The S&P 500 return during the second quarter was 2.46%. The forward price earnings (PE) multiple was 16.6x at quarter end, slightly above its long term average. From its low in March 2009, when the forward PE was 10.3x, the S&P 500 has increased 210% excluding dividends. There is a high correlation between the forward PE multiple and subsequent returns, with higher multiples correlated strongly with lower subsequent returns and lower multiples correlated strongly with higher returns.

Developed international and emerging market equity valuations are modestly below their historical averages, and we expect better returns from these asset categories than the domestic equity market. For multiple asset class portfolios, we have gradually increased the allocation to developed international and emerging stock markets.

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