Stock Market Commentary -

The S&P 500 has tallied 34 new highs year-to-date but it became a much bumpier ride in the third quarter. The S&P 500 ended the quarter up a mere 1.1%, though it was the leader among global equity markets. Investor attention alternated from strong economic news to the strengthening U.S. dollar to world events including the continuing conflict in Ukraine and the threat of ISIS. Stocks of smaller companies fell into negative territory during the quarter with the S&P Midcap 400 retreating 4% and the Russell 2000 Index sinking 7.4%. Stretched valuations of smaller companies have come into question because impending higher interest rates will have a more immediate impact on their profit margins versus larger companies. International markets struggled as well, with the MSCI EAFE dropping 5.7%, as European economies weakened amid geopolitical events. The MSCI Emerging Markets Index fell by 3.5%, disrupted by pro-democracy protests in Hong Kong. Market sectors that performed well during the quarter were Healthcare and Technology, up 5.5% and 4.8%, respectively. The Energy sector, down 8.6%, has come under pressure as worldwide demand is not keeping up with the ramped-up production coming out of the United States and Canada.

Bond Market Commentary -

The third quarter was difficult for bond funds with exposure to credit sensitive sectors such as corporate and high-yield debt. Investors withdrew cash from investment grade and high-yield bond funds during the quarter, while corporate debt issuance hit historic highs. High-Yield bonds lost 1.9% for the quarter but still enjoy big gains year-to- date. Conditions for sustained underperformance in the corporate bond sector such as weakening balance sheets, rising real interest rates, and tighter credit conditions, have not yet settled into place. Municipal bonds have been strong performers this year, bouncing back as headline news about issuers such as Puerto Rico and Detroit have become less prominent. Average maturity has played a big part this year in determining total return. The 10-year municipal bond index, for example, is up 7.1% year-over-year, while the 3-year index is up a relatively modest 1.9%. The short/intermediate part of the yield curve, including bonds with two and five year maturities, has started to shift upward as the market began to anticipate rate hikes by the Federal Reserve.