Quarterly Investment Briefing November 6, 2013

1. QuarterlyInvestment BriefingNovember 6, 2013 Clayton T. Bill, CFA Stephen J. Nilles, CFP

2. Capital Market Returns Period Ending September 30, 2013 Source: Russell

3. It’s Only a Market Peak Until The Next One Market has “peaked” 62 times since 1995Russell 1000® Index monthly data from 1/1995 – 9/2013 • Hitting a high mark doesn’t necessarily mean the market will drop the next period • Most of the 62 market “peaks” since 1995 don’t look like peaks when considered in a historical context • Current market does not appear over-valued compared to the average P/E ratio over this entire period P/E ratio= 16.9 P/E ratio= 17.9 P/E ratio= 30.6 Average P/E ratio = 19.8 Source: Russell

4. Record Corporate Profits Boost Equity Markets Source: J.P. Morgan

5. Don’t Fight the FedImpact at the short end of the yield curve FOMC Press Release Statement – September 18, 2013 “…the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” Money markets are generating negative real returns Source: Russell

6. Opportunities For The Global Investor Global Market Capitalization “Then and Now” 14% 34% • The past and present: • Global opportunity constantly changes • Performance leadership across asset classes switches (and quickly!) • The future: • Non-U.S. stock valuations currently appear attractive relative to the U.S. 1970 2013 66% 41% 45% • U.S. Equity • Non-U.S. Equity • Emerging Market Equity Equity Leadership Reversal Source: Russell

7. Developed Non-U.S. Equity MarketsLed Broad-Based Rally Strong returns in Europe spearheaded widespread gains across non-U.S. developed-country equity markets. Emerging markets rose also, recouping some year-to-date losses. Non-U.S. developed markets generally benefited from currencies rising against the weakening U.S. dollar. Gold bounced back from a steep Q2 drop, and commodities made modest gains. Source: Fidelity

8. Bonds Reverse From Sell-off in Second Quarter Most bond categories showed positive returns as interest rates stabilized. Credit sensitive classes such as high yield corporate bonds and leveraged loans led the way, boosted by steady economic data and the Fed’s continuation of QE at current levels. Long-term bonds fell as long-term yields rose, while TIPS signaled a modest increase in inflation expectations. Source: Fidelity

9. Muni Valuations Still Favorable, Fundamentals Improved Although fiscal challenges still exist for many municipalities, state revenues have improved for 14 straight quarters, and the recent uptick in property tax revenues is a positive sign for localities. Highly rated municipal bonds may still offer better tax-equivalent yields than comparable Treasuries, despite the sell-off in Treasuries earlier this year. Source: Fidelity

11. Global Business Cycle in a Trend of Modest Improvement The global economy continues to indicate a steady upward trend despite the relatively slow pace of overall growth. Most of the world’s developed economies – including Europe, the U.S. and Japan – remain in the more favorable early-cycle or mid-cycle phases. Despite late-cycle dynamics, China’s outlook has stabilized. Source: Fidelity

12. Late-Cycle Risks to U.S. Expansion Remain Low The U.S. economy has been in a slow mid-cycle expansion for more than three years, with few signs of late-cycle pressures: labor markets remain relatively slack, cyclical productivity continues to rise and boost corporate profit margins, inventory levels remain lean, and credit availability is easing amid accommodative Fed policies. Source: Fidelity

13. Government Debt & Deficit Battles: No market causality, but maybe no relation either Source: Russell

14. Near-Term Fiscal Outlook Improved, Long-Term Untenable Following fiscal consolidation measures over the past two years, the government budget deficit is projected to continue shrinking through 2015. However, projections of rising entitlement expenditures during the coming decades anticipate U.S. debt growing over the next 25 years to levels last seen during World War II. Source: Fidelity

15. U.S. Inflation Risks Remain Subdued Most of the dramatic increase in the monetary base has been held as excess bank reserves, not lent out. The drop in the velocity of money has effectively blunted the ability of the Fed’s balance sheet expansion to create inflation. Weak employment and low income growth have capped inflation in housing and services, the two largest components of the CPI. Source: Fidelity

16. Bonds Historically Less Volatile Even Amid Rising Rates Historically, investment grade bonds – the bond category most sensitive to interest rates – offered more downside protection than U.S. equities, even when rates were rising. During the 40-year bond bear market from 1941 to 1981, yields rose from 2% to 16%, yet bonds had less severe episodes of losses and lower frequencies of negative returns over all holding periods. Source: Fidelity

17. Federal Reserve Tightening Not Necessarily Bad for Equities While Fed tightening cycles have often led to increased volatility in equity markets, more often than not stocks have experienced positive real (inflation-adjusted) returns following the Fed’s first rate hike. Even if the Fed moves to taper its QE program, monetary tightening by itself does not necessarily indicate negative stock market performance. Source: Fidelity

18. Don’t Let Short-Term Government ConcernsDerail Your Long-Term Investment Plans • Government uncertainty is running high and may introduce market volatility, but economies and markets appear to be moving in the right direction • Tapering is an indication that the U.S. economy is getting stronger • Interest rates are gradually normalizing, creating an environment for modest positive bond returns Source: Russell

19. Don’t Let Short-Term Government ConcernsDerail Your Long-Term Investment Plans • Discipline and diversification are still among the best tools for navigating rough waters • Identify your long-term goals • Maintain the global diversification that will help get you there Source: Russell

20. 50th ANNIVERSARY OF THE KENNEDY ASSASSINATION A BENEFIT LECTURE FOR THE ALCOHOL & ADDICTIONS RESOURCE CENTER (AARC) AND CHILD AND PARENT SERVICES (CAPS) PRESENTED BY DR. JACK GORDON WHAT REALLY HAPPENED IN DALLAS AND WHY THE TRUTH STILL MATTERS 50 YEARS LATER November 7, 2013 7:00 PM THE LERNER -- 410 South Main Street, Elkhart, IN General Admission - $15 Seniors - $12.50 Students - $7.50