Eaton Vance on the Markets

Our timely perspectives on the key global economic forces and the long-term investment strategies to consider.

This Just In: Market burps at the death of ZIRP

Timely perspectives on recent stock market volatility, April 11, 2014

Bill Hackney, Managing Partner, Atlanta Capital Management, LLC

Lower-quality and smaller-capitalization companies have led the bull market of the past five years. Underpinning their strong performance has been an extraordinary period of easy money characterized by the Fed’s zero-interest-rate policy (ZIRP), affecting short-term rates and quantitative easing (QE) that pressured long rates lower.

The recent market correction signals that an important inflection point has been reached: The end of extraordinarily easy money is now in sight. The Federal Reserve is scheduled to end QE in October and Fed Chair Yellen recently stated that six months later short rates could begin to rise. Investors are understandably nervous about the Fed’s ability to engineer a “return to normalcy” following a period of easy money that is without precedent in American history. That’s why the more speculative areas of the stock market – social media and biotechnology stocks, small-cap and lower-quality stocks – have taken such a beating in recent weeks.

In our view, the bull market in stocks is not over; it’s just reaching middle age. From here on, we believe leadership is likely to shift from smaller-cap and lower-quality to less expensive stocks found between the larger-cap and higher-quality issues. With monetary policy becoming less accommodative and the economic cycle maturing, equity investors may increasingly be concerned about issues of liquidity, earnings consistency and downside protection. These are the very qualities that characterize most large-cap, high-quality stocks.

What we’ve seen so far in 2014 is a stock market that is relieving a little bubble-like pressure that’s built up in its most extended and expensive sectors. It’s a burp, not a heart attack.

Eric Stein, Vice President, Co-Director, Global Income Group, Eaton Vance

- Market reactions to Fed policy – particularly in interest-rate and currency markets – have been stronger than they probably should be in both directions – though if we’re at an inflection point, this is understandable.

- The inflection point is that the Fed seems to be on a pretty clear path to tightening, QE taper is on a preset course and fed funds rate appears likely to rise during the second half of ’15 or Q1 ‘16.

- The Fed has been suppressing volatility and driving asset prices higher and higher over the past five years with ZIRP and QE, while the real economy has been slowly improving.

- As such, it is possible and perhaps even likely that we continue to have a gradually improving real economy, but asset prices become more volatile, with valuations appearing stretched in many areas and as the Fed unwinds.

Richard Bernstein, CEO and CIO, Richard Bernstein Advisors LLC

Markets often see more choppiness during parts of the midcycle because fiscal stimulus typically ends and the Fed begins to reverse course. That seems to be the situation today, and suggests the recent volatility might be more normal than many investors believe.

One has to be careful not to let normal midcycle volatility outweigh the search for opportunity.

The views and opinions expressed by the author are those of his own as of the date indicated, and do not necessarily represent the views of Eaton Vance. Any such views are subject to change at any time based on market or other conditions and Eaton Vance disclaims any responsibility to update such views.

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Market Insights

Market Insights

Equity Market Insight

Thomas E. Faust Jr., April 2014

After a powerful rally in 2013, the first quarter of 2014 saw the bull market demonstrate a measure of resilience in the face of several headwinds. In the latter half of January, stocks fell sharply on emerging-market concerns, with volatility spiking to more “normal” post-financial crisis levels. The market bounced back strongly in February and went on to record a new all-time closing high on March 7. Performance was choppy in the final few weeks of the quarter, as investors digested mixed economic reports, geopolitical issues and the latest U.S. Federal Reserve (Fed) meeting.

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Economic Insight: Fed policy goes back to the future

Thomas Luster, April 2014

We fully expected the strength the economy showed in late 2013 to carry over into 2014; however, that was simply was not the case. Instead, we saw weaker-than-expected economic data across a wide range of economic indicators.

In the coming weeks, we believe the data will confirm that severe winter weather patterns, slower global growth (especially in China) and a reduction of last year’s inventory build were worthy of blame for the loss of economic momentum in the first quarter.

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Are you managing volatility or is it managing you?

February 2014

Market volatility has often caused investors to make emotional decisions, resulting in performance that may have hindered their progress toward long-term goals.

Eaton Vance believes that a sound investment strategy can and should provide long-term investors with the tools needed to effectively manage market volatility.

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Confronting the tax drag

February 2014

• The impact of the “tax drag” on investor portfolios can be significant over long time frames, potentially consuming a quarter or more of every dollar earned by the average investor.
• As federal tax rates have risen for many investors, so too has the risk of losing a larger portion of one’s returns to taxes—highlighting the need for a tax-aware investment approach.
• Municipal and tax-advantaged bond strategies, tax-efficient equities and solutions for high-networth investors can all help improve investors’ after-tax portfolio performance.

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Solving the income puzzle: When traditional sources no longer complete the income picture, where’s an investor to turn?

Christopher Remington, Michael A. Cirami, Kathleen Gaffney, Scott Page; September 2013

• Income needs may be as high as they’ve ever been, while the yield potential from many traditional investment classes has dwindled to generational lows.
• Investors who remain in high-priced, low-yielding core bond strategies could experience loss of principal (and mounting retirement shortfalls) if interest rates revert toward their mean.
• We advocate creating an integrated, multi-pronged income plan that may offer yield potential that meets investor needs, while managing key risks found in the typical core fixed-income allocation.

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The unloved bull market: Richard Bernstein on the U.S. equity rally

Richard Bernstein, June 2013

The U.S. equity market has seen quite a rally in 2013. Both the Dow Jones Industrial Average and the S&P 500 Index eclipsed their 2007 record closing highs in the first quarter and are up 17.4% and 16.7%, respectively, year-to-date as of May 15, 2013. Additionally, the S&P 500 has risen more than 140% from its bear market low on March 9, 2009, having done so against a slowgrowth economic backdrop.1

1 Source: Factset. The Dow Jones Industrial Average is a price-weighted average of 30 U.S. blue-chip stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. Index performance is historical and not indicative of future results. It is not possible to invest directly in an index.

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