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November 24, 2014

2014 Third Quarter Economic & Market Overview

The Economy The domestic economic landscape improved markedly in the third quarter, emerging from a first half that did not quite live up to expectations. The Bureau of Labor Statistics raised its third estimate of second quarter gross domestic product…

2014 Third Quarter Economic & Market Overview

The Economy

Market Index ReturnsThe domestic economic landscape improved markedly in the third quarter, emerging from a first half that did not quite live up to expectations. The Bureau of Labor Statistics raised its third estimate of second quarter gross domestic product (GDP) to +4.6%, a robust about-face from the -2.9% contraction of the first quarter. The reversal did not come as a surprise, as many economists had noted that economic data was exhibiting strength in many segments. The gains in the third quarter were led by an increase in consumer spending, which was fueled by an improving employment situation, record stock prices, and firming housing values. The employment situation was somewhat mixed during the quarter, with an average of about 207,000 jobs added each month during the quarter. The unemployment rate also declined to 6.1%, a cycle low.

Globally, the recovery has been a bit more challenging. While the U.S. and Canada have seemingly turned the corner towards acceleration, the eurozone’s economy has had a difficult time generating steam, and continues to be hampered by high levels of unemployment and large amounts of debt. The recent decline in the euro should help exports, and could perhaps serve as a catalyst for sustained improvement. Japan’s economy has slowed considerably following an April sales tax increase.

Economists expect China to remain a key driver of global growth going forward, but policymakers will be seeking to manage an unwinding of the credit bubble and a cooling off of the property market without adversely impacting other areas of the economy. Still, recent data suggest that the economy will end the year below the 7.5% annual growth target, and policymakers may take further stimulus measures to mitigate a further slowdown.

Sector ReturnsDuring the third quarter the Federal Open Market Committee (FOMC) affirmed its commitment to keeping the fed funds rate near 0% for a “considerable time,” language that many economists believe will be altered during the committee’s December meeting. In addition, the FOMC further reduced its asset purchase program, and stated that it will end in October. A growing consensus among economists is that the FOMC will begin to raise the fed funds rate sometime in the latter half of 2015.

The domestic economic landscape in the second quarter remained mixed, after the effects of severe weather in the first quarter lingered. The Bureau of Labor Statistics lowered its third estimate of first quarter gross domestic product (GDP) to -2.9%, reflecting a broad-based contraction in many areas of the economy, including consumer spending, exports and business investment. It was the largest decline in GDP in five years. The employment situation continued its trend of modest improvement, with an average of about 200,000 jobs added each month during the quarter. In addition, payroll employment finally exceeded the pre-financial crisis peak, having recovered the 8.7 million jobs lost in the recession.

– Posted by Chris

Disclaimer

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this quarterly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet | PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Index Overview

The S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. The S&P/Case-Shiller Home Price Indices measure the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. The Morgan Stanley EAFE Index represents 21 developed markets outside of North America. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index of investment-grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. The index may include emerging market debt. The Barclays Municipal Bond Index is an unmanaged index comprised of investment-grade, fixed-rate municipal securities representative of the tax-exempt bond market in general. The Barclays 1-3 Year Credit Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that are rated investment-grade (BBB- or higher) by at least two of the major ratings agencies, have maturities between one and three years, and have at least $250 million par amount outstanding. The Barclays 7-10 Year Credit Index includes publicly issued U.S. corporate and specified foreign debentures and secured notes that are rated investment-grade (BBB- or higher) by at least two of the major ratings agencies, have maturities between seven and ten years, and have at least $250 million par amount outstanding. The DJ-UBS Commodity Index Total ReturnSM measures the collateralized returns from a basket of 19 commodity futures contracts representing the energy, precious metals, industrial metals, grains, softs and livestock sectors. The Russell 1000 Index is a market capitalization-weighted benchmark index made up of the 1000 largest U.S. companies in the Russell 3000 Index (which comprises the 3000 largest U.S. companies). The Russell Midcap Index is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Consumer Price Index (CPI) measures the change in the cost of a fixed basket of products and services. The Gross Domestic Product (GDP) rate is a measurement of the output of goods and services produced by labor and property located in the United States.

 

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