By Pax World Chief Investment Officer, Chris Brown

In a concerted effort, global central banks around the world announced major stimulative actions during the quarter.  The European Central Bank indicated it would use everything in its power to lower bond yields while the Federal Reserve Bank declared another round of quantitative easing (QE3)1 and essentially left open the possibility of additional easing. Markets here and abroad rallied significantly on the news.  However, we still face a slowing global economy, a potential “fiscal cliff2” and decelerating earnings growth here in the U.S. and abroad. Central bank policies may help drive the markets higher in the short-term, but ultimately we need stronger economic fundamentals to sustain the markets. We believe consensus estimates for fourth quarter corporate profits could decrease further, especially after third quarter results are announced in October.

Against this backdrop, we have become less sanguine about the markets in the near-term, particularly with respect to early 2013. However, in light of the many recent stimulus announcements, the markets still have the potential to eke out further gains between now and the end of the year.  With this in mind, we continue to favor companies with strong balance sheets, growing dividends and the ability to increase profits regardless of the economic environment. Bond yields continue to be depressed as a result of central bank policies. As a result, stock dividend yields are at one of their highest levels over bond yields which, combined with the factors mentioned above, makes a strong case for owning equities. We continue to believe that maintaining a diversified3 portfolio of stocks and bonds is the best strategy for navigating these uncertain times.

Thank you for your support and interest in the Pax World Funds.

1 Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

2 Fiscal cliff refers to expiration of Bush-era tax cuts, combined with drastic spending cuts on the defense and domestic budgets.

3 Diversification does not eliminate the risk of experiencing investment losses.

Past performance does not guarantee future results.

 

The statements and opinions expressed are those of the author as of the date of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security.

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