2014 – 3rd Quarter Newsletter

Global stock markets generally fell in the third quarter. In the United States, larger-company stocks dominated, with the S&P 500 gaining 1.1% while smaller-company stocks were down 7.4%. Year to date, large-cap stocks have gained 8.2% versus a decline of 4.3% for the small-cap benchmark.

Our portfolios are tactically underweight small caps—a beneficial stance given this year’s performance divergence between the two asset classes. Our view has been that while U.S. stocks, broadly speaking, are somewhat expensive relative to companies’ earning potential (i.e., valuations are high relative to fundamentals), small caps have been particularly overvalued and are more vulnerable in market sell-offs.

Developed international and emerging-markets stocks fell during the quarter, particularly in dollar terms as the U.S. dollar rose against other currencies. (A stronger dollar reduces returns on investments denominated in foreign currencies.) In the bond market, yields rose slightly at the prospect of the Federal Reserve’s exit from its bond buying program and eventually beginning to raise rates (likely in 2015). The core bond benchmark was flat for the quarter.

Download and read full quarterly here.