Real GDP is forecasted to rise at a 3.9% annualized rate in the second half of 2009 on modest broad-based economic growth, and a concurrent slowdown in the inventory correction. Both manufacturing and service activity indicators point to a possible end of the recession in September, although disappointing employment measures indicate continued weakness in labor markets. We expect consumer spending to slow again in the fourth quarter after solid growth in the third quarter, which was bolstered in part by the “cash for clunkers” program. However, the recovery is expected to reach the consumer in 2010, as monetary and fiscal stimulus enters the economy in full force. Real GDP and inflation (CPI-U) are forecasted at 3.4% and 3.0% respectively in 2010, but both may exceed those levels. The Federal Reserve will likely attempt to maintain the Fed Funds rate target in the 0% to 0.25% range into the first half of next year, but possible inflationary pressures, compounded by ballooning federal deficits dependent on foreign capital for financing, may put upward pressures on long-term interest rates, and continued downward pressures on the dollar next year.

Financial markets continued a remarkable recovery in the third quarter as credit conditions further improved from last year’s meltdown. During the quarter, Treasury yields fell 20 to 30 basis points as markets sorted through mixed economic data. Agency and mortgage-backed securities offered what normally would be respectable returns. However, corporate bonds were again the star performers last quarter as they beat Treasury markets by over 6%. Overall, broad fixed income market indices produced a total return of +3.56% for the period. Looking ahead, we expect 10-year Treasury yields will rise towards 4.10% in late 2010 as economic conditions improve and inflation pressures build. The credit markets should continue to improve but at a slower pace. We have trimmed our emphasis on corporate bonds to “neutral” given the strong sector performance. Bond markets have enjoyed a near-ideal environment for several years and attracted tremendous attention from investors. However, going forward we believe better risk-adjusted returns will be found in competing markets such as domestic and international equities.

The equity market rally that began in early March barreled ahead in the third quarter on improving fundamentals and increasing risk appetites. The S&P 500 index posted a total return of +15.59% for the period. Third quarter results continued to favor higher risk areas of the markets such as smaller companies, cyclical industries, and lower quality companies. Looking ahead, we expect equity markets to continue posting positive gains through 2010 albeit at a slower pace. The market seems to be transitioning from a liquidity- to profits-driven market and with that adjustment there will likely be higher volatility. A 10% correction could occur at any time; however, we would view such an event as a buying opportunity. Valuation levels remain attractive, liquidity measures are high, and most importantly, economic conditions are showing signs of improvement. As a result, earnings expectations are sufficiently depressed to allow for positive surprises later this year and next. Our sector emphasis favors cyclical areas (technology, industrial, energy) at the expense of defensive safe havens (staples, healthcare, utilities).

Broad international market gains continued through the third quarter in both developed and emerging countries. Japan’s market grew more slowly as the 50 year reign of the ruling party in that country came to an end, leading to some policy uncertainty. In general, markets favored more speculative issues, with lower quality, smaller capitalization and higher valuation issues doing relatively better in most regions. We see market valuations as much closer to expectations at this point. There could be a pause in gains if the earnings reports coming out in October and November are not better than expectations. Economic data is still mixed, but steadily improving, with employment in the developed countries as the main concern. Monetary policy in the largest economies is still very stimulative, and that cash seems to be heading into equity markets, so further gains in the fourth quarter are certainly possible. We continue to find opportunities to invest in stocks with reasonable valuations representing companies with stable finances and the ability to gain from continued economic recovery.

The funds are distributed by Unified Financial Securities, Inc. (Member FINRA) a wholly owned subsidiary of Huntington Bancshares, Inc. and an affiliate of Huntington Asset Advisors, Inc. the advisor to the Huntington Funds.

While believed to be accurate, the presented information is general in nature. Investors should consider their individual financial circumstances and the inherent risks of investing with their investment advisor. Contributors: Kirk Mentzer, Director of Research; George Mokrzan, Senior Economist;
Madelynn Matlock, Director of International Investments

The Fund's past performance does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 1-800-253-0412.

The views expressed in this reprint are those of the author as of 10/09/2009, and are not intended as a forecast or as investment recommendations.