Following several years of relatively benign capital market volatility, it appears wider swings may finally be upon us. January produced multiple moves up and down in excess of 3%. Market Perspectives explores the meaning behind the volatility and how we may seek to take advantage of it.

1. Market Perspectives - February 2015
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Overview: After several years of generally benign market volatility, we believe
2015 could see broader market swings. Although in the month of January the
S&P traded within a somewhat narrow range, we did experience more
volatility with multiple moves both up and down of 3-4%. This month we
explore the rationale behind the possibility of increasing volatility and discuss
how we will seek to opportunistically take advantage.
January Market Gyrations

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What Do We Mean by Volatility?
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• Since 2011, the market has
not experienced a pullback
of greater than 10%
(although we came close in
October ‘14). On average,
we experience a 10%
decline every year.
• Looking at this longer term
trend, market declines have
seemed minor and quickly
erased losses.
• As you will note in the
coming slides, we expect
markets to normalize with
modestly more future
volatility.

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The Fed’s Exit
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• The Federal Reserve’s rate
“manipulation” is coming to
a close.
• It is widely anticipated that
after more than 6 years of a
near zero interest rate
target, the Fed will begin
raising rates this year (with
many expecting them to do
so in the summer time
frame and at the latest,
early in 2016).
• Removing this so-called
“Fed Put”, in which the Fed
bails out the market with
any weakness, logically
could cause more volatility.

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Large Currency Swings
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• With the U.S. Dollar Index up
almost 20% in the last 9
months (moves not typically
seen in currency markets),
we may see large price moves
(both negative and positive)
in asset classes affected by
currencies.
• Oil, which trades in U.S.
Dollars, has already seen
such a move.
• We would also expect to see
some earnings volatility
amongst U.S. multinationals
as it becomes more
expensive for foreign nations
to purchase the goods and
services of these companies.

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Corporate Earnings & Profit Margins
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• The thin vertical line represents the
current quarter’s expectations for S&P 500
sales and earnings growth. The next four
quarters are on the right side of the chart,
reflecting consensus expectations and the
left side shows the last four historical
quarters of S&P 500 sales and earnings
growth.
• With about half of the S&P 500 companies
having reported Q4 2014 earnings, sales
growth is slightly negative and earnings
growth is a modest 3.5%.
• The energy sector’s rapid decline may
throw future S&P 500 earnings growth in
to negative territory for the first time in
quite a while, with growth expected to pick
up later this year.
• With labor markets beginning to firm-up,
we also may see some profit margin
pressures.
• Swings in earnings may tend to cause
market volatility over time.

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How Does This Translate to Client Portfolios?
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• Risk management remains one of our foremost objectives for clients. We seek a
reduction of volatility by utilizing a variety of different investment strategies. In
other words, it is important to be flexible and have some level of “defense on the
field.” When appropriate, we can offer additional protection via portfolio
hedging.
• Simply stated, our goal is to dramatically reduce downside capture in client
portfolios.
• We seek to be opportunistic in adding to asset classes and securities that offer
attractive risk/reward opportunities based on this risk management process.

7. Market Perspectives – February 2015
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Conclusion: Many of the safety nets that have buoyed markets and
reduced volatility are advancing towards their latter stages. We believe
this may yield more market volatility than in recent experience as well as
offer potentially interesting opportunities. As always, with the flexibility
to preserve client capital, we are seeking to invest in asset classes and
securities with favorable risk/reward outcomes.
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8. Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for any
specific person for any particular purpose. We utilize information sources believed to be reliable, but
cannot guarantee the accuracy of those sources. Past performance is no guarantee of future
performance; investing involves risk and may result in loss of capital. Consider seeking advice from a
professional before implementing any investing strategy.
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Disclaimer
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