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October 3, 2015

3rd Quarter Highlights
• Risky assets (equities, high yield, commodities) sold off as investors flocked to the safety of fixed
income over mounting concerns of a global economic slowdown driven by China and uncertainty
surrounding the timing of the first Fed rate hike. Even YTD winners such as media and healthcare
were caught up in the broad market selloff.

• Within equities, Asian-ex-Japan markets performed the worst followed by ex-U.S. developed markets.
U.S. large cap growth was the best performing style, while utilities were the only sector to turn
in positive performance.

• The global economy showed signs of improvement with strong employment and housing driving
growth in the U.S. and Europe and Japan benefiting from quantitative easing to help drive export
growth. However, commodity prices led by oil and copper had begun to sell off in July amidst concerns
over global supply gluts.

• Then, the Peoples’ Bank of China (PBOC) unexpectedly devalued the Yuan on August 11 resulting in
a worldwide sell-off of equities and commodities. The resulting volatility and increased uncertainty
helped drive the Fed’s decision to not raise rates at its 9/16-9/17 meeting, surprising the markets,
which resulted in further selling. The Fed had, more or less, signaled that it will take into account
global market conditions in justifying its decision to hold rates, effectively becoming the world’s
Central Bank.

• Investors face an increasingly uncertain environment due to conflicting signals from economic releases
versus market price data. Employment and housing undergird U.S. strength while industrial
sentiment continues to improve in Europe and Japan. However, S&P companies are facing a period
where they may actually report a year-over-year decline in sales, something that typically happens
only in a recession. The bond market is also signaling deflationary concerns as indicated by widening
credit spreads, a flattening term structure, and falling breakeven rates. Investors will pay close attention
to 3rd quarter earnings releases for signs of further weakness. Fed watchers will also monitor
signs of inflationary pressure, particularly in employment cost indicators.

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