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Third Quarter 2013Market Overview

Economic Summary: Third Quarter 2013

• Milestones– Equity markets hit all-time high (again)– U.S. government begins partial shutdown– BlackBerry agrees to be taken private in $4.7B deal– Merkel scores decisive victory in German election– Fed continues bond-buying program– Verizon’s $49B bond deal sets record in Vodafone acquisition– SEC approves advertising for hedge funds and private offerings– Europe agrees on further aid tranche for Greece– Housing recovery appears strong despite rise in rates– Detroit declares bankruptcy– Syria overshadows economic issues at G-20 meeting

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

Economic Themes

• Equity/fixed income• Housing• Credit and banking• Employment• Consumer behavior• Business and manufacturing activity

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

Q3 2013: S&P 500 Index and Dow Jones Industrial Average

Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Stock Price Averages: Dow Jones 30 Industrials, NYSE

Standard & Poor's 500 Stock Price Index

OCTSEPAUGJULJUN11

MAYAPRMARFEBJANDECNOVSources: Dow Jones, Wall Street Journal /Haver Analytics

13000

12500

12000

11500

11000

10500

1425

1350

1275

1200

1125

1050

Stock Price Averages: Dow Jones 30 Industrials, NYSE

Standard & Poor's 500 Stock Price Index

SEPAUGJULJUN13

MAYAPRMARFEBJANDECNOVOCTSources: Dow Jones, Wall Street Journal /Haver Analytics

15750

15000

14250

13500

12750

12000

1800

1725

1650

1575

1500

1425

1350

Q3 2013: Equity Returns by Style

Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Value Blend Growth

Large 3.94 6.02 8.11

Mid 5.89 7.70 9.34

Small 7.59 10.21 12.80

Source: Commonwealth Asset Management/Morningstar Direct

Large Growth

Large Blend

Large Value

Mid Growth

Mid Blend

Mid Value

Small Growth

Small Blend

Small Value

12.56 12.74 13.3515.15 14.59 14.29

17.9617.14 16.53

3-Year Volatility in Returns

Q3 2013: Fixed Income Returns by Style

Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

2009 2010 2011 2012 Q3High-Yield

57.51High-Yield

15.19

U.S. Treasury

9.81

Emerging Markets18.62

High-Yield2.29

Emerging Markets28.78

Emerging Markets12.24

Corporates8.15

High-Yield15.59

Foreign Sovereign

1.33

Corporates18.68

Corporates9.00

Emerging Markets

8.02

Foreign Sovereign

13.97

Emerging Markets

1.11

Foreign Sovereign

11.64

U.S. Core6.54

U.S. Core7.84

Corporates9.82

Mortgage1.08

U.S. Core5.93

U.S. Treasury

5.87

Mortgage6.14

U.S. Core4.21

Corporates0.82

Mortgage5.76

Mortgage5.67

Foreign Sovereign

4.78

Mortgage2.59

U.S. Core0.57

U.S. Treasury

−3.57

Foreign Sovereign

4.05

High-Yield4.38

U.S. Treasury

1.99

U.S. Treasury

0.10

Source: Commonwealth Asset Management/Morningstar Direct

2.092.82

3.59

4.55

6.627.15

8.28

3-Year Volatility in Returns

Fixed Income

Treasury Yields

Yield up = Price down

10-Year Treasury Note Yield at Constant Maturity

Avg, % p.a.

SEPAUGJULJUN13

MAYAPRMARFEBJANDECNOVOCTSource: Federal Reserve Board /Haver Analytics

3.00

2.75

2.50

2.25

2.00

1.75

1.50

3.00

2.75

2.50

2.25

2.00

1.75

1.50

Net Flows into Bank Loan Funds

Source: Morningstar Direct/Haver/Commonwealth Investment Research

Fixed Income

Past performance is no guarantee of future results.

High Yield Spread

BOA ML HY Master - 10-year US Treasury

OCTSEPAUGJULJUN13

MAYAPRMARFEBJANDECNOVSource: Haver Analytics

5.6

5.2

4.8

4.4

4.0

3.6

3.2

5.6

5.2

4.8

4.4

4.0

3.6

3.2

Fixed Income continued

Past performance is no guarantee of future results.

Announcement

BofA Merrill Lynch Municipal Master Index: Yield to Worst

%

1312111009080706050403Source: Bank of America Merrill Lynch /Haver Analytics

6

5

4

3

2

6

5

4

3

2

Housing

Housing: Prices and Supply

CoreLogic National House Price Index% Change - Year to Year NSA, Jan-00=100

1-family homes sold/1-family homes for sale

131211100908070605040302Source: Haver Analytics

20

10

0

-10

-20

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Housing: Prices and Supply continued

Composite Housing Affordability IndexMedian Inc=Qualifying Inc=100

Contract Rates on Commitments: Conventional 30-Yr Mortgages, FHLMC%

1005009590858075Sources: NAR, FRB /Haver

240

200

160

120

80

40

20

16

12

8

4

0

Credit and Banking

Credit and Banking: TED Spread

TED Spread

(3-mo LIBOR minus 3-mo t-bill)

1312111009Source: Haver Analytics

1.2

1.0

0.8

0.6

0.4

0.2

0.0

1.2

1.0

0.8

0.6

0.4

0.2

0.0

Credit and Banking: Inflation

Velocity of Money: Ratio of Nominal GDP to Money Supply M2% Change - Year to Year Ratio

CPI-U: All Items, 1982-84=100Y/Y %Change

10050095Sources: MA/FRB/H, BLS /Haver

8

4

0

-4

-8

-12

-16

6

4

2

0

-2

-4

r = 0.44

Employment

Change in Nonfarm Payrolls

Source: Commonwealth Asset Management/Bloomberg

Strong!

Unemployment Rate

U-6 Unemployment Rate

SA, %

10050095Source: Bureau of Labor Statistics /Haver Analytics

12

10

8

6

4

12

10

8

6

4

Marginally Attached Workers

Persons Not in LF: Want a Job, Searched, Available to Work Now

12-month %Change NSA, Thous

10050095Source: Bureau of Labor Statistics /Haver Analytics

60

40

20

0

-20

-40

60

40

20

0

-20

-40

Business and Manufacturing

ISM Manufacturing

ISM Mfg: PMI Composite Index

SA, 50+ = Econ Expand

10050095Source: Institute for Supply Management /Haver Analytics

67.5

60.0

52.5

45.0

37.5

30.0

67.5

60.0

52.5

45.0

37.5

30.0

ISM Nonmanufacturing

Strong move!

ISM Nonmanufacturing: NMI Composite Index

SA, 50+=Increasing

100500Source: Institute for Supply Management /Haver Analytics

65

60

55

50

45

40

35

65

60

55

50

45

40

35

Capacity Utilization

Capacity Utilization: Industry

SA, Percent of Capacity

13121110090807060504Source: Federal Reserve Board /Haver Analytics

84

80

76

72

68

64

84

80

76

72

68

64

Gross Domestic Product% Change - Year to Year SAAR, Bil.$

Commonwealth Labor Index% Change - Year to Year

1005009590Source: Haver Analytics

10.0

7.5

5.0

2.5

0.0

-2.5

-5.0

12

8

4

0

-4

-8

Economic Expansion

Conclusions

• Job growth was strong in Q3; unemployment fell to 7.3 percent.• Inflation is not a large concern, for now.• ISM indices hit post-recession highs in some cases.• Treasury rates moved aggressively higher across the curve,

prompting bond outflows.• Dividend sectors, especially utilities, saw pricing pressure as

rates moved higher.• The housing recovery is still progressing, but pricing may slow

in the near term.• GDP growth is expected to continue but could see a headwind

as the government shutdown ripples through the economy.

Looking Forward . . .

• Key themes to monitor– Nomination of Yellen as new Fed Chairman– Impact of government shutdown on broader economy– Earnings season for Q3 (beat or miss estimates?)– Will the rise in mortgage rates curb the housing recovery?– Europe and economic outcome– Ongoing debt ceiling debate– Emerging markets manufacturing in Q3– Fed “tapering” and direction of Treasury rates

Disclosure

Investing involves risks, including loss of principal amount invested due to market fluctuations. All indices are unmanaged, and investors cannot invest directly in an index. Past performance is not indicative of future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Bank of America Merrill Lynch US Corporate Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. The Merrill Lynch Municipal Master Index tracks the performance of U.S. dollar-denominated investment-grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. The Bank of America/Merrill Lynch High Yield Master II Index tracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. International investing involves special risks such as currency fluctuation and political instability. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, they offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. Municipal bonds are federally tax-free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT). The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.

Investments in floating-rate securities are subject to significant credit, interest rate, valuation, liquidity, and inflation risk. Floating-rate securities tend to attract investors during periods when interest rates are rising but may be less attractive when interest rates are falling. Floating-rate securities have a variable interest rate that will go up and down, or ‘float,’ to reflect changes in current market rates.