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«Navigating Volatility: Staying the Course The Dow Jones Industrial Average Index was down more than 1,000 points last week, marking its first ...»

Consulting Group Market Commentary

August 26, 2015

Navigating Volatility: Staying the Course

The Dow Jones Industrial Average Index was down more than 1,000 points last week, marking its first official

correction in four years. The selloff continued into the start of this week, as the S&P500 dropped 10% off its recent

peak. While a number of factors were at play, we believe the selloff was triggered by a repricing of global growth

expectations – not entirely “out of the blue” when considering the primary culprit was China. Weakness in the world’s second largest economy, coupled with low growth in Europe and Japan, appears to have sparked concern over the prospects for corporate earnings growth in the US.

While a slowdown in China’s economic engine could have global ramifications, our fundamental outlook for the United States has not changed.

• We believe the US will continue to grow at a moderate pace with little inflation pressure on the back of a stronger US dollar.

• In the near term, the Fed’s first rate increase, which had been widely expected to take place in September, could be put on ice to provide solace for risk assets.

• We see it as a positive sign that China has responded quickly with a series of interest rate cuts and liquidity injections.

• We remain optimistic on Europe, as the ECB’s quantitative easing program should buoy equity prices and fuel earnings growth for multinationals.

• With many uncertainties remaining – China, oil prices, Fed rate hike – we recommend preparing for increased equity volatility in the future.

We believe this market correction, somewhat of a natural and healthy repricing, was long overdue; however, the pace and scope of the selloff was startling. As always, these events bring to light the importance of controlling for market volatility, rather than attempting to time market shifts. We believe that the most effective way to navigate today’s market environment is to remain focused on the longer-term strategic view – one that is rooted in diversified, low-correlated assets. As displayed in the Asset Class Quilt below, we believe that the incorporation of diversifying strategies such as Global Macro, Event Driven, and Real Assets complement a traditional blend of global bonds and global equities. We find that this results in a portfolio much less susceptible to downside risk and thus more suitable for periods of market volatility.

For more insight, please reference our OAM Strategist viewpoints below:

“Given recent market volatility, we provide a mid-month update on our Equity Risk Model, which remains moderately bullish for equities.” - Andrew Burkly (Portfolio Strategy: Macro Musings – Buying Bull Market Leaders, 8/25/15).

“We remain constructive on equities and expect the markets to sooner than later establish a platform from which the next leg up can emerge.” - John Stoltzfus (Market Strategy Radar Screen, 8/24/15) “Overall, we're respecting the likely need for trend to stabilize, but our market outlook is turning increasingly positive following the latest round of losses.” - Ari Wald (Technical Analysis: Inflection Points, 8/24/15)

–  –  –

Data Source: Bloomberg, Factset, Morningstar, Zephyr. 10 year return data from 1/31/1990 to 6/30/2015 Represented Indices: Russell 3000 (US Equity); MSCI ACWI ex-US (Non-US Equity); MSCI EAFE (Int’l Developed Equity); MSCI Emerging Markets (EM Equity);

Barclays Aggregate (US Core Bond); BofA ML High Yield Master II (US HY Bond); Citigroup WGBI non-USD (Non-US Bond); HFRX Event Driven (Event Driven);

HFRX Macro/CTA (Macro/CTA); 50% FTSE NAREIT All Equity/50% Bloomberg Commodity (Real Assets) Moderate Portfolio Weights: 40% Russell 3000; 20% MSCI ACWI ex-US; 10% Barclays Aggregate; 10% BofA ML High Yield Master; 5% Citigroup WGBI non-USD;

5% HFRX Event Driven; 7% HFRX Macro/CTA; 3% Real Assets.

Past performance is no guarantee of future results. Please see below for disclosures regarding definitions and investment risk.

The opinions expressed herein are subject to change without notice. The Consulting Group is a division of OAM. OAM and Oppenheimer are both indirect wholly owned subsidiaries of Oppenheimer Holdings Inc. Neither OMA nor any of its affiliates offer tax advice. Indices are shown for comparative purposes only. One cannot invest directly in an index.

2

Index Definitions:

Indices are unmanaged, hypothetical portfolios of securities that are often used as a benchmark in evaluating the relative performance of a particular investment. An index should only be compared with a mandate that has a similar investment objective. An Index is not available for direct investment, and does not reflect any of the costs associated with buying and selling individual securities or management fees.

Russell 3000 Index: Measures the performance of the 3,000 largest US companies based on total market capitalization, which represents nearly the entire market capitalization of the investable US equity market. Frank Russell Co. ranks the US common stocks from largest to smallest market capitalization at each annual reconstitution period.

MSCI ACWI ex-US: A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index ExU.S. includes both developed and emerging markets.





MSCI EAFE: The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. EAFE stands for Europe, Australasia and Far East.

MSCI EM: is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Barclays Aggregate Bond Index: This index is comprised of the Barclays Govt/Credit Index, Mortgage-backed Securities and the Asset-backed Securities Indices. All issues in the Aggregate Index are rated BBB or higher, have at least one year to maturity and have an outstanding par value of at least $200 million.

BofAML High Yield Master II Index: A commonly used benchmark index for high yield corporate bonds. It is administered by Merrill Lynch.

The Master II is a measure of the broad high yield market, unlike the Merrill Lynch BB/B Index, which excludes lower-rated securities.

Citigroup non-US WGBI: This index covers thirteen government-bond markets: Australia, Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, and the United Kingdom. For inclusion in this index, a market must total at least (U.S.) $20 billion for three consecutive months.

HFRI Event Driven Index: Event Driven (ED) Managers maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.

HFRI Macro/CTA: Macro strategy managers trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposed to EH, in which the fundamental characteristics on the company are the most significant and integral to investment thesis.

FTSE NAREIT Equity: FTSE NAREIT Equity Index consists of all Real Estate Investment Trusts that currently trade on the New York Stock Exchange, the NASDAQ National Market System and the American Stock Exchange.

Bloomberg Commodity: A rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges. The index serves as a liquid and diversified benchmark for the commodities' asset class. Weightings are based on the economic significance of individual components, while maintaining low volatility and sufficient liquidity.

Disclosures Risk Factors The success of an investment program may be affected by general economic and market conditions, such as interest rates, the availability of credit, inflation rates, economic uncertainty, changes in laws and national and international political circumstances. These factors may affect the level and volatility of securities prices and the liquidity of a portfolio’s investments. Unexpected volatility or illiquidity could result in losses.

Investing in securities is speculative and entails risk. There can be no assurance that the investment objectives will be achieved or that an investment strategy will be successful. Investors should consider the objectives, risks and charges of an investment company carefully before investing. This information is contained in a fund’s prospectus, which can be obtained from your Oppenheimer & Co. Inc. Financial Advisor.

Past Performance does not guarantee future results.

© 2015 All rights reserved. This report is intended for informational purposes only. All information provided and opinions expressed are subject to change without notice. The information and statistical data contained herein have been obtained from sources we believe to be reliable. The opinions expressed herein are subject to change without No part of this report may be reproduced in any manner without the written permission of Oppenheimer Asset Management or any of its affiliates. Any securities discussed should not be construed as a recommendation to buy or sell and there is no guarantee that these securities will be held for a client’s account nor should it be assumed that they were or will be profitable. The Consulting Group is a division of Oppenheimer Asset Management. Oppenheimer Asset Management is the name under which Oppenheimer Asset Management Inc. (“OAM”) does business. OAM is an indirect, wholly owned subsidiary of Oppenheimer Holdings Inc., which is also the indirect parent of Oppenheimer & Co. Inc. (“Oppenheimer”). Oppenheimer is a registered investment adviser and broker dealer. Securities are offered through Oppenheimer OAM 082615MCI 3



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