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A Short Market Commentary – Third Quarter 2014

Although the Fed often stated that it had no set time frame for removing their ultra-accommodative policy (zero interest rates and QE), investors knew, given Chairman Bernanke’s exit strategy roadmap, that as long as the QE program was ongoing, they need not worry about imminent increases in the Federal Funds rate. Now that the QE program is complete, the data dependent nature of near term policy likely means that the reaction to future economic releases will be transmitted through to market prices in a more pronounced manner. Volatility in most asset classes will remain above the levels of the recent past. Additionally, announcements from central banks other than the Fed will likely have a greater focus as well.

Fixed income remains an area with potential returns that for the most part do not compensate the investor for the attendant risks. Total return will likely be relegated to coupon payments in most markets as capital appreciation from current levels is unlikely. Sovereign debt levels remain elevated yet yields are shockingly low. This is especially true in Europe where yields on some peripheral bonds were at times trading below U.S. treasuries. It seems once again that credit markets are assuming more unity in the European Union than the underlying reality as it now stands.

Interest rates back at the lower end of their recent trading range with the potential to stay contained make the dividend trade more attractive again as investors hunt for yield. The stronger dollar is a headwind for commodities which is a problem for some of the emerging markets; country selectivity is important as is capturing the growing consumerism through focusing below the largest market cap companies.

The potential for interest rates to remain low means that yield generating assets such as real estate should remain well bid. The expected increase in equity market volatility should be fruitful for the hedge fund space as well.

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