Market Perspectives

Richard Weiss
President & Chief Investment Officer
City National Asset Management

It was déjà vu all over again last week as investors flocked to quality - specifically - Treasury securities. Risky assets all lost significant ground. Domestic and international equities fell by 3-6%, depending on the sector and size classification. Year-to-date, the S&P 500 remains up by 17%.

Yields fell as bond prices moved higher. The three-month T-bill yield stands at 0.04%, while the 10-year Treasury bond yield fell to 3.4%.

The major economic news was the long awaited GDP growth figure for the third quarter. Real economic growth was widely expected to rise by 3%, but came in at 3.5%, a welcome surprise at first glance.

The positive number derived from increases in consumption, residential investment, federal spending and inventory rebuilding, but all of the fundamental growth in the quarter came from stimulus - so it remains to be seen if the economy is truly able to stand on its own when the federal assistance wears off. The latest measure of personal spending fell, which led to a significant market drop on Friday. Clearly, without the consumer re-engaging, our domestic economy and the financial markets in general will not be able to sustain consistent gains.

On a financial note, many of you are no doubt hearing about the phenomenal growth in what are known as "ETFs" which stands for "Exchange Traded Funds." ETFs are simply investment vehicles that trade very much like stocks. They offer liquid and cost efficient access to a wide variety of investments, asset classes and commodities that were not previously available to investors except in mutual funds or other, more illiquid packages.

ETFs now total more than $500 billion collectively and are gaining rapidly on mutual funds and stocks as the individual investor's vehicle of choice.

One can buy an ETF for something as simple as mirroring the movement in the S&P 500 or virtually any other major stock index. There are also ETFs that represent different countries or industrial groups, such as Mexico or technology stocks.

Some of the more exotic ETFs include: ones that follow the price of the commodity Palladium, companies located in Oklahoma and even companies involved in research of drugs for the treatment of skin disorders.

More recently, ETFs have been created to position an investor either for or against the value of the Dollar vis-à-vis other currencies, or ETFs that replicate the value of commodity baskets. In each case, the ETF offers us a direct, cost efficient method for gaining exposure to various asset classes.

Certainly, we're not recommending any of these in particular for purchase, but the wide variety and accessibility of these relatively new trading vehicles make them an excellent candidate to consider for any investor seeking additional diversification.

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.