Quarterly Investment Strategy

V O L U M E 7 / / I S S U E 4 / / O C T O B E R 2 0 1 5

INVESTMENT STRATEGY OUARTERLY

Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals. You may contact your financial advisor to discuss the content of this publication in the context of your own unique circumstances. Published 10/01/2015. Material prepared by Raymond James as a resource for its financial advisors.

PAGE 2 INVESTMENT COMMITTEE MEETING RECAP

PAGE 4 ECONOMIC SNAPSHOT

PAGE 14 STRATEGIC ASSET ALLOCATION MODELS

PAGE 15 TACTICAL ASSET ALLOCATION WEIGHTINGS

PAGE 16 ALTERNATIVE INVESTMENT SNAPSHOT

PAGE 16 CAPITAL MARKETS SNAPSHOT

PAGE 17 SECTOR SNAPSHOT

Turn Off The Noise: Are we back to “normal” volatility? PAGE 8

Oversupply:Not just oil’s problem anymore PAGE 12

The Fed: Delayed, but not forgotten PAGE 10

China: Global perspectives on change and challenge PAGE 5

2

INVESTMENT STRATEGY QUARTERLY

ECONOMIC OUTLOOK

Recent volatility in the global equity markets clearly suggests that uncertainty exists among investors. Despite the extreme mid-quarter intraday price swings, the committee is in agreement that the U.S. economic out-look remains bright. “We’ve had very strong job growth, August’s numbers notwith-standing,” says Chief Economist Scott Brown. “I think the focus for U.S. investors on China is misplaced, they’re not really focusing on the real issue, which is our domestic strength.”

Citing concerns over structural reform in Europe, European Strategist Chris Bailey* agreed that, “the clearest eco-nomic growth driver today is the United States. I’m still seeing a real implementa-tion problem in Europe. European governments may sound unified in their rhetoric, but the implementation isn’t there at the moment. And ultimately this will hurt the European economy.” He is more constructive on China’s ability to successfully imple-ment reforms: “I think China ultimately may contribute [to global growth] in a positive fashion.”

FEDERAL RESERVE POLICY

When asked prior to the September FOMC meeting about the timing of Fed action, Brown stated, “Vice-Chair Fischer is clearly suggesting the Fed’s on track to begin raising rates this year. Whether that’s September or not is an open question.” Citing recent global financial market turmoil as a potential cause for delay, he assures that it will be temporary. Brown’s comments held true, as Fed Chair Janet Yellen announced on September 17 that rates would remain unchanged due to the potential impact of soft global growth on the U.S. economy, among other factors. As far as the financial market’s fixation on the topic, Brown expressed that, “the stock market is overly concerned about the Fed. This shouldn’t be a big deal. The initial increase in short-term rates would be a sign that the recovery is well entrenched and the Fed expects that we’re going to see fur-ther improvement down the line.”

From an international perspective, Chris Bailey* sees the eventual rise in U.S. rates creating an opportunity for the dollar to potentially retreat a bit. A slightly lower dollar “would actually be really good for reinforcing the need for structural reform in Europe.” Additionally, it would help reduce global imbalances which have negatively impacted emerging markets and other areas around the world.

ASSET ALLOCATION GUIDANCE

EQUITIES

The committee is neutral on equities overall in the near term. Recent volatility has led to mixed signals between fundamental and tech-nical indicators. Chief Investment Strategist Jeff Saut stated, “I’m having a real hard time because we did get a Dow Theory Sell Signal on August 25. While I’m ignoring this one tem-porarily, if we go below those levels on a closing basis, I’m going to have to honor the sell signal. I don’t want to because I think we’re in a secular bull market.”

Due to market activity in the weeks following the third quarter committee meeting, we are providing updated insights:

“We have been a tad conflicted lately. On one hand, we have long held the belief that we are in the midst of a long-term secular bull market that has years left to run, and that any dips or corrections should be viewed within the con-text of this multi-year uptrend (and this view may still very well end up being correct). However, the other hand has thrown an unwanted variable into the equation by giving us the Dow Theory Sell Signal that we have discussed quite a bit over the last month.

When examining historical market activity similar to what we’ve experienced over the last two months, the results, for-tunately, do not indicate that the bottom is about to drop out of this bull market. This bit of good news obviously isn’t enough for us to completely throw caution to the wind, but it does put the current landscape into context.”

-Andrew Adams, CMT, Equity Research

SEPTEMBER 2015 INVESTMENT STRATEGY COMMITTEE MEETING RECAPSimilar to last quarter, the committee agrees that the Federal Reserve, which delayed the highly anticipated rate hike in September, is the most influential macro-economic factor facing investors as we head into the final quarter of 2015 and early 2016. Other concerns include slowing global economic growth, particularly in China. The committee’s attitude toward real U.S. GDP growth over the next 6-12 months is neutral, with expected annual growth registering in the 2-3% range.

“What drives the markets is

not tied to a single event or

sentiment. The world's

economies are experiencing

proactive intervention from

their central banks including

some of the most influential

institutions: the Bank of Japan,

European Central Bank,

People's Bank of China and the

Federal Reserve. It is difficult

to attribute specific actions to

end results but it could be

argued that the Fed maintain-

ing interest rates at near-zero

for seven years and increasing

their balance sheet to $4.5

trillion infused money into the

system. Equities swelled during

this period arguably not based

on pure profitability.”

DOUG DRABIK, Senior Strategist, Retail Fixed Income

3

OCTOBER 2015

General consensus believes the equity market correction was long overdue and much needed. Ryan Lewenza, SVP, Private Client Strategist and Portfolio Manager* is confident that “we’re going to consolidate through this. A seasonally weak September, perhaps even early October, should set us up for a year-end rally. As we all know, October to December is the strongest period for the equity markets, especially when you come off a correction in late September.”

Mike Gibbs, Managing Director of Equity Portfolio & Tech-nical Strategy added, “I’m not ready to toss in the towel yet. The U.S. economy is in good shape and the global economy should give us better data down the road. We have to pay attention to what’s going on and see how things play out…just strap in and be prepared for the next month or two. It could be a fairly volatile ride.”

FIXED INCOME

The committee was evenly split between a neutral and slightly underweight allocation to fixed income. Members suggested that any imminent action by the Fed should not have a discern-ible effect on the overall fixed income markets. Nick Goetze, Managing Director of Fixed Income Services stated, “I think that the impact of an eventual rate change really won’t amount to anything. As I understand it, anything short of 3.25% is accommodative, so when they increase short-term rates by 20 or 50 basis points, I would imagine the Fed’s language there-after will sound something a lot like, ‘we’re going to stop now and we’re going to watch and see what happens’.”

“But in general, if you look at the overall bond market, it's still a very, very safe asset [on a relative basis],” added Goetze. “I think it’s telling you something when a lot of the world is still buying bonds based on the most important premise - being able to get your money back. It’s return of principal, not return on principal.”

Each quarter, the committee members complete a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications.

INVESTMENT STRATEGY COMMITTEE MEMBERS

Andrew Adams, CMT Research Associate, Equity Research

Chris Bailey European Strategist, Raymond James Euro Equities*

Scott J. Brown, Ph.D. Chief Economist, Equity Research

Robert Burns, CFA, AIF® Vice President, Asset Management Services

James Camp, CFA Managing Director of Fixed Income, Eagle Asset Management*

Doug Drabik Senior Strategist, Retail Fixed Income

J. Michael Gibbs Managing Director of Equity Portfolio & Technical Strategy

Kevin Giddis Senior Managing Director, Fixed Income

Nick Goetze Managing Director, Fixed Income Services

Peter Greenberger, CFA, CFP® Director, Mutual Fund Research & Marketing

David Hunter, CFA, CAIA Officer, Institutional Research, Asset Management Services

Nicholas Lacy, CFA Chief Portfolio Strategist, Asset Management Services

Ryan Lewenza, CFA, CMT Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.*

Pavel Molchanov Senior Vice President, Energy Analyst, Equity Research

Paul Puryear Director, Real Estate Research

Jeffrey Saut Chief Investment Strategist, Equity Research

Richard Skeppstrom Managing Director of Investments, Portfolio Manager, Eagle Asset Management*

Scott Stolz, CFP® Senior Vice President, PCG Investment Products

Jennifer Suden, CAIA Director of Alternative Investments Research

Tom Thornton, CFA, CIPM Vice President, Asset Management Services

Anne B. Platt, AWMA®, AIF® – Committee Chair Vice President, Investment Strategy & Product Positioning, Wealth, Retirement & Portfolio Solutions

Kristin Byrnes – Committee Vice-Chair Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions

*An affiliate of Raymond James & Associates and Raymond James Financial Services.

ENERGY

Oil and gas prices are in a bear market, though some of oil’s recent decline is sentiment-driven, as a result of Chinese headlines that pushed equities down as well. Ultimately, we think there will be an oil price recovery toward the end of 2016 as a supply response materializes.

U.S. HOUSING

Director of Real Estate Research Paul Puryear believes that the U.S. housing market is in its best shape in the last 15 years. “We had a great housing boom followed by a lot of vacancy as a result of over financing and, of course, the crash. Consequently, we haven’t seen the buckets of housing, whether it’s rental or owner-occupied housing, line up funda-mentally for quite some time.” Still, “we are in really good shape directionally from an inventory standpoint.”

From a job growth standpoint, the market is positive, yet not as impactful as it has been historically due to the lower mag-nitude of builds compared to past periods. “Nonetheless, household formations and consumer trends should support continued price appreciation. Unless the economy rolls over, things should continue to be pretty good for housing.”

SUMMARY

The fourth quarter will likely shed light on the long-term direction of the economy and financial markets. The com-mittee is hopeful that the consensus view of a positive long-term outlook holds and that this recent correction does not escalate into something worse.

Given the current environment of heightened volatility, our opinions could change as market conditions dictate. Market updates and guidance will be provided by Chief Investment Strategist Jeffrey Saut, should a change of opinion occur in the coming months.

4


STATUSECONOMIC INDICATOR COMMENTARY

PO

SIT

IVE

OU

TLO

OK

GROWTHGDP growth is likely to be restrained somewhat by a fall in net exports and an inventory correction, but consumer spending and business fixed investment should remain relatively strong in the near term.

EMPLOYMENTJob losses remain limited. New hiring appears to have remained moderately strong, led by gains in small and medium-sized businesses.

CONSUMER SPENDING

Nominal wage growth has remained relatively lackluster, but the drop in oil prices has added significantly to consumer purchasing power.

HOUSING AND CONSTRUCTION

Job growth has been supportive and bank mortgage lending has gotten somewhat easier, but we still have a long way to go for a full recovery.

INFLATIONConsumer price inflation has been close to 0% y/y, reflecting the drop in gasoline prices. Pipeline inflation pressures are minimal.

MONETARY POLICY

Fed officials believe that downward pressure on inflation will be transitory, and most expect that it will be appropriate to begin raising short-term interest rates by the end of the year. The pace of tightening should be gradual.

THE U.S. DOLLARThe dollar has been largely range-bound against the major currencies since mid-March, but rallied significantly against the smaller currencies in the late spring and summer.

NEU

TR

AL

OU

TLO

OK

BUSINESS INVESTMENT

The contraction in energy exploration and the soft global economy have been restraints, but orders have picked up somewhat following a poor first half.

MANUFACTURINGAuto production has remained strong, but factory output has been mixed and generally lackluster otherwise (reflecting the impact of a strong dollar).

LONG-TERM INTEREST RATES

Long-term interest rates should drift gradually higher as the economy improves and the Fed starts to raise short-term rates. However, we may continue to see a flight to safety (lower bond yields) on global concerns.

FISCAL POLICYThere is a strong likelihood of a government shutdown over the federal budget and debt ceiling by the end of the year.

REST OF THE WORLD

The outlook for China and other emerging market economies has grown more uncertain, rattling investor nerves. It’s difficult to gauge how much the global economy may slow over the near term.

ECONOMIC SNAPSHOT

The economic outlook is mixed. Softer global growth and a strong dollar are expected to restrain

export growth. However, the domestic economy appears to be in good shape, supported by strong

job growth, accommodative monetary policy, and low oil prices. Fed policymakers expect to begin

raising short-term interest rates by the end of the year, but the pace of tightening beyond the first

move, while data-dependent, is expected to be very gradual.

SCOTT BROWN Chief Economist, Equity Research

5

OCTOBER 2015

A U.S. PERSPECTIVE

– Scott J. Brown, Ph.D.

China has been a key concern for investors in recent months. The

country’s stock market correction and currency adjustment added

to market volatility worldwide. After the Shanghai

Composite Index more than doubled in a year, the

decline in share prices appears to be the unwinding

of a speculative bubble. The currency decline was

not intended to be a competitive devaluation.

Rather, it was an ill-fated attempt to move to a

more market-driven exchange rate. China’s leaders

want the yuan to be seen as one of the world’s key

reserve currencies. The International Monetary

Fund ("IMF") was reported to be considering

whether to add the yuan to its benchmark basket

(along with the dollar, pound, euro, and yen). However, to do so

would require that the exchange rate be set by the market, rather

than at the whim of Chinese officials. This exchange rate experi-

ment didn’t last long, as the currency fell sharply in just two days,

and officials declared the adjustment to be “essentially com-

plete.” These developments were a sideshow, however, to the

more important issue, which is slower growth.

China is making two difficult and potentially dangerous tran-

sitions. The first is that the economy needs to transform from

one being led by export growth and infrastructure spending

to one being led by consumption. That will take some time

and growth could be bumpy along the way. Moreover, sustain-

able growth at the end of the transition is likely to be slower.

China’s growth has averaged about 10% per year over the last

couple of decades, but may slow to 4-6% in the years ahead.

The second is the liberalization of China’s capital markets. Asset

prices need to be determined by the markets, with limited inter-

vention from the government. History has shown that if such a

transition is not carefully coordinated, there can be severe con-

sequences. The government’s clumsy efforts to prevent share

prices from falling and to keep its currency from

weakening too rapidly illustrate the difficulties

and have undermined confidence.

What would a slowdown in China mean for the

U.S. economy? Not much directly. China accounted

for a little over 7% of U.S. exports in 2014, less than

1% of GDP. However, China has been a major

importer of raw materials and many commodity

exporters, such as Australia, Brazil and Canada,

are seeing weakness. So, slower growth in China

will have broad effects on the global economy.

It’s not all bad news. Lower commodity prices, especially the

drop in oil prices, should be beneficial to U.S. consumers and

businesses. That should add to domestic strength in the

months ahead.

A COMMODITY MARKET PERSPECTIVE

– Ryan Lewenza

China’s economic growth and commodity prices are inextri-

cably linked. We often say that “China is the marginal price

setter of commodities.” We say this for a number of reasons.

First, the combination of China’s large population, rising stan-

dards of living, and urbanization has led to an insatiable

demand for commodities. Second, related to this point, China

represents roughly 50% of annual global demand for key com-

modities like steel, cement, and copper among others. Third,

China has been investing in infrastructure at an incredible

rate, building roads, airports, and high-speed rail, to support

What would a slowdown

in China mean for the

U.S. economy? Not much

directly. China accounted

for a little over 7% of U.S.

exports in 2014, less than

1% of GDP.

Scott J. Brown, Ph.D., Chief Economist, Equity Research Ryan Lewenza, CFA, CMT, Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.*Chris Bailey, European Strategist, Raymond James Euro Equities*

SCOTT BROWN Chief Economist, Equity Research

*An affiliate of Raymond James & Associates and Raymond James Financial Services.

China: Global perspectives on change and challenge

6


the continued urbanization and growth of the country. To put

this into context, China’s investment as a percentage of GDP is

51%, compared to the U.S. at 17%. While some of these invest-

ments were surely dubious (i.e., China’s ghost cities), many of

these investments were critical in the advancement and growth

of the nation. Finally, as the saying goes “a picture is worth a

thousand words.” In the chart below, China’s GDP growth is

overlayed with the year-over-year change in commodity prices.

Note the high correlation between the two. As China’s growth

accelerated, commodity prices rose, and as China has slowed,

commodity prices have come under pressure. Putting it all

together, it becomes clear that the outlook for China will largely

drive the outlook for commodities. And on that, it should come

as no surprise that as China’s GDP growth has slowed from an

average of 9.4% in the 2000s to 7% in 2015, that demand for com-

modities has waned, and prices have fallen.

The question then is “what is the outlook for China’s growth?”

China is currently undergoing a massive transformation. This

transformation in part explains the deceleration of economic

COMMODITY PRICES MIRROR CHINA'S ECONOMIC GROWTH

REASONS WHY CHINA IS THE MARGINAL PRICE SETTER OF COMMODITIES

UNITED STATES

17%CHINA

51%

1. The combination of China’s large population, rising standards of living, and urbanization has led to an insatiable demand for commodities.

2. China represents roughly 50% of annual global demand for key commodities such as steel, cement, and copper, among others.

3. China has been investing in infrastructure at an incredible rate, building roads, airports and high-speed rail, to support the continued urbanization and growth of the country.

4. As China’s growth accelerated, commodity prices rose, and as China has slowed, commodity prices have come under pressure.

activity. The other key drag on economic growth has been the

notable decline in export growth. Following China’s inclusion in

the World Trade Organization in 2001, real exports rose at a stag-

gering 25% per year until 2007. Since 2014, real export growth has

slowed significantly to 3.5%. Our view is that while China should

avoid a hard landing, economic growth should continue to slow,

possibly to a more sustainable mid-single digit growth rate.

Given this slowdown, we have maintained a cautious view of

commodities, which is one factor in our recommendation to

underweight the materials sector. It is also why we continue

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

4%

8%

12%

16%

1996 1998 2001 2004 2006 2009 2012

Commodity Research Bureau Commodity Index Y/Y % Chg (left axis) China GDP Y/Y % Chg (right axis)

INVESTMENT AS A PERCENTAGE OF GDP

China (continued)

7

OCTOBER 2015

KEY TAKEAWAYS:

• A slowdown in China would not mean much for the U.S. economy directly. China accounted for a little over 7% of U.S. exports in 2014, less than 1% of GDP.

• Putting it all together, it becomes clear that the outlook for China will largely drive the outlook for commodities.

• Given the slowdown in China, we have maintained a cautious view of commodities.

• Europe’s trade links with China remain a medium-term tailwind rather than a headwind as the ending of recent over-reliance on the Middle Kingdom’s economic development can actually be turned into an impetus for further required European reform.

Out of danger, however, comes opportunity. Policy makers –

especially in the euro area – seem more enthused by crisis

moments. Europe probably needs a second (or extended)

dose of quantitative easing support and it certainly needs

structural reform initiatives that improve the region’s flexi-

bility, dynamism and competitiveness. A Chinese slowdown

should boost the likelihood of both events. The most difficult

aspect to predict is timing. The fastest agents of change are

once again likely to be individual companies rather than gov-

ernments and that should support a more thematic or specific

investment approach to European assets versus a more blunt

index-wide approach.

Europe’s trade links with China remain a medium-term tailwind

rather than a headwind as the ending of recent over-reliance on

the Middle Kingdom’s economic development can actually be

turned into an impetus for further required European reform. In

the meantime, it also implies the announcement of a further slug

of quantitative easing support, making the economic and finan-

cial policy-making debate in the region a continued differentiator

from current policy in the United States.

to recommend to our Canadian clients to look outside of

Canada more, focusing on the better positioned U.S. and

European equity markets.

A EUROPEAN PERSPECTIVE

– Chris Bailey

“When written in Chinese, the word ‘crisis’ is composed of two

characters. One represents danger and the other represents

opportunity” - John F. Kennedy

Europe’s economic revitalization strategy over the past couple

of years has been as much about stimulating exports via a low

euro as it has been about expanding unorthodox monetary

policy via quantitative easing and other support measures. A

by-product of this has been the rapid build-up in the share of

exports to emerging markets as a percentage of European

countries’ GDP. Last year, German exports to emerging mar-

kets were equivalent to over 10% of their GDP and for the

broader euro area, just over 8% of regional GDP. By contrast,

the equivalent statistic for the U.S. is 4%. Unsurprisingly, the

majority of demand for European exports comes from China.

The current Chinese economic challenges are therefore poorly

timed for European economies as it lessens one of the positive

growth drivers for the region and therefore places more

emphasis on local regional drivers. Given we have previously

chronicled challenges with coordinating pan-European stim-

ulus and structural reform policies, this development is a

headwind for European growth levels. Earlier in the month, the

President of the European Central Bank, Mario Draghi, reduced

expectations for 2015-17 euro area growth, citing the chal-

lenging global backdrop. There is little doubt that the

combination of a Chinese slowdown and a disappointing appli-

cation of European structural reform initiatives has impacted

this action. Little wonder that rumors about a second wave of

quantitative easing in Europe have heightened.

8


WHERE ARE WE NOW?

The Shanghai Composite Index continues to display height-

ened volatility, yet remains up around 30% over the last year,

as of late-September. Brown makes an important point, noting

that, “China’s stock market decline is not really indicative

of economic weakness, nor is it necessarily going to cause

economic weakness. That said, Chinese growth has slowed.”

European Strategist Chris Bailey opines that, “President

Xi of China is actually making pretty good progress on its

structural reform.” Furthermore, Bailey finds the likelihood of

successful reform much greater for China than for Europe.

U.S. equity markets have since followed suit, with the Dow

Jones Industrial Average recovering from late-August lows,

but volatility remains elevated. General consensus believes

that recent U.S. market activity, while unpleasant, is a healthy

correction and a normal part of the equity market cycle.

Still, it can be alarming for those who don’t understand the

phenomenon of a correction. Any sustained period of price

appreciation, as seen in China as stocks began skyrock-

eting in mid-2014, is a warning to many astute investors that

a correction may be near. Corrections are necessary when

General consensus believes that recent market activity, while unpleasant, is a healthy correction and a normal part of the equity market cycle.

WHAT HAPPENED LAST QUARTER?

June 12, 2015 marked the beginning of a significant correction in China’s stock market which

spanned most of the summer months. Despite several attempts by the Chinese government to

halt the sell-off, the Shanghai Composite Index lost nearly 43%, peak-to-trough. Roughly two

months later, on August 17, the Dow Jones Industrial Average embarked on a more muted cor-

rection, losing 10% over the course of seven consecutive trade days.

Further complicating matters for China, government officials made a surprising move by devaluing

the yuan, China’s national currency. Chief Economist Scott Brown, Ph.D. explains the failed experi-

ment: “They were not trying to boost exports by weakening their currency. What they were trying to do

was move towards a free-floating currency - to have a market-based determination of the exchange

rate.” What was actually an attempt to implement positive structural reform quickly turned into a

misinterpreted signal by investors that further economic slowdown was to be expected.

Kristin Byrnes, Committee Vice-Chair, Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions

the markets become saturated with investors attempting to

take advantage of inflated asset prices rather than trading

on fundamentals. Eventually, the “bubble bursts,” removing

speculators from the market and paving the way for a return

to a “normal” investment environment.

Turbulent markets following a quiet period of general price

appreciation with low interest rates can be troublesome for

investors who have become complacent with the current envi-

ronment. In turn, they may have overextended their portfolio’s

risk profile in an attempt to stretch for yield or increase total

return. Director of Mutual Fund Research & Marketing Peter

Greenberger reminds us that it is in moments like this that

Warren Buffett’s investment acumen holds true: “Only when

the tide goes out do you discover who’s been swimming naked.”

WHERE ARE WE HEADED?

So what does this say about the future state of the equity mar-

kets? Chief Investment Strategist Jeff Saut reiterated his

long-term bullish stance, stating, “To a long-term bull, which

is what I am, what happened over the last several weeks is just

Turn Off The Noise: Are we back to “normal” volatility?

9

OCTOBER 2015

CBOE VOLATILITY INDEX (VIX) Through September 2015

The CBOE Volatility Index® (VIX)® is based on the S&P 500® Index (SPX), and esti-mates expected volatility by

averaging the weighted prices of SPX puts and calls over a wide range of strike prices.Aug.

1995Aug.1997

Aug.1999

Aug.2001

Aug.2003

Aug.2005

Aug.2007

Aug.2009

Aug.2011

Aug.2013

0

20

40

60

80

Aug.2015

KEY TAKEAWAYS:

• “China’s stock market decline is not really indic-ative of economic weakness, nor is it necessarily going to cause economic weakness. That said, Chinese growth has slowed.” - Scott Brown, Ph.D.

• General consensus believes that recent market activity, while unpleasant, is a healthy correction and a normal part of the equity market cycle.

• “During this period, over the next three-six-nine months possibly, the markets have the potential to be more volatile as investors wait and try to get clarity on just what is really happening around the world.”- Mike Gibbs

• Given that the short-term market outlook is unclear - as policies unfold at home and abroad - now is an oppor-tune time to reevaluate current portfolio positioning.

VIX 20-Year Average

noise. Our belief is that this is a pull-back in an ongoing sec-

ular bull market that still has another eight or nine years left to

run, providing the averages don't close below August 25 lows of

15,666 on the Dow and 7,466 on the Dow Transportation Index.”

Managing Director of Equity Portfolio & Technical Strategy

Michael Gibbs agreed that this was an ordinary correction,

pointing out that it takes time for markets to settle after a sig-

nificant loss. “During this period, over the next three-six-nine

months possibly, the markets have the potential to be more

volatile as investors wait and try to get clarity on just what is

really happening around the world.” He is confident that as

time plays out, “Everything will be fine with economic growth.

The global economy is still set to grow at 2-3%, as is the U.S.

economy, and typically you do not see a bear market in stocks

when the economy is growing.” Brown concurs, assuring that

“despite all of this noise, underlying it all is a domestic outlook

from the U.S. which is still very, very promising.”

As Gibbs emphasized, “The one thing that investors despise

is uncertainty.” Given that the short-term market outlook is

unclear - as policies unfold at home and abroad - now is an

opportune time to reevaluate current portfolio positioning. In

particular, comparing the current risk profile of the portfolio to

that of the investor’s risk tolerance can identify mismatches that

require repositioning. Whether it’s paring back or mitigating

current risk levels, participating in the glut of buying opportu-

nities available in oversold markets, or simply staying on track;

managing expectations surrounding risk/return objectives

is central to reducing investor surprise, panic, and emotional

decision-making during volatile market environments.

10


The Federal Reserve has not raised short-term interest rates since June 2006. The U.S. central bank last

lowered the target range for federal funds (the overnight lending rate) to 0-0.25% in December 2008

and has kept it there since. The economic recovery, now more than six years along, has made substantial

progress. Job growth has been strong in the last couple of years and slack in the labor market has been

reduced considerably – with further slack expected to be removed over the next year. Fed officials need

to set monetary policy based on where the economy is expected to be 12 to 18 months ahead. Hence,

it is appropriate for policymakers to consider embarking on a gradual normalization. The first step is to

raise the federal funds target range.

tantrum.” Bond yields rose, emerging econo-

mies experienced financial strains, and the

Fed ultimately delayed, but did not perma-

nently postpone, its tapering of QE3.

This time around, bond yields haven’t taken off,

but stock market participants here and abroad are

still nervous. If not for the recent global financial

volatility, the Fed would likely have begun raising

short-term interest rates in September.

Why raise rates? The Fed would not be “hit-

ting the brakes” so much as “starting to take

the foot off the gas pedal.” Inflation isn’t

really a problem. The strong dollar and lower

commodity prices put downward pressure on consumer

price inflation in the near term, but the Fed views that as

transitory. Oil prices won’t fall forever and should stabi-

lize. The dollar has been range-bound against the major

currencies since March, but has rallied sharply against

other currencies in recent months. Those currencies

accounted for 57% of U.S. imports in 2014. A rate increase

would boost the dollar somewhat, adding downward pres-

sure on inflation, but much of that may already be priced

into the markets.

Fed officials believe that the precise timing

of the initial move should not be important.

What matters is the pace of tightening, and

officials expect rate hikes to be very gradual.

However, financial market participants

believe that timing matters a lot. Recent

signs of softness in emerging-market econo-

mies suggest that the global economy may

be fragile and that a Fed rate hike could

make conditions worse, adding to recent

market volatility. The Fed’s focus is clearly

on the domestic economy, which appears to

be in good shape, but officials do need to

take into account how overseas reactions to

Fed action might influence things here.

If this sounds vaguely familiar, it’s because we went through

a similar situation in 2013. At that time, the Fed was in the

middle of its third large-scale asset purchase program, also

known as QE3. The Fed was contemplating reducing the

current monthly pace of $85 billion in asset purchases, but it

couldn’t stop all at once and decided to taper the rate of

asset purchases over time. Simply mentioning the reduction

in the pace of purchases sent financial markets into a “taper

The decision is not so

easy given all the data that

contests the policy. The

Fed has extended a very

open and accessible policy

and will likely raise by year

end; however, there are

compelling reasons to

think they will not have

too many consecutive

or significant increases.

DOUG DRABIK Senior Strategist, Retail Fixed Income

Scott J. Brown, Ph.D., Chief Economist, Equity Research

NON-TRADITIONAL FIXED INCOME (continued)

The Fed:Delayed but not forgotten

11

OCTOBER 2015

The labor market is the widest channel for inflation pres-

sure. Wage growth has remained lackluster, but should

eventually pick up as the job market improves further. A

number of Fed officials have been surprised that we

haven’t seen strong wage growth, given the drop in the

unemployment rate and strong pace of growth in nonfarm

payrolls over the last year. There may be a number of fac-

tors (for example, the decline in union power or the ability

of firms to cast a wider net when hiring) that are limiting

wage pressures.

Fed officials are divided on the perceived risks. The

“hawks” always seem to see inflation around every bend

and want to tighten sooner rather than later. The “doves”

see few signs of upward pressure in inflation in the near

term and are more concerned with signs of slack in the

labor market. Monetary policy will still be very accommo-

dative even after the first few Fed rate hikes.

While global concerns may delay the Fed’s initial rate

increase, it won’t postpone it permanently. As Fed Vice

Chair Stanley Fischer put it in late August, by meeting the

Fed’s objectives (low inflation and maximum sustainable

employment), “and so maintaining a stable and strong

macroeconomic environment at home, we will be best

serving the global economy as well.”

KEY TAKEAWAYS:

• Fed officials believe that the precise timing of the initial move should not be important. What matters is the pace of tightening, and officials expect rate hikes to be very gradual.

• The Fed’s focus is clearly on the domestic econo-my, which appears to be in good shape, but offi-cials do need to take into account how overseas reactions to Fed action might influence things here.

• Monetary policy will still be very accommodative even after the first few Fed rates hikes.

12


Q: U.S. and international oil stockpiles are near record highs.

Why is the market so saturated on the supply side?

A: There are three fundamental reasons why the physical

oversupply of oil is so visible globally. First, Saudi Arabia’s

oil production is running at record-high levels, up 7% year-

over-year, as it continues its price war with non-OPEC

producers such as the U.S., Russia, and Brazil. Saudi

behavior is starting to become irrational, and of course it

cannot keep worsening the oil glut forever. However, as

things stand, we have to assume that its record production

will continue into 2016. Second, Iraq’s production has

soared – which may seem counterintuitive, given the

ongoing headlines about the war with ISIS. On a per-

centage basis, Iraq stands out as the fastest-growing major

oil producer of 2015: up more than 15% year-over-year,

ahead of most expectations. Third, non-OPEC oil supply –

which is two-thirds of the world total – hasn’t yet begun to

exhibit significant declines. To be clear, this will eventually

happen, given the extent to which the entire industry is in

austerity mode, but it will likely be the second half of 2016

before the non-OPEC declines become meaningful.

Q: What will ultimately trigger price recovery in the oil

market, and do you see volatility being a common theme

going forward?

A: It is overwhelmingly supply that is the culprit behind the oil

selloff. The 2015 global oil demand picture (up 2%) looks

much better than we would have predicted a year ago. So it

is supply that will have to “fix” the oil market. The quickest

solution would be for Saudi Arabia to ease off on its over-

production, because – let’s be honest – it is already winning

the price war. But if that does not happen, then it may take

12 to 18 months to rebalance the

market via a decline in non-

OPEC supply. Across non-OPEC

countries, we are seeing huge

declines in oil and gas invest-

ment, drilling activity and project approvals. This will

gradually trigger a supply response – so much so, in fact,

that it’s even possible to imagine points of time towards

the end of this decade when the oil market might be under-

supplied, especially in the event of geopolitical supply

disruptions. In the meantime, however, there is no

escaping the fact that volatility will persist. The negative

economic headlines from China, for example, spurred a

dramatic downturn in equities and commodities alike –

even though the actual impact on Chinese oil demand is

small. On the other hand, in late August, oil prices had

their biggest three-day gain since 1990 amid rumors that

OPEC might be rethinking its production strategy.

Q: What about natural gas? Is it looking better or worse than oil?

A: Unlike oil, there is no such thing as a global market for nat-

ural gas. North America is a single gas market, but Europe

consists of three separate ones, and Asia-Pacific coun-

tries also have different gas price dynamics. It is well

understood that oversupply of shale gas in North America

has pushed prices to historically low levels, but what’s less

well known is that international gas economics are also

starting to look more bearish. Case in point: European gas

demand has had a stunning fall to a 20-year low, due to a

combination of more wind and solar as well as cheap coal.

Europe still relies, to a large extent, on buying gas from

Russia, but its falling consumption means imports are

There is no escaping

the fact that volatility

will persist.

Q&A with Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research

Oversupply:Not just oil’s problem anymore

13

OCTOBER 2015

down. In Asia, gas demand is growing, but not as fast as

the industry would have hoped. In the meantime, Austra-

lian gas exports are ramping up, and for the first time, the

U.S. Gulf Coast will be exporting some gas to Asia in 2016.

Thus, we cannot blame OPEC for the weakness in gas

prices worldwide, but rather it’s an issue of structural

changes in both supply and demand.

Q: Why are agricultural commodity prices so low, and who are

the winners and losers?

A: Many investors tend to be more familiar with what’s hap-

pening in energy and metals as compared to the agricultural

sector. While they don’t always trade in parallel, over the

past year we’ve seen close correlations among just about all

commodities. In the case of the main staple crops – corn,

wheat, soybeans, sugar cane – prices are at or near the

lowest levels since the global financial crisis of 2008-2009.

As of July, for example, the United Nations’ global food price

index was down 19% year-over-year. Part of the reason is

ample supply. Favorable weather in the Midwest has boosted

U.S. output and exports, though the strong dollar has been a

headwind. In Russia and Ukraine – and, to a lesser extent,

Brazil – weak currencies are enabling especially cheap

exports. Meanwhile, Chinese demand has not been as robust

as expected – as is true of all commodities – leaving global

stockpiles at elevated levels. Low energy prices are also

helping by reducing the cost of fertilizer and transportation.

All this is great news for countries that depend on imported

food: for example, China, Japan and Egypt. On the flip side,

farmers in the top food exporters – the U.S. and Canada,

much of South America, and Russia – are feeling the pres-

sure of lower revenues.

KEY TAKEAWAYS:

• It is overwhelmingly supply that is the culprit behind the oil selloff. So it is supply that will have to “fix” the oil market.

• There is no escaping the fact that volatility will persist.

• Over the past year we’ve seen close correlations among just about all commodities. In the case of the main staple crops, prices are at or near the lowest levels since the global financial crisis of 2008-2009.

14


CONSERVATIVE CONSERVATIVE BALANCED BALANCED BALANCED

WITH GROWTH GROWTH

EQUITY 31% 51% 67% 78% 93%

U.S. Large Cap Equity 18% 31% 35% 35% 42%

U.S. Mid Cap Equity 4% 7% 9% 10% 11%

U.S. Small Cap Equity 2% 3% 5% 6% 7%

Non-U.S. Developed Market Equity 7% 10% 14% 17% 21%

Non-U.S. Emerging Market Equity 0% 0% 4% 6% 8%

Publicly-Traded Global Real Estate 0% 0% 0% 4% 4%

FIXED INCOME 67% 47% 31% 15% 0%

Investment Grade Long Maturity Fixed Income 0% 0% 0% 0% 0%

Investment Grade Intermediate Maturity Fixed Income 39% 27% 17% 15% 0%

Investment Grade Short Maturity Fixed Income 5% 0% 0% 0% 0%

Non-Investment Grade Fixed Income (High Yield) 4% 5% 4% 0% 0%

Global (non-U.S.) Fixed Income 4% 4% 4% 0% 0%

Multi-Sector Bond* 15% 11% 6% 0% 0%

ALTERNATIVE INVESTMENTS 0% 0% 0% 5% 5%

CASH & CASH ALTERNATIVES 2% 2% 2% 2% 2%

STRATEGIC ASSET ALLOCATION MODELS

Raymond James asset allocation targets are based on the contributors’ changing views of the risk and return in the various

asset classes, looking out over three or more years. These models assume fully allocated portfolios and do not take into

account outside assets, additional cash reserves held independent of these fully allocated models or any actual investor’s

unique circumstances. Investors should consult their financial advisor to decide how these models might assist in the

development of their individual portfolios.

*Refer to page 18 for multi-sector bond asset class definition.

15

OCTOBER 2015

OVERALL EQUITYEquities showed increased volatility in 3Q with elevated valuations and negative mo-mentum. Despite these characteristics, it remains one of the few places with positive expected return potential in the near term.

U.S. Large Cap EquityIn sustained periods of volatility, large caps tend to hold up better than their smaller coun-terparts. Valuations are not as expensive as mid and small caps, and if the USD continues to rise, it will likely be at a slower growth rate than experienced over the last 12 months.

U.S. Mid Cap EquityMid caps have seen a substantial run up in valuations over the past 6 years and are currently trading at stretched multiples. The strong momentum tailwind has abated this quarter, suggest-ing that expected returns may not compensate investors for the risk exposure of this segment.

U.S. Small Cap EquityU.S. small caps have been more isolated from the global economy relative to their larger brethren. Pockets of relative attractiveness exist in this space, particularly on the value side. Growth-style, on the other hand, look very expensive making them less attractive.

Non-U.S. Developed Market EquityDouble-digit returns earned in H1 this year were erased in 3Q due to concerns over global growth. Positive growth prospects and quantitative easing remain tailwinds while political unity and structural reform remain concerns.

Non-U.S. Emerging Market EquityThis space is oversold from a market-sentiment standpoint and is due for an eventual rebound. While long-term prospects are attractive, volatility will likely continue in the near term. Opportunities exist for investors who can tolerate near-term instability.

Publicly-Traded Global Real EstateReal estate securities provide diversification benefits against equity risk, but impending ris-ing interest rates could negatively impact these rate-sensitive investments. Still, pockets of growth do exist, particularly outside of the U.S. Active management is recommended here.

OVERALL FIXED INCOMEFixed income will likely react negatively to the Fed raising short-term rates over the next 6-12 months, however, we do not recommend abandoning strategic allocations altogether. A slight underweight in this space seems prudent at this time.

Investment Grade Long Maturity Fixed Income

This is the most attractive part of the yield curve based on forward markets, due in part to ex-pectations that long-term rates will fall as the Fed raises short-term rates. Potential for positive returns in the near term and strong diversification benefits relative to equities make us neutral.

Investment Grade Intermediate Maturity Fixed Income

Intermediate-term bonds are unattractive relative to the long end of the curve and will likely be impacted, to some degree, by the potential rise in short-term rates.

Investment Grade Short Maturity Fixed Income

Short-term fixed income has the lowest duration, but is also the most expensive and overbought. This is a crowded trade and does not have positive prospects once the Fed begins raising short-term rates.

Non-Investment Grade Fixed Income (High Yield)

Spreads are somewhat tight here suggesting investors are not being adequately compensated for the embedded equity risk taken on by these holdings.

Global (non-U.S.) Fixed IncomeWhile QE can be viewed as a headwind for many global bond markets, this low yielding environment does not offer the necessary protection against currency risk. Active management is recommended here.

Multi-Sector Bond*Multi-strategy bonds are likely to outperform core fixed income as interest rates rise. However, they are relatively expensive and tend to provide less diversification from equity downturns due to the embedded equity risk within these strategies.

ALTERNATIVE INVESTMENTSAlternatives have the potential to offer diversification benefits, and profit from market dislocations. Declining intra-stock correlations bode well for L/S Equity strategies while heightened volatility is typically a tailwind to Global Macro/Managed Futures.

CASH & CASH ALTERNATIVESVolatility within the capital markets leads to buying opportunities for those who have cash reserves available to invest.

Refer to back page for model definitions. *Refer to page 18 for multi-sector bond asset class definition.

TACTICAL COMMENTSUN

DE

RW

EIG

HT

SLIG

HT

UN

DE

RW

EIG

HT

NE

UT

RA

L

OV

ER

WE

IGH

T

SLIG

HT

OV

ER

WE

IGH

T

● July 2015 ● Oct. 2015

TACTICAL ASSET ALLOCATION WEIGHTINGS

For investors who choose to be more active in their portfolios and make adjustments based on a shorter-term outlook, the

tactical asset allocation dashboard below reflects the Raymond James Investment Strategy Committee’s recommendations

for current positioning relative to our longer-term strategic models. Your financial advisor can help you interpret each

recommendation relative to your individual asset allocation policy, risk tolerance and investment objectives.

●

●

●

●

●

●

● ●

● ●

●●

●

●

● ●

●

●●

● ●

● ●

16


CAPITAL MARKETS SNAPSHOT

*Total Return

ALTERNATIVE INVESTMENTS

Certain alternative investments could provide valuable diversification benefits and profit from market dislocations. Long/Short Equity strategies have the potential to benefit from declining intrastock correlations. Additionally, elevated levels of volatility are typically a tailwind to Global Macro/Managed Futures strategies.

EQUITY LONG/SHORTWhen markets are driven by fundamentals as opposed to various macro policies and technical factors, correlation among stocks decline and Long/Short Equity managers can potentially benefit from both long and short positions. If headed into a more difficult equity environment, short positions have the ability to protect on the downside.

MULTI-MANAGER/ MULTI-STRATEGY

The Multi-Manager, Multi-Strategy category tends to be a more conservative approach to alternative investing. Many products have relatively low betas and correlation to equities, displaying a volatility profile more akin to fixed income. These strategies may be appropriate for those looking to diversify existing low-volatility holdings.

MANAGED FUTURESManaged futures typically benefit from elevated levels of volatility. Dislocations in the global financial markets and diverging economic policies bode well for these strategies.

EVENT DRIVENEvent-driven funds include various strategies. Currently, the environment is challenging for Distressed managers given the decreased opportunity set. Merger Arbitrage managers have found it difficult to generate noteable performance given tight credit spreads and regulatory concerns. Activism, on the other hand, is a substrategy in which we have high conviction.

EQUITY MARKET NEUTRAL

Similar to Equity Long/Short, Equity Market Neutral funds are likely to perform better in periods when stock prices are trading based upon fundamentals with low intrastock correlation.

COMMODITIESGlobal growth concerns and a glut in oil supply make this a difficult area to be constructive in. Long-Short or Managed Futures strategies may have the ability to profit here, while Long-Only positions are not attractive at this time.

GLOBAL MACROSimilar to managed futures funds, global macro funds typically benefit from elevated levels of volatility. Dislocations in the global financial markets and diverging economic policies bode well for these strategies.

ALTERNATIVE INVESTMENTS SNAPSHOT

This report is intended to highlight the dynamics underlying seven major categories of the alternatives

market, with the goal of providing a timely assessment based on current economic and capital market

environments. Our goal is to look for trends that can be sustainable for several quarters; yet given the

dynamic nature of financial markets, our opinion could change as market conditions dictate. Investors should

consult their financial advisors to formulate a strategy customized to their preferences, needs, and goals.

JENNIFER SUDEN Director of Alternative Investments Research

EQUITY* AS OF 9/30/2015 3Q15 RETURN 12-MONTH RETURN

Dow Jones Industrial Average 16,284.70 -6.98% -2.11%

S&P 500 1,920.03 -6.44% -0.61%

NASDAQ 4,620.16 -7.26% -0.71%

MSCI EAFE 1,644.40 -10.23% -8.66%

RATES AS OF 9/30/2015 AS OF 6/30/2015 AS OF 9/30/2014

Fed Funds Target Rate 0.25 0.25 0.25

3-Month LIBOR 0.33 0.28 0.24

2-Year Treasury 0.64 0.64 0.58

10-Year Treasury 2.06 2.34 2.51

30-Year Mortgage 3.84 4.17 4.12

Prime Rate 3.25 3.25 3.25

COMMODITIES AS OF 9/30/2015 3Q15 RETURN 12-MONTH RETURN

Gold $1,114.00 -4.87% -8.43%

Crude Oil $45.09 -24.18% -50.54%

17

OCTOBER 2015

SECTOR SNAPSHOT

This report is intended to highlight the dynamics underlying the

10 S&P 500 sectors, with a goal of providing a timely assessment

to be used in developing your personal portfolio strategy. Our

time horizon for the sector weightings is not meant to be short-

term oriented. Our goal is to look for trends that can be sustainable

for several quarters; yet given the dynamic nature of financial

markets, our opinion could change as market conditions dictate.

Most investors should seek diversity to balance risk versus

reward. For this reason, even the least-favored sectors may be

appropriate for portfolios seeking a more balanced equity

allocation. Those investors seeking a more aggressive invest-

ment style may choose to overweight the preferred sectors

and entirely avoid the least favored sectors. Investors should

consult their financial advisors to formulate a strategy cus-

tomized to their preferences, needs and goals.

These recommendations will

be displayed as such:

Overweight: favored areas

to look for ideas, as we expect

relative outperformance

Slight Overweight: next favored areas to look for ideas

Equal Weight: expect in-line relative performance

Slight Underweight: expect relative underperformance in

general, but opportunities exist within select subsectors

Underweight: unattractive expectations relative to the other

sectors; exposure might be needed for diversification

For a complete discussion of the sectors, please ask your financial

advisor for a copy of Portfolio Strategy: Sector Analysis.

J. MICHAEL GIBBS Director of Equity Portfolio & Technical Strategy

RECOMMENDED WEIGHT SECTOR S&P WEIGHT COMMENTS

OVERWEIGHT

INFORMATION TECHNOLOGY 20.2%

Technology remains a favored sector due to attractive relative valuations and healthy balance sheets. Reductions to expected 2015 earnings stabilized and are expected to outpace the flattish earnings for the S&P 500. The jump in relative strength during recent market weakness builds our confidence here.

FINANCIALS 16.5%Our overweight is driven by attractive relative valuation, solid expected earnings growth, and positive benefits to some subsectors (banks) should interest rates rise. The sector was hard hit during the recent market decline. It will need to quickly regain performance.

CONSUMER DISCRETIONARY 13.0%

It is our belief the consumer will spend (job growth, lower energy costs, generally growing economy) thus allowing many subsectors to benefit. Double-digit earnings growth and a declining stock market have pushed relative valuations to a less elevated position.

INDUSTRIALS 10.2%

If the global fears are overdone (our opinion) this group is set up to provide relative performance. The strong USD remains a headwind for manufacturing on the global stage. Any uptick in the fundamentals leaves this sector with plenty of runway before valuation becomes an issue. If recent momentum continues to build, our overweight position may finally be rewarded.

EQUAL WEIGHT

HEALTH CARE 15.3%Fundamental momentum and M&A activity justify our equal weight stance. Relative valuation remains elevated; but rising earnings estimates and M&A activity are supportive of valuation.

CONSUMER STAPLES 9.6%

Potential for less downside keeps us at equal weight during this period of market volatility. Earnings are still anemic at only 1.9% growth.

UNDERWEIGHT

ENERGY 6.9%Excess supply will continue to weigh on fundamentals in the energy space. Lack of clarity as to where fundamentals will bottom results in less confidence in current valuations. The intermediate trend still suggests avoidance of the sector.

UTILITIES 2.9%Earnings are expected to advance meagerly in 2015. The sector has been held back by a general consensus that rising interest rates will negatively pressure stock prices.

MATERIALS 2.9%Deflationary trends in commodities (includes energy) and metals will have a negative impact on the sector. Valuation is compelling as the sector has reached one standard deviation below the long-term average.

TELECOM 2.4%

Two stocks, VZ and T make up over 85% of the index. Valuation has pushed below one standard deviation below the average. Relative performance for the intermediate term is still weak, however the sector does offer capital preservation and quality high dividends for those expecting market weakness.

18


ASSET CLASS DEFINITIONS

U.S. Large Cap EquityRussell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.

U.S. Mid Cap EquityRussell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.

U.S. Small Cap EquityRussell 2000 Index: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

Non U.S. Developed Market EquityMSCI EAFE: This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

Non U.S. Emerging Market EquityMSCI Emerging Markets Index: A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of December 31, 2010, the MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

Real EstateFTSE NAREIT Equity: The index is designed to represent a comprehensive performance of publicly traded REITs which covers the commercial real estate space across the US economy, offering exposure to all investment and property sectors. It is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria.

CommoditiesBloomberg Commodity Index (BCOM): Formerly known as the Dow Jones-UBS Commodity Index, the index is made up of 22 exchange-traded futures on physical commodities. The index currently represents 20 commodities, weighted to account for economic significance and market liquidity with weighting restrictions on individual commodities and commodity groups to promote diversification. Performance combines the returns of the fully collateralized BCOM Index with the returns on cash collateral (invested in 3 month U.S. Treasury Bills).

Investment Grade Long Maturity Fixed IncomeBarclays Long US Government/Credit: The long component of the Barclays Capital Government/Credit Index with securities in the maturity range from 10 years or more.

Investment Grade Intermediate Maturity Fixed IncomeBarclays US Aggregate Bond Index: This index is a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities. Maturities range from 1 to 30 years with an average maturity of nearly 5 years.

Investment Grade Short Maturity Fixed IncomeBarclays Govt/Credit 1-3 Year: The component of the Barclays Capital Government/Credit Index with securities in the maturity range from 1 up to (but not including) 3 years.

Non-Investment Grade Fixed Income (High Yield)Barclays US Corporate High Yield Index: Covers the universe of fixed rate, non-investment grade debt which includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors. The

index also includes Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Must publicly issued, dollar-denominated and non-convertible, fixed rate (may carry a coupon that steps up or changes according to a predetermined schedule, and be rated high-yield (Ba1 or BB+ or lower) by at least two of the following: Moody’s. S&P, Fitch. Also, must have an outstanding par value of at least $150 million and regardless of call features have at least one year to final maturity.

Global (Non-U.S.) Fixed IncomeBarclays Global Aggregate Bond Index: The index is designed to be a broad based measure of the global investment-grade, fixed rate, fixed income corporate markets outside of the U.S. The major components of this index are the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities.

Multi-Sector BondThe index for the multi-sector bond asset class is composed of one-third the Barclays Aggregate US Bond Index, a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities; maturities range from 1 to 30 years with an average maturity of nearly 5 years, one-third the Barclays US Corporate High Yield Index which covers the universe of fixed rate, non-investment grade debt and includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors and one-third the J.P. Morgan EMBI Global Diversified Index, an unmanaged index of debt instruments of 50 emerging countries.

The Multi-Sector Bond category also includes nontraditional bond funds. Nontraditional bond funds pursue strategies divergent in one or more ways from conventional practice in the broader bond-fund universe. These funds have more flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, and typically with very large allocations. These funds typically have broad freedom to manage interest-rate sensitivity, but attempt to tactically manage those exposures in order to minimize volatility. Funds within this category often will use credit default swaps and other fixed income derivatives to a significant level within their portfolios.

Alternatives InvestmentHFRI Fund of Funds Index: The index only contains fund of funds, which invest with multiple managers through funds or managed accounts. It is an equal-weighted index, which includes over 650 domestic and offshore funds that have at least $50 million under management or have been actively trading for at least 12 months. All funds report assets in US Dollar, and Net of All Fees returns which are on a monthly basis.

Cash & Cash AlternativesCitigroup 3 Month US Treasury Bill: A market value-weighted index of public obligations of the U.S. Treasury with maturities of 3 months.

KEY TERMS

Long/Short EquityLong/short equity managers typically take both long and short positions in equity markets. The ability to vary market exposure may provide a long/short manager with the opportunity to express either a bullish or bearish view, and to potentially mitigate risk during difficult times.

Global MacroHedge funds employing a global macro approach take positions in financial derivatives and other securities on the basis of movements in global financial markets. The strategies are typically based on forecasts and analyses of interest rate trends, movements in the general flow of funds, political changes, government policies, inter-government relations, and other broad systemic factors.

Relative Value ArbitrageA hedge fund that purchases securities expected to appreciate, while simultane-ously selling short related securities that are expected to depreciate.

Multi-StrategyEngage in a broad range of investment strategies, including but not limited to long/short equity, global macro, merger arbitrage, statistical arbitrage, structured credit, and event-driven strategies. The funds have the ability to dynamically shift capital among the various sub-strategies, seeking the greatest perceived risk/reward opportunities at any given time.

19

OCTOBER 2015

Event-DrivenEvent-driven managers typically focus on company-specific events. Examples of such events include mergers, acquisitions, bankruptcies, reorganizations, spin-offs and other events that could be considered to offer “catalyst driven” investment opportunities. These managers will primarily trade equities and bonds.

Special SituationsManagers invest in companies based on a special situation, rather than the underlying fundamentals of the company or some other investment rationale. An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation, and is generally not a long-term investment.

Managed FuturesManaged futures strategies trade in a variety of global markets, attempting to identify and profit from rising or falling trends that develop in these markets. Markets that are traded often include financials (interest rates, stock indices and currencies), as well as commodities (energy, metals and agriculturals).

INDEX DEFINITIONS

Barclays U.S. Aggregate Bond IndexA broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. Securities must be rated investment-grade or higher using the middle rating of Moody’s, S&P and Fitch. When a rating from only two agencies is available, the lower is used. Information on this index is available at [email protected].

DISCLOSURE

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. The performance mentioned does not include fees and charges which would reduce an investor’s return. Dividends are not guaranteed and will fluctuate. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.

International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging and frontier markets can be riskier than investing in well-established foreign markets.

Investing in small- and mid-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term obligations of the U.S. government.

While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit.

If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency.

Commodities and currencies are generally considered speculative because of the significant potential for investment loss. They are volatile investments and should only form a small part of a diversified portfolio. Markets for precious metals and other commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio.

Beta compares volatility of a security with an index.

Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. Investors should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in hedge funds, managed futures, distressed credit or other similar strategies if they do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. The S&P 500 is an unmanaged index of 500 widely held stocks.

The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Investing in the energy sector involves risks and is not suitable for all investors.

The performance mentioned does not include fees and charges which would reduce an investor’s returns. The indexes are unmanaged and an investment cannot be made directly into them. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ over-the-counter market. The S&P 500 is an unmanaged index of 500 widely held securities. The Shanghai Composite Index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

MODEL DEFINITIONS

Conservative Portfolio: may be appropriate for investors with long-term income distribution needs who are sensitive to short-term losses yet want to achieve some capital appreciation. The equity portion of this portfolio generates capital appreciation, which is appropriate for investors who are sensitive to the effects of market fluctuation but need to sustain purchasing power. This portfolio, which has a higher weighting in bonds than in stocks, seeks to keep investors ahead of the effects of inflation with an eye toward maintaining principal stability.

Conservative Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. The portfolio, which has an equal weighting in stocks and bonds, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader market with lower levels of risk and volatility.

Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader equity market with lower levels of risk and volatility.

Balanced with Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks seeks to keep investors well ahead of the effects of inflation with principal stability as a secondary consideration. The portfolio has return and short-term loss characteristics that may deliver returns slightly lower than that of the broader equity market with slightly lower levels of risk and volatility.

Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has 100% in stocks, seeks to keep investors well ahead of the effects of inflation with little regard for maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns comparable to those of the broader equity market with similar levels of risk and volatility.

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Articles with bylines are submitted by industry specialists and reprinted with permission. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

©2015 Raymond James Financial Services, Inc., member FINRA/SIPC ©2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 15-BDMKT-1921 CW 10/15

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