INVESTMENT REVIEW
As the year drew to a close, a handful of big-picture issues dominated the investment landscape: the plunging price of oil, positive economic indicators in the U.S. relative to most of the globe, and the ongoing influence of central banks (a key effect of which has been to bolster stocks and other risk assets). In the financial markets, the year saw strong gains for U.S. large-cap stocks and core bonds with lagging performance elsewhere. 


 
 
INVESTMENT REVIEW
Global stock markets generally fell in the third quarter. In the U.S., larger-company stocks dominated, with the S&P 500 gaining +1.1% while smaller-company stocks were down -7.4%. Year to date, large-cap stocks have gained +8.2% versus a decline of -4.3% for the small-cap benchmark. Our view has been that while U.S. stocks, broadly speaking, are not cheap relative to companies’ earning potential, small caps have been slightly overvalued and are more vulnerable in market sell-offs. 

 
 
One thing that stands out about the past quarter amidst the record-setting highs of the S&P 500 is the very low stock market volatility. By late June (6/19/14), the VIX, a volatility index that measures expected 30-day volatility of the S&P 500, had dropped to 10.6, a level last seen in February 2007.

While low volatility and high stock prices reflect the market’s apparent lack of concern about risk—likely buttressed by a belief that the Federal Reserve will continue to support financial markets with accommodative monetary policy—this seeming complacency is causing us some near-term concern because it suggests a market more vulnerable to negative surprises.