The pace of events in Europe’s sovereign debt crisis quickened in the third quarter, increasing the probability that the financials sector would be compelled to realize debt-related losses in the near term. A financial crisis in Europe appears as likely as a fourth-quarter recovery. We favor a conservative investment stance as the fourth quarter begins.

U.S. investments appear attractive in a global context

Amid Europe’s turmoil, U.S.-based assets have increased in relative appeal. Even following the decision in early August by Standard & Poor’s to drop the U.S. long-term sovereign credit rating from AAA to AA+, U.S. government securities have unexpectedly rallied. From the day of the downgrade through September 30, the 30-year Treasury bond rose a surprising 9%. Aside from Treasuries, U.S. equities have also outperformed non-U.S. equities.

Even the much-maligned U.S. dollar has recently regained luster. The dollar’s strength has implications for other asset classes. Commodities, which are priced in dollars on global markets, often weaken when the greenback rises.

While risk is the paramount current concern, it can also be valuable for investors to consider how to be ready for an eventual recovery. One constructive approach is dollar-cost averaging. Although this strategy cannot protect existing investments from losing value, it can take advantage of developing valuation opportunities in a systematic way.

Read Capital Markets Outlook.