Global Economic Update & Strategic Investment Outlook Q2 2014
 

Global Economic Update & Strategic Investment Outlook Q2 2014

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An informative overview of the current state of the global economy and the many factors that impact investment strategies, and a look at domestic economic indicators that may impact them.

An informative overview of the current state of the global economy and the many factors that impact investment strategies, and a look at domestic economic indicators that may impact them.

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Global Economic Update & Strategic Investment Outlook Q2 2014 Global Economic Update & Strategic Investment Outlook Q2 2014 Presentation Transcript

  • CLICK TO EDIT MASTER TITLE STYLE GLOBAL ECONOMIC UPDATE & STRATEGIC INVESTMENT OUTLOOK Q2 2014 PRESENTED BY: DONALD LAUBACHER, CFP®, CPA
  • 2 GLOBAL MACROECONOMIC THESIS Global growth is poised to accelerate this year but intermediate term (2-5 years) growth potential is declining: • U.S. fundamentals are improving in a longer but less robust business cycle expansion • Europe is slowly but surely exiting recession despite choppy economic data and deflationary scares • Japan’s economic plan is the right prescription for increasing GDP and combating deflation • China is engineering a deceleration through a normalization of the investment - consumption tradeoff and positive economic reform • Emerging markets are a long term global growth driver and not a systematic risk despite a short term growth slowdown and turbulence
  • 3 GLOBAL MACROECONOMIC THESIS GLOBAL GROWTH IS POISED TO ACCELERATE THIS YEAR Developed economies may be the source of incremental global GDP (gross domestic product) growth for the next two years led by the U.S. and the Eurozone. SOURCE: INTERNATIONAL MONETARY FUND & BUREAU OF ECONOMIC ANALYSIS
  • 4 GLOBAL MACROECONOMIC THESIS GLOBAL GROWTH IS POISED TO ACCELERATE THIS YEAR Emerging market GDP growth in Latin America could somewhat offset China’s growth slowdown. SOURCE: INTERNATIONAL MONETARY FUND & BUREAU OF ECONOMIC ANALYSIS
  • 5 GLOBAL MACROECONOMIC THESIS GLOBAL GROWTH IS POISED TO ACCELERATE THIS YEAR However, the global intermediate term growth potential could decline as more normalized growth in both developed and emerging markets takes root. SOURCE: THE CONFERENCE BOARD
  • 6 GLOBAL MACROECONOMIC THESIS GLOBAL GROWTH IS POISED TO ACCELERATE THIS YEAR SOURCE: JP MORGAN The Global Purchasing Managers Indices (economic indicators based on monthly business activity surveys of private global companies) remain strong and continue to signal expansion (>50) for the global GDP growth.
  • 7 UNITED STATES MACROECONOMIC THESIS U.S. fundamentals are improving in a longer but less robust business cycle expansion: • Despite financial punditry to the contrary, the Fed created financial and monetary conditions to stimulate growth and stem financial system failure (QE1), prevent deflation (QE2), and offset severe fiscal tightening (QE3). • Leading economic indicators suggest economic momentum is positive though recent weather-induced (or otherwise) weakness is a concern. • The next recession continues to appear to be a ways away: o A sustained but mild business cycle expansion can continue considering still high unemployment, low inflation, and a Fed supporting the business cycle o Every business cycle downturn over the last century (save 1930’s and 1981) came after the output gap went positive and unemployment fell to below average levels o An inverted Treasury yield curve and negative aggregate money supply growth are 9 for 9 in predicting the last 9 business cycle downturns and tend to lead business cycle peaks by 6-10 months; today these indicators are flashing “green” not “red”
  • 8 UNITED STATES MACROECONOMIC THESIS FINANCIAL PUNDITRY ASIDE, THE FED FOSTERED GROWTH THROUGH FINANCIAL & MONETARY CONDITIONS SOURCE: JPMORGAN ASSET MANAGEMENT The narrative around the ultimate Fed’s impact on the economy, a debate that generally declines into an intellectual cul de sac, needs to fit logically into the actual behavior of market indicators and data. Financial and monetary conditions created an environment in which economic growth accelerated to a pace that will now foster further employment, capital spending, financing, etc. Actual data shows profits increasing and leverage declining since 2008.
  • 9 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: LEADING ECONOMIC INDICATORS = ECONOMIC MOMENTUM INCREASING Credit markets and financial conditions can provide a report card for the Fed’s monetary policy and provide hints of forthcoming problems. A good high frequency proxy for both is the weekly Federal Reserve Bank of Chicago’s National Financial Conditions Index shown above. Financial conditions still remain conducive to economic growth so far this year. SOURCE: FEDERAL RESERVE BANK OF CHICAGO & BLOOMBERG LOOSE/POSITIVE TIGHT/NEGATIVE -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CHICAGO FED NATIONAL FINANCIAL CONDITIONS INDEX
  • 10 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: LEADING ECONOMIC INDICATORS = ECONOMIC MOMENTUM INCREASING SOURCE: THE CONFERENCE BOARD & BLOOMBERG The Conference Board’s monthly Leading Economic Indicator Index, which incorporates 10 leading business cycle indicators capable of predicting recessions over the past 50 years, is pointing to an acceleration in real (inflation-adjusted) GDP during the quarters ahead. The quantity r, called the linear correlation coefficient, measures the strength and the direction of a linear relationship between two variables. If two variables have a strong positive linear correlation, r is close to +1. An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a relationship between two variables such that as values for one increases, values for the other also increase. Correlation coefficients whose magnitudes are between 0.7 and 1.0 are considered highly correlated. If two variables have a strong negative linear correlation, r is close to -1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a relationship between two variables such that as values for one increase, values for the other decrease. -25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 LEADING ECONOMIC INDICATOR INDEX Y/Y% REAL GDP Y/Y% (ADVANCED 1Q) r=0.85
  • 11 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: LEADING ECONOMIC INDICATORS = ECONOMIC MOMENTUM INCREASING The Institute for Supply Management’s Manufacturing Index (an economic indicator based on monthly manufacturing business activity surveys of private domestic companies) rose to 54.9 in April; as a leading indicator, this is a level consistent with +3-4% real (inflation-adjusted) GDP growth in the near future. SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS
  • 12 This may be a longer-than-average business cycle expansion, considering high unemployment, low inflation, and the Fed supporting the business cycle instead of suppressing it. Every business cycle downturn over the last century (save 1930s and 1981) came after the output gap went positive and unemployment fell to below average levels. The current output gap (the difference between actual and potential GDP as a % of potential GDP) is still negative. A positive output gap exists when demand grows faster than supply; this can accelerate inflation and lead to higher interest rates. UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY SOURCE: CBO & BLOOMBERG -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 CBO U.S. OUTPUT GAP
  • 13 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY SOURCE: MKM PARTNERS Labor market slack is NAIRU (the “non-accelerating inflation rate of unemployment” or the rate of unemployment just below the threshold where higher wages would start to cause higher inflation) minus the unemployment rate. Though employment is improving, there is still a lot of slack in the labor market and the threat to higher inflation is benign.
  • 14 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY Labor market slack will continue to decline as the employment level improves (gray line shown above). First-time jobless claims (a high frequency/weekly leading indicator of the labor market in green above), continues to improve and points to a fundamental improvement in the employment level, not simply the perception of one, similar to the early 90’s. SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS
  • 15 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY We would start to get more concerned about the business cycle if eventual Fed tightening (i.e. interest rates rising) were associated with a flat to inverted Treasury yield curve similar to July 2007. Today the yield curve is steep but has flattened since December and is a concern. SOURCE: US DEPARTMENT OF TREASURY 0% 1% 2% 3% 4% 5% 6% 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y U.S. TREASURY YIELD CURVE 5/31/2014 12/31/2013 7/31/2007
  • 16 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY The Personal Consumption Expenditure Index, excluding the more volatile components of food and energy, is the Federal Reserve Bank’s preferred way to measure inflation. The latest reading as of April was +1.6%, which is low compared to history. SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS
  • 17 UNITED STATES MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: THE NEXT RECESSION IS STILL A WAYS AWAY We would also be concerned about the business cycle if the Fed was reducing the money supply (i.e., negative money supply growth). Today the money supply is growing. SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS
  • 18 EUROPE MACROECONOMIC THESIS Europe is slowly but surely exiting recession despite choppy economic data and deflationary scares: • While not necessarily clear sailing, the region is emerging from its 18-month recession as leading economic indicators suggest economic momentum is present • Potential help from the European Central Bank in the form of increased monetary accommodation will provide support until the economy is fully healed
  • 19 EUROPE MACROECONOMIC THESIS EXITING RECESSION: LEADING ECONOMIC INDICATORS = ECONOMIC MOMENTUM PRESENT SOURCE: MARKIT ECONOMICS Eurozone GDP rose +0.9% y/y in Q1 2014. The Eurozone Composite PMI Index (an economic indicator based on monthly business activity surveys of private companies in the Eurozone) is a powerful leading indicator for future GDP growth and has improved since recent troughs in 2009 and 2012.
  • 20 EUROPE MACROECONOMIC THESIS FUNDAMENTALS ARE IMPROVING: LEADING ECONOMIC INDICATORS = ECONOMIC MOMENTUM INCREASING r=0.79 The quantity r, called the linear correlation coefficient, measures the strength and the direction of a linear relationship between two variables. If two variables have a strong positive linear correlation, r is close to +1. An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a relationship between two variables such that as values for one increases, values for the other also increase. Correlation coefficients whose magnitudes are between 0.7 and 1.0 are considered highly correlated. If two variables have a strong negative linear correlation, r is close to -1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a relationship between two variables such that as values for one increase, values for the other decrease. SOURCE: BLOOMBERG The Eurozone Financial Conditions Index (considered an accurate gauge of overall financial and credit market conditions in the Eurozone) is also a powerful leading indicator for future GDP growth and a good scorecard for ECB direction. The index has improved since recent troughs in 2008 and 2011 and shows ample financial accommodation. -6% -4% -2% 0% 2% 4% 6% -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 1999 2001 2003 2005 2007 2009 2011 2013 BLOOMBERG EUROZONE FINANCIAL CONDITIONS INDEX (LEFT) EUROZONE REAL GDP Y/Y% (ADVANCED 2Q; RIGHT)
  • 21 EUROPE MACROECONOMIC THESIS EXITING RECESSION: DEFLATIONARY SCARES? SOURCE: BARCLAYS Inflation in the euro area as a whole has been on a downward trend since 2012 and below 1% since October 2013. Core inflation reached a historical low of 0.7% at the end of 2013, with some peripheral countries posting outright deflation. Unemployment is at a record high of 12% and capacity utilization is still well below the historical average.
  • 22 JAPAN MACROECONOMIC THESIS Japan’s economic plan AKA “Abenomics” is the right prescription for increasing GDP and combating deflation: • Aggressive monetary stimulus, increased public infrastructure spending, and currency devaluation to make exports more attractive has worked so far and leading economic indicators continue to point in the right direction • Monetary and financial conditions remain easy and, as a result, bank lending is finally improving and providing growth capital to the economy • Long term forward corporate profit estimates and inflation are picking up, but a weaker currency has not resulted in increased exports over the last two quarters
  • 23 JAPAN MACROECONOMIC THESIS ECONOMIC PLAN IS THE RIGHT PRESCRIPTION FOR INCREASING GDP AND COMBATING DEFLATION SOURCE: THE BROOKINGS INSTITUTION/JOSHUA HAUSMAN & JOHANNES WIELAND “Abenomics” is working. Japan’s working age population is in sharp decline, a significant headwind to economic growth but an important criteria to judge the plan’s effectiveness. While Abenomics so far has shown only mildly above-average growth in GDP, it has shown stellar growth in GDP per working age adult i.e., much of the success of Abenomics so far has been masked by demographics.
  • 24 JAPAN MACROECONOMIC THESIS ECONOMIC PLAN IS THE RIGHT PRESCRIPTION FOR INCREASING GDP AND COMBATING DEFLATION SOURCE: ORGANISATION FOR ECONOMIC CO-OPERATION & DEVELOPMENT, ECONOMIC & SOCIAL RESEARCH INSTITUTE & BLOOMBERG The OECD and ESRI leading economic indicator indices, both of which incorporates leading business cycle indicators capable of predicting recessions, are pointing to an acceleration in GDP during the quarters ahead. 0.0 20.0 40.0 60.0 80.0 100.0 120.0 96.0000 97.0000 98.0000 99.0000 100.0000 101.0000 102.0000 103.0000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 OECD JAPAN COMPOSITE LEADING ECONOMIC INDEX (LEFT) ESRI BUSINESS CYCLE LEADING INDICATORS INDEX (RIGHT)
  • 25 JAPAN MACROECONOMIC THESIS ECONOMIC PLAN IS THE RIGHT PRESCRIPTION FOR INCREASING GDP AND COMBATING DEFLATION SOURCE: BLOOMBERG Monetary and financial conditions are accommodating and business confidence in the economic plan remains high. As a result the monetary base and bank lending growth is in sync and has improved since 2010. -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 JAPAN BANK LENDING GROWTH Y/Y% JAPAN MONETARY BASE GROWTH Y/Y%
  • 26 JAPAN MACROECONOMIC THESIS ECONOMIC PLAN IS THE RIGHT PRESCRIPTION FOR INCREASING GDP AND COMBATING DEFLATION SOURCE: BLOOMBERG Japan’s economic plan has successfully increased inflation/avoided detrimental deflation in the short term. However, true success will be determined by the sustainability of inflation over the longer term. There have been short term successes in the past that ultimately did not work out. -3% -2% -1% 0% 1% 2% 3% 4% 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 JAPAN CPI Y/Y%
  • 27 CHINA MACROECONOMIC THESIS China is engineering a deceleration through a normalization of the investment/consumption tradeoff and positive economic reform: • Averted a hard landing during the recent global slowdown and now appears to be free of a major financial crisis despite recent fears associated with ongoing economic reforms in its transition to a more market-oriented and balanced (investment vs. consumption) economy • Recent economic news flow has been poor and leading economic indicators are sending worrying signs about intermediate term economic growth, which can pose difficulties for the government in maintaining the momentum of economic reforms in 2014 and beyond • In contrast to the rest of the world but appropriate for its business cycle and economic evolution, monetary and financial conditions have tightened
  • 28 CHINA MACROECONOMIC THESIS DECELERATION THROUGH NORMALIZATION SOURCE: MKM PARTNERS & BLOOMBERG Retail sales have been outpacing industrial production for most of the last two years, which can be interpreted as a subtle shift toward consumption and away from an investment-led economy. 0% 5% 10% 15% 20% 25% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CHINA RETAIL SALES GROWTH Y/Y% CHINA INDUSTRIAL PRODUCTION GROWTH Y/Y%
  • 29 CHINA MACROECONOMIC THESIS DECELERATION THROUGH NORMALIZATION SOURCE: MARKIT ECONOMICS & HSBC Recent economic news flow has been poor and leading economic indicators are sending worrying signs about intermediate term economic growth.
  • 30 CHINA MACROECONOMIC THESIS DECELERATION THROUGH NORMALIZATION SOURCE: BLOOMBERG Monetary and financial conditions have tightened with the monetary base growth slowing down causing liquidity to tighten and short term interest rates to rise. 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 0% 5% 10% 15% 20% 25% 30% 35% 2005 2007 2009 2011 2013 CHINA MONETARY BASE GROWTH Y/Y% (LEFT) CHINA 2YR GOVERNMENT BOND YIELD (RIGHT)
  • 31 EMERGING MARKETS MACROECONOMIC THESIS Emerging markets are a long term global growth driver and not a systematic risk despite a short term growth slowdown and turbulence: • Demographics and a catch up in productivity should drive emerging markets to around 70% of global growth through the end of the decade • All major developed economies are moving in the right economic direction for the first time in a long time, and, despite recent turbulence, this will ultimately benefit emerging markets in general which are commodity and industrial manufacturing export oriented • Emerging markets continue to adjust sovereign balance sheets as a consequence of depreciating currencies, inflation concerns, and higher global interest rates resulting in a short term growth downshift
  • 32 EMERGING MARKETS MACROECONOMIC THESIS LONG TERM GLOBAL GROWTH DRIVER AND NOT A SYSTEMATIC RISK SOURCE: CITI RESEARCH Economic Growth = POPULATION GROWTH + PRODUCTIVITY GROWTH
  • 33 ASSET ALLOCATION THESIS Overweight fairly valued equities on improving macroeconomics and relative valuation vs. fixed income; alternative assets remain necessary by adding non-correlated risk-adjusted performance: • Global Equity valuations are currently inline to slightly higher than their 10-year historical averages; Japan, China and emerging markets are exceptions and remain undervalued o U.S. Equities have largely priced in the prospective economic improvement, which means share price gains are likely to be modest from here; prefer large cap over small cap and value over growth o International developed equity markets have not fully priced in a prospective economic improvement in most major regions (i.e. Europe and Japan) and share price gains should be better than U.S. equities going forward as economic data improves • Fixed Income allocations are preparing for higher interest rates = lower portfolio duration and a higher exposure to more opportunistic areas such as floating rate, high yield, and convertible bonds SOURCE: OHIO DEPARTMENT OF JOBS & FAMILY SERVICES/BUREAU OF LABOR MARKET INFORMATION Past Performance is not indicative of future results.
  • 34 ASSET ALLOCATION THESIS OVERWEIGHT EQUITIES ON RELATIVE VALUATION VS. FIXED INCOME; ALT ASSETS REMAIN NECESSARY The relative global valuation of equities over fixed income is very attractive compared to the long-term history. SOURCE: JPMORGAN ASSET MANAGEMENT & CITI RESEARCH
  • 35 EQUITY ALLOCATION THESIS U.S. EQUITY SOURCE: JPMORGAN ASSET MANAGEMENT The U.S. equity markets have largely priced in the prospective economic improvement, which means share price gains are likely to be modest from here even if economic data improves, as we expect it will. Nonetheless, we do not see a compelling reason to be negative with recession risk low and leading indicators of earnings and growth on the upswing.
  • 36 EQUITY ALLOCATION THESIS INTERNATIONAL DEVELOPED EQUITY SOURCE: JPMORGAN ASSET MANAGEMENT International developed equity markets have not fully priced in a prospective economic improvement in most major regions (i.e. Europe and Japan). Share price gains should be better than U.S. equities going forward as economic data improves, as we expect it will.
  • 37 THE POWER OF ASSET ALLOCATION, PORTFOLIO DIVERSIFICATION & A GLOBAL PERSPECTIVE A commitment to fixed income provides both balance and diversification. Bond market declines have been small and short-lived compared to stock market declines. SOURCE: PIMCO Data shown depicts stocks represented by the S&P 500 Index and bonds are represented by the Barclays US Aggregate Index.
  • 38 THE POWER OF ASSET ALLOCATION, PORTFOLIO DIVERSIFICATION & A GLOBAL PERSPECTIVE Proper portfolio and asset class diversification will achieve highly favorable risk-adjusted returns over full market cycles. SOURCE: JPMORGAN ASSET MANAGEMENT Indexes and weights of the traditional portfolio are as follows: 55% in the S&P 500 Index, 30% Barclays Capital Aggregate Index, 15% MSCI EAFE Index. Portfolio with 25% in alternatives is as follows: 22.2% S&P 500 Index, 8.8% Russell 2000 Index, 4.4% MSCI EM Index, 13.2% MSCI EAFE Index, 26.5% Barclays Capital Aggregate Bond Index, 8.3% CS/Tremont Equity Market Neutral Index, 8.3% DJ UBS Commodities Index, 8.3% NAREIT Equity REIT Index. Return and standard deviation calculated using Morningstar Direct. Charts are shown for illustrative purposes only. Past performance is not indicative of future returns. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data are as of 03/31/14, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 02/28/14.
  • 39 WHAT CAN GO WRONG? • U.S. GDP acceleration does not happen as key economic drivers breakdown: o Housing stalls on higher interest rates o Capital spending does not follow through o Government interference: fiscal policy, debt ceiling debate, shutdown, etc. • U.S. GDP acceleration happens too fast/the economy is much stronger than we anticipate, and the Fed raises rates earlier than expected or appropriate. • Europe does not successfully exit recession and deflation sets in. • Japan’s rising government debt cost overwhelms the country’s ability to service that debt. • China stumbles in its transition to a more market-oriented economy (recent data has been disappointing). • Emerging market turbulence spirals into a full blown financial crisis similar to the late 90’s. • Adverse geopolitical event in any one of the contentious areas of the world (Middle East, Africa, Russia vs. the West, China vs. Japan, etc.). • The Great Unknown.
  • 40 AKRON ECONOMIC INDICATORS
  • 41 Questions?
  • 42 Contact Information DON LAUBACHER, CFP®, CPA EXECUTIVE VICE PRESIDENT, WEALTH PLANNING Email: dlaubacher@sequoia-financial.com Phone: (330) 255-2130
  • 43 DEFINITIONS All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Barclays Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. Barclays Capital Emerging Markets Bond Index (“Emerging Market Bonds”) includes USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays Capital, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability. Barclays Capital Global Aggregate ex U.S. Bond Index (“International Bonds”) is a measure of global investment grade debt from 22 different local currency markets. This multi- currency benchmark includes fixed-rate treasury, government-related, corporate and securitized bonds from both developed and emerging markets issuers. The Global Aggregate Index is largely comprised of two major regional aggregate components: the Pan-European Aggregate and the Asian-Pacific Aggregate Index. In addition to securities from these three benchmarks, the Global Aggregate Index also includes investment grade Eurodollar, Euro-Yen, Canadian, and 144A index-eligible securities not already in the two regional aggregate indices. Barclays Capital Government Bond Index (“Government Bonds”) is the Government component of the Barclays Capital U.S. Aggregate Index. Barclays Capital Municipal Bond Index (“Municipal Bonds”) includes bonds that are rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates and derivatives are excluded from the benchmark. Barclays Capital U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. Barclays Capital U.S. Aggregate 1-3 Year Bond Index (“Short Term Bonds”) covers the universe of bonds in the Barclays U.S. Aggregate Index that mature within 3 years. Barclays Capital U.S. Aggregate 5-7 Year Bond Index (“Intermediate Term Bonds”) covers the universe of bonds in the Barclays U.S. Aggregate Index that mature between 5-7 years. Barclays Capital U.S. Aggregate 10+ Year Bond Index (“Long Term Bonds”) covers the universe of bonds in the Barclays U.S. Aggregate Index that mature +10 years from present. Barclays Capital U.S. Corporate High Yield Bond Index (“High Yield Bonds”) covers the universe of fixed rate, non-investment grade corporate bond debt and includes original issue zeroes, step-up coupon structures, and 144-As. Barclays Capital U.S. Corporate Investment Grade Bond Index (“Corporate Bond”) is the Corporate component of the Barclays Capital U.S. Aggregate Index. CS/Tremont Equity Market Neutral Index takes both long and short positions in stocks with the aim of minimizing exposure to the systematic risk of the market (i.e., a beta of zero). It is a component of the Credit Suisse/Tremont Equity Hedge Fund Index is compiled by Credit Suisse Tremont Index, LLC. It is an asset index weighted hedge fund index and includes only funds as opposed to accounts. The Index uses the Credit Suisse/Tremont database, which tracks over 4500 funds, and consists only of funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements. It is calculated and rebalanced on a monthly basis, and shown net of all performance fees and expenses. It is the exclusive property of Credit Suisse Tremont Index, LLC. Dow Jones-UBS Commodity Index (“Commodities”) is composed of futures contracts on physical commodities and represents twenty two separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc.
  • 44 DEFINITIONS All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. MSCI ACWI (All Country World Index) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2009, the index consisted of 45 country indices comprising 23 developed and 22 emerging market country indices. MSCI EAFE (Europe, Australia, & Far East) Index (“Internation Equity”) is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. MSCI Emerging Markets Index (“Emerging Market Equity”) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2007, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of June 2007, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure frontier market equity performance in 26 frontier market countries as defined by MSCI. The MSCI Frontier Market Indices include large, mid and small cap representation and cover approximately 98% of the investable equity universe across all frontier markets countries. NAREIT Equity REIT Index (“Real Estate”) is designed to provide the most comprehensive assessment of overall industry performance, and includes all tax-qualified real estate investment trusts (REITs) that are listed on the NYSE, the American Stock Exchange or the NASDAQ National Market List. Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000. Russell 1000 Growth Index (“US Large Cap Growth Equity”)measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index (“US Large Cap Value Equity”) measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. Russell 2000 Growth Index (“US Small Cap Growth Equity”) measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 2000 Value Index (“US Small Cap Value Equity”) measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. S&P GSCI Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. Individual components qualify for inclusion in the index on the basis of liquidity and are weighted by their respective world production quantities. U.S. 10-Year Treasury is a component of the United States government debt obligation stock that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
  • 45 IMPORTANT DISCLOSURE INFORMATION This material does not constitute tax, legal, investment or any other type of professional advice. You should consult with a qualified tax, legal or financial advisor prior to making a decision. Information has been obtained from sources believed to be reliable, but we do not guarantee their accuracy or completeness. While we have taken great care in the preparation of these materials, we cannot be responsible for clerical, computational, or other errors. Certain assumptions may have been made by these sources in compiling such information, and changes in such assumptions may have material impact on the information presented herein. We may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Prior reports reflect the different assumptions, views and analytical methods of the individuals who prepared them. Indices are shown for comparative and informational purposes only. Indices are unmanaged, assume reinvestment of income, and do not reflect the impact of advisory fees or transaction costs. Use of indices as benchmarks may have limitations because benchmarks may involve securities, and may have volatility and other material characteristics, that differ from a given manager/fund performance data. An investor cannot invest directly in an index. Reference to an index does not imply that a portfolio will achieve return, volatility, or other results similar to an index. This material is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based upon their specific financial situations and investment objectives. Income from an investment may fluctuate and the price or value of financial instruments described in this report may rise or fall. Except where otherwise indicated herein, the information provided herein is based on matters as they exist as of the date of preparation, and may not be updated or otherwise revised to reflect information that subsequently becomes available, or changes occurring after the date hereof. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. These materials do not take into account your specific circumstances and we do not represent that this material is complete or applicable to your situation. Past performance is not necessarily indicative of future results. Any hypothetical investment performance data contained within this document are included for illustrative and informational purposes only, not as a representative of past or future results. Actual results will vary from those illustrated.
  • 46 IMPORTANT DISCLOSURE INFORMATION Certain information contained herein constitutes forward-looking statements which can be identified by the use of terms such as “may,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” (or the negatives thereof) or other variations thereof. Due to various uncertainties and actual events, including those discussed herein and in other documents, actual results or performance may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward-looking statements in making their investment decisions. We have no duty to update or amend such forward-looking statements. An investment in any vehicle discussed herein has not been recommended or approved by any U.S. Federal or state or any non-U.S. regulatory authority. Furthermore, the foregoing authorities have not passed upon the accuracy or determined the adequacy of this presentation. Any representation to the contrary is a criminal offense. Sequoia Financial Advisors, LLC does not provide tax or legal advice. These professionals should be consulted separately before implementing changes to your tax or legal matters. Circular 230: Any tax advice or communication contained within this document was not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed. Sequoia Financial Group, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials. These materials are made solely available for informational purposes and do not constitute an offer by Sequoia Financial Group, LLC, or its related entities, to buy or sell any instrument, trading strategy or investment fund. Investment advisor services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor, 3500 Embassy Parkway, Akron, OH 44333, 330-375-9480.
  • 47 SUMMARY & QUESTIONS? Thank You!