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Q3 2016: Walls of Worry

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A quiet summer did not resolve investors’ many concerns: extremely low bond yields, the potential for rate increases to hit bond prices, high equity valuations, and political uncertainty. Nonetheless, global stock and bond markets in Q3 steadily climbed these “walls of worry.” We like broadly higher asset prices, but it’s also a sign that market correlations have increased sharply lately. This makes true diversification harder to achieve and might not bode well for investors if markets fall in tandem.

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1Sources: Aviva Investors, Morningstar Direct. As of 12/31/15.

Correlation Coefficient: a measure that determines the degree to which two variables’ movements are associated. The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation and +1 indicates perfect positive correlation.

U.S. Equities represented by S&P 500®Index. U.S. Investment Grade Bonds represented by Bloomberg Barclays U.S. Corp IG. European Corporate Bonds represented by Bloomberg Barclays EUR Corporate bonds 1-5Y. U.S. High Yield Bonds represented by Bloomberg Barclays U.S. Corporate High Yield. Asset Backed Securities represented by Bloomberg Barclays ABS. CMBS represented by Bloomberg Barclays CMBS IG. European Equity represented by MSCI Europe. Japanese Equity represented by Nikkei 225 Average. Emerging Markets Equity represented by MSCI EM.

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Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.