Market Perspectives

Richard Weiss
President & Chief Investment Officer
City National Asset Management

Everything – except oil – went up last week. Stocks, bonds, commodities, private equity, hedge funds all enjoyed 1-3% gains or more on relatively little economic news.

The major domestic equity indices rose 2-3% on average, while the major international equity markets gained 3-4%. Year-to-date, all the major markets remain up by 20% or more.

Three-month T-bill yields held steady at 0.05%, while the 10-year Treasury rate inched down to 3.4%. The Dollar lost ground against most foreign currencies last week and year-to-date, remains down by 1% against the Yen, 6% against the Euro and more than 12% against the Pound.

This week we wanted to update you on City National Asset Management's latest investment strategy shift. In addition to our heavier emphasis on international equities, which we implemented several months ago, we are now beginning to shift our domestic stock portfolios to value stocks at the margin. This style allocation, toward value stocks and away from growth-oriented issues is something we will be implementing over the next several weeks in client portfolios.

Our quantitative forecasting models, which are used as part of our strategic positioning, have been increasingly pointing towards value since early in the year. This shift will be made in a sector-neutral fashion - in other words, we are not prepared to over or underweight any particular economic sector of the market at this time, but rather, we are tilting toward any and all stocks that show value characteristics. We will seek to integrate this rebalancing with our normal year-end tax-driven rebalancing.

We will focus on three factors in determining the value tilt in our core equity portfolios:

• Price/Book
• Forecasted P/E
• Dividend Yield.

We will be seeking to increase our portfolios' average dividend yield and reducing the P/B and P/E measures.

We believe that value-oriented stock issues will be in favor over the coming months, after being out-of-favor for most of the last several months based on a number of factors.

The current level of real bond yields, slope of the yield curve, level of credit spreads, and size of the equity risk premium all point to a resurgence of out-performance in value stocks given where we currently stand in the economic cycle.

Thank you all and have a good week.

This article is for information and education purposes only and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients. Clients should evaluate the merits and risks associated with relying on any information provided.