Market & Economic Insights 3Q 2017
Economic Outlook – 5 Factors Positive/ Neutral/ 5 Factors Comments Negative • U.S. Fed has raised rates four times (Dec 15; Dec 16; Mar & June 17); one more expected in 2017 Monetary Policy NEGATIVE • Other central banks (ECB, BOJ) continuing accommodative policy • U.S. Fed set the stage for the reduction of $4T balance sheet beginning late 2017 • Trump agenda focused on fiscal stimulus: tax cuts, infrastructure spending • CBO expects budget deficits & federal net debt as % of GDP to grow Fiscal Policy NEUTRAL • Fiscal policy lag may continue to prove challenging • U.S. experiencing slow GDP growth, but consumer health still strong Global Macro • U.S. unemployment low at 4.4% – tightening labor market Environment NEUTRAL • Global macro environment improving. Macron winning French presidential election (U.S. Emphasis) helps stabilize geopolitical concerns in Europe, aside from Brexit • Valuations stretched • Corporate earnings will be challenged by increasing financing costs Valuations NEGATIVE • High Yield spreads have contracted significantly • Expected pro-business environment increasing equity market confidence Investor • Positive market momentum POSITIVE Sentiment • S&P 500 positive 15 of the last 16 months
Impact of Fed Tightening Historic Rate Hikes Fed Funds Rate Increase 10 Year Treasury Increase 5% Last 5 Rate Hike 4.25% Cycle Averages: 4% • Fed Funds Rate: 3.25% 3.0% Increase 3.13% 3.00% 2.74% 3% • 10 Year Treasury: 1.0% Increase 1.85% 1.75% 2% Current Cycle Expectations: 1.00% 0.91% 1% 0.50% 0.50% • Fed Funds Rate: 0.14% - Fed = 3.0% 0% - Market = 2.0% MAY 1983-JUL 1984 MAR 1988-FEB 1989 FEB 1994-FEB 1995 JUN 1999-MAY 2000 JUN 2004-JUN 2006 DEC 2015-? May 1983-Jul 1984 Mar 1988-Feb 1989 Feb 1994-Feb 1995 Jun 1999-May 2000 Jun 2004-Jun 2006 Dec 2015-? # of Rate Increases 7 10 7 6 17 4 Time Period (Months) 14 11 12 11 24 19 Fed Funds Rate Increase 3.13% 3.25% 3.00% 1.75% 4.25% 1.00% 10 Year Treasury Increase 2.74% 0.91% 1.85% 0.50% 0.50% 0.14% S&P 500 Return -9.60% 6.80% -2.10% 8.50% 12.00% 14.44% U.S. Dollar 10.40% 1.70% -4.70% 3.40% -5.80% -3.00% Source: Federal Reserve; Morningstar Direct; JP Morgan Asset Management
U.S. Treasury Curve – Historical Perspective 6% 5% 5.03% 4% Flattening 3.04% 3% 2% 2.31% 1% 0% 1 Mon 3 Mon 6 Mon 1 YR 2 YR 3YR 5 YR 7 YR 10 YR 20 YR 30 YR 6/30/2017 12/31/2013 6/30/2007 Once one accounts for increasing inflation assumptions in moving along the curve, the real yield curve is flat at best, and may be in the process of inverting. Applying long-term historic inflation to the nominal yield curve results in negative real rates on the longer end of the curve. Source: U.S. Department of the Treasury
Expansion – Growth Improving Indicator THEN NOW Recent POS/NEG 12-31-16 7-31-17 Move Industrial Production 0.5 2.0 Pos ISM Non Manufacturing* 57.2 53.9 Neg June 57.4 Recent High ISM* 54.7 56.3 Neg June 57.8 Recent High Real Trade Deficit Q2Imp -41.4 -43.8 Pos Real GDP annual rate Q2Imp 1.9 2.1 Pos Consumer Confidence 113.3 121.1 Pos Real Consumer Spending 2.8 2.4 Pos Annual Rate Non-Farm Payrolls Q2Imp 156,000 209,000 Pos Unemployment Rate Q2Imp 4.7 4.3 Pos
Economic Cycle and Recession Probability Business Cycle Position • The U.S. is well into a growth phase, but economic growth may Recession continue for some time Probability and Years to • However, declines in Recession equity valuations typically precede recessions Source: Goldman Sachs Global Investment Research, National Bureau of Economic Research, GSAM, Fidelity Investments (AART)
Prices Have Outpaced Earnings S&P 500 Return Components - Last 5 Yrs. 2016 6% 2% 4% 2015 -11% 2% 10% 2014 5% 2% 6% 2013 11% 2% 20% 2012 0% 2% 13% Operating Earnings Growth Dividend Yield Price (Multiple) Expansion • Over the last five years, earnings for U.S. companies have grown just 13%, yet the stock market has rallied 87% • The rally in U.S. stocks has been driven by expanding valuation multiples – investors paying more to own stocks, rather than underlying corporate earnings growth Source: Advisor Intelligence; Standard & Poor’s; Morningstar Direct
U.S. vs. International Stocks: Performance Cycles Per-Cycle Cumulative Relative Performance, S&P 500 vs. MSCI EAFE Possible new cycle: International outperforming U.S. for five of seven months beginning November 2016 200% Cycle of U.S. Stocks 100% Outperforming 0% Cycle of Intl. Stocks 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 -100% Outperforming -200% -300% -400% -500% -600% -700% -800% -900% -1000% -1100% -1200% -1300% -1400% U.S. stocks and developed market international stocks may outperform each other over cycles of multiple years, and the cumulative performance difference each cycle may be significant. Source: Morningstar Direct
Will the Market Decline 10%? S&P 500 Calender Year Price Returns and Annual Max Declines 40 34 31 30 27 27 30 26 26 26 26 23 20 20 15 17 20 15 14 13 13 12 11 10 9 8 7 10 4 4 3 2 1 0 0 -1 -2 -3 -10 -7 -10 -6 -7 -10 -10 -11 -12 -13 -20 -23 -30 -40 -38 Median Annual Max Decline = 10.5%; 2016 = 11% -50 Annual Calendar Year Returns positive in 28 of 37 Years (75%) -49 -60 Calender Year Returns (%) Intra Year Max Declines (%) Source: JPMorgan Asset Management
Strategic Market Outlook – Portfolio Impact • Increase INTL Exposure • Add INTL Small Cap • Add EM Exposure • Add ALT EM Bond Exposure • Retain Conservative Stance in Domestic Fixed Income • Reduce Risk in Equity Space through Strategy Selection 10
Disclosures Financial Advisory Consultants DBA/Cornerstone Management Inc. is a Registered Investment Advisory Firm. Although the information in this report has been obtained from sources that the Firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. This presentation may only be dispensed with the disclosure page attached. Market & Economic Insights Contacts: Bryan Taylor, Winters Richwine, or Chad Crawford Phone: 770-449-7799 Email: bryan@cornerstonemgt.net winters@cornerstonemgt.net chad@cornerstonemgt.net Web Address: www.cornerstonemgt.net
Recommend
More recommend
