potential tax liabilities. Some simple tactics can go a long way to minimize tax obligations. Make sure you have those conversations with your team of advisors.

Thank you taking the time to review our blog and have a fun and safe Halloween.


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