3Q 2011 Capital Markets Review

Third Quarter 2011: Market Review & Outlook

Once again, macroeconomic risks dominated asset performance across the globe, with volatility rising after remaining mostly subdued in the second quarter, and stock markets pulling back sharply. As the quarter moved forward, we faced one crisis after another, with each finding its own short term solution but leaving longer term concerns unanswered. With an uncertain growth outlook and high levels of volatility, risk assets sold off in the quarter, logging the worst performance since the Financial Crisis.

In the end, US stock markets fell 13.9% in the third quarter (see Exhibit 1), driven by financial and materials stocks. Overseas markets did even worse with the EAFE benchmark falling 19.0%, dragged down by Europe which fell 22.6%. On the other hand, US Treasury bond markets rallied, with government bonds rising 3.2% as interest rates fell to record low levels. High quality corporate bonds held up as well but high yield bonds sank 6.1% as investors fled to safer assets. Commodities, down 11.3%, were weak on lower growth forecasts and gold, up 8.0%, took a wild ride hitting record levels only to meet selling in the latter part of the quarter.

Debt Debates Create Volatility

As we discussed last quarter, the markets have been dominated by a handful of macroeconomic risks: US economic growth, the European sovereign crisis, and developing nation growth and inflation. On top of that, we had the

debt ceiling debate and subsequent S&P downgrade of the country’s long-term debt rating. Whether the risks were real or perceived had become irrelevant as the ensuing volatility led investors to forgo equity investments. The impact on economic growth has also become a concern with the high levels of uncertainty damaging consumer and business confidence.

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3Q 2011 Capital Market Review

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