Market Commentary

Patience and Time

February 2014

"The strongest of all warriors are these two — Time and Patience."

We've had a sharp market reversal in the past few weeks. Globally, there's worry about emerging market economies, the US economy whose readings have come in weaker than expected, and the Federal Reserve's taper policy. Bonds have rallied, stocks are down and there's been a flight to safety to gold and gold-related assets (your gold and gold-related holdings are up, some sharply, this year).

Against this broad backdrop, we will make the observation that we continue to think volatility - exactly these kinds of sharp reversals up and down - will continue to be the hallmark of a market that is strongly tied to the impact of the decisions made by the US Federal Reserve and how these decisions are perceived. Part of what has provided a negative backdrop against the past week is the Fed's decision to continue its plan of gradually cutting back on its open market purchases of long-term US bonds and mortgages. As one analyst pointed out, the decision to do this once (as the Fed did in December) is a single point, while the decision to do this twice (now in January) allows investors to draw a line, so investors are extrapolating out to the end of a Fed taper later this year. This re-introduces a big unknown as to the impact of this withdrawal both here and overseas, where plentiful and cheap dollars migrated in search of return during the years following the financial crisis of 2008-2009.

As for our potential next moves, we are patient, and so are your managers. We've been in touch with your managers in the past few days, and they are to varying degrees actively considering additions to your fund portfolios - including active assessment of where opportunity and transparency at the right price presents itself in emerging markets. This goes for both the bond and the stock investments in your portfolios. Your managers make the observation that while the aggregate markets appear cheap, quality companies in those markets that they would be interested in need to trade down before they reach the kind of discounts at which they like to buy more heavily. We agree with this patient approach and have confidence that they will open you up to new exposure as quality investments become more attractive based on price. Moreover, we are watching carefully to potentially open up new exposure in your portfolio with new managers as broader areas potentially become more attractive - such as emerging market or global stocks.

To date, the declines in equity prices here and in other developed markets have not been extensive, though they've come swiftly. We are watching very closely for opportunity. As always, we'll be in touch with you if we decide to make changes in your portfolios. In the meantime, we think your portfolios are currently well-positioned for an environment like this, and the hedges we've put into place are doing their job.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

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