Stifel: The Knall/Cohen Group Market Commentary Second Quarter 2017
Index Returns: Second Quarter 2017 10.0% 8.0% 6.4% 6.4% 6.0% 4.5% 4.0% 3.1% 2.5% 2.0% 1.5% 0.0% ‐ 2.0% ‐ 4.0% ‐ 6.0% ‐ 5.5% ‐ 8.0% ‐ 10.0% MSCI Emerging MSCI EAFE MSCI All S&P 500 Index Russell 2000 Bloomberg S&P GS Markets Index Index Country World Index Barclays U.S. Commodity Index Aggregate Index Index International stocks outperformed the U.S. in the second quarter of 2017, while commodities lagged due to a decline in oil prices. Sources: Zephyr StyleADVISOR; Bloomberg. 1 Equities
Index Returns: 2Q17 Year ‐ to ‐ Date 20.0% 18.6% 14.2% 15.0% 11.8% 9.3% 10.0% 5.0% 5.0% 2.3% 0.0% ‐ 5.0% ‐ 10.0% ‐ 10.2% ‐ 15.0% ‐ 20.0% MSCI Emerging MSCI EAFE MSCI All S&P 500 Index Russell 2000 Bloomberg S&P GS Markets Index Index Country World Index Barclays U.S. Commodity Index Aggregate Index Index Emerging market equities have gained nearly 19% this year, international developed markets were up 14% through the first six months, and the S&P 500 Index increased 9% year ‐ to ‐ date. Sources: Zephyr StyleADVISOR; Bloomberg. 2 Equities
Low Volatility for the S&P 500 Index in 2017 2017 Has Been One of the Least Volatile Years We’ve Seen in Decades The S&P 500 Index was up on a total return basis in each of the first six months of 2017. The last two times this occurred was 1995 and 1996. The S&P 500 Index closed up or down at least 1% only four times during the first half of the year. The last time that occurred was 1972, with only three instances. The record was 1964 with only one, and the most was in 1932 with 91. The largest pullback was only 2.8% (March 1 until April 13) and that was the second ‐ smallest first ‐ half pullback ever (1995 at 1.7% is the record). The average first ‐ half pullback has been 9.0% since 1950. Sources: LPL Research; Knall/Cohen Group. 3 Equities
Passive Ownership of U.S. Stocks By Vanguard % of Stocks in S&P 500 Index Where Vanguard Owns > 5% of Company 98% 97% 100% 89% 90% 80% 70% 60% 60% 50% 47% 40% 35% 30% 23% 20% 10% 0% 2010 2011 2012 2013 2014 2015 2016 Due to growth in indexing strategies, Vanguard owns at least 5% of the outstanding float of 98% of the companies in the S&P 500 Index, up from 23% in 2010. In addition, Bank of America calculates the proportion of stocks in the S&P 500 Index now managed passively has nearly doubled since the 2008 crisis to 37%, while ETF trading accounts for about one ‐ fourth of the daily volume across U.S. exchanges. So when investors want to sell how much liquidity will there be? Who will be buying? Source: Zerohedge.com. 4 Equities
S&P 500 Index Sector Returns: 2Q17 Year ‐ to ‐ Date 20.0% 17% 16% 15.0% 11% 10% 10.0% 9% 9% 8% 7% 6% 5.0% 0.0% ‐ 5.0% ‐ 10.0% ‐ 11% ‐ 13% ‐ 15.0% ‐ 20.0% Technology Health Care Consumer Industrials Materials Utilities Consumer Financials Real Estate Telecom Energy Discretionary Staples Growth stocks outperformed value thus far in 2017, led by Technology and Health Care, with Energy and Telecom lagging. Source: Standard & Poor’s. 5 Equities
Country Returns: 2Q17 Year ‐ to ‐ Date 29% 30% 25% 24% 21% 20% 18% 16% 16% 13% 10% 10% 9% 9% 10% 8% 3% 0% ‐ 10% ‐ 14% ‐ 20% Greece China Spain India France Germany Italy Portugal U.K. Japan U.S. Australia Ireland Brazil Russia Emerging market countries were among the top performers with Greece gaining 29%, China 25%, and India 21%. Sources: Zephyr StyleADVISOR; MSCI (Gross, U.S. dollars); Standard & Poor’s. 6 Equities
Government Bonds, Yield Curve As of April 12, 2016 Maturity Country 2 ‐ Year 3 ‐ Year 5 ‐ Year 7 ‐ Year 10 ‐ Year Yields remain low across the world with many countries U.S. 0.9% 1.2% 1.2% 1.5% 1.8% having negative interest rates. United Kingdom 0.4% 0.6% 0.8% 1.2% 1.4% Relative to Europe and Japan, France ‐ 0.5% ‐ 0.4% ‐ 0.2% 0.1% 0.5% interest rates in the U.S. are Germany ‐ 0.5% ‐ 0.5% ‐ 0.4% ‐ 0.2% 0.2% attractive to investors. Japan ‐ 0.3% ‐ 0.3% ‐ 0.2% ‐ 0.2% ‐ 0.1% Compared to the Spring of 2016, Switzerland ‐ 1.0% ‐ 1.0% ‐ 0.8% ‐ 0.6% ‐ 0.4% current interest rates in the countries shown have generally As of July 10, 2017 increased across the yield curve, Maturity except for the United Kingdom Country 2 ‐ Year 3 ‐ Year 5 ‐ Year 7 ‐ Year 10 ‐ Year where interest rates have slightly U.S. 1.4% 1.6% 2.0% 2.2% 2.4% declined due to concerns about a potential economic slowdown United Kingdom 0.3% 0.4% 0.7% 1.0% 1.3% related to Brexit. France ‐ 0.4% ‐ 0.3% 0.0% 0.4% 0.9% Germany ‐ 0.6% ‐ 0.5% ‐ 0.2% 0.1% 0.6% Japan ‐ 0.1% ‐ 0.1% ‐ 0.1% 0.0% 0.1% Switzerland ‐ 0.9% ‐ 0.7% ‐ 0.5% ‐ 0.3% 0.0% Sources: Bloomberg, Thomson One, July 10, 2017.; Knall/Cohen Group. 7 Fixed Income
“Riskier” Debt Has Very Low Yields Too Security Yield at Issue Date Debt Issue Date South Korea 50 ‐ Year Government Bond 1.6% October 2016 Ireland 100 ‐ Year Government Bond 2.4% March 2016 Italy 50 ‐ Year Government Bond 2.9% September 2016 Spain 50 ‐ Year Government Bond 3.5% May 2016 Mexico 100 ‐ Year Government Bond 4.2% April 2015 Argentina 100 ‐ Year Government Bond 7.9% June 2017 In June, the Argentine government raised $2.8 billion by issuing 100 ‐ year maturity bonds at a yield of 7.9%. This was the first time a junk ‐ rated government sold century bonds. At the start of 2016, Argentina was effectively barred from international bond markets, the result of an $80 billion default in 2001. Argentina has defaulted on their debt eight times since 1827. Sources: The Wall Street Journal , June 20, 2017; Bloomberg; Knall/Cohen Group. 8 Fixed Income
Growth in ETF Yield Product Over the Past Decade Due to low interest rates, a “thirst for yield” by investors has led to demand for income assets, such as corporate debt, REITs, emerging market bonds, MLPs, and dividend stocks. Source: WSJ’s The Daily Shot, June 28, 2017. 9 Fixed Income
Impact of Higher Interest Rates on Bond Returns 6/30/17 Price Impact if 1% U.S. Treasury Yield Rise in Interest Rates 2 ‐ Year 1.4% ‐ 1.9% 5 ‐ Year 1.9% ‐ 4.7% 10 ‐ Year 2.3% ‐ 8.4% 30 ‐ Year 2.8% ‐ 17.7% Indices Barclays U.S. Aggregate Index 2.6% ‐ 5.9% Barclays Municipal Index 2.2% ‐ 6.0% Barclays U.S. Corp. High Yield Index 5.6% ‐ 4.0% Source: JP Morgan, Guide to the Markets, June 2017. 10 Fixed Income
Global Central Bank Balance Sheets The amount of money printing by the major global central banks has been massive, but it is forecasted to hit a plateau soon at approximately $16 trillion, up from less than $4 trillion in 2007. Source: WSJ’s The Daily Shot, June 12, 2017. 11 Fixed Income
S&P 500 Index Forward P/E Multiple 30.0 26 25.0 20.0 17 17 16 15 14 15.0 10.0 5.0 0.0 Mar ‐ 00 Oct ‐ 07 Dec ‐ 16 Jun ‐ 17 10 ‐ Year Average 25 ‐ Year Average The current forward price ‐ to ‐ earnings multiple for the S&P 500 Index at 17x is slightly above the 25 ‐ year average of 16x, but well below the 2000 bubble at 26x earnings. Sources: FactSet Research; JP Morgan. 12 Valuation
S&P 500 Index Earnings Growth 15.0% 12% 10% 10.0% 7% 6% 6% 5.0% 0% 0% 0.0% 2012 2013 2014 2015 2016 2017F 2018F After mid ‐ to ‐ high single digit earnings growth in 2012 through 2014 and no earnings growth in 2015 and 2016, the companies in the S&P 500 Index are forecasting double digit earnings gains in 2017 and 2018. Sources: FactSet Earnings Insight, July 7, 2017; Knall/Cohen Group. 13 Valuation
Tech Valuations Not Far Off from Broad Market Although technology companies have been among the top performing stocks this year, their valuations are not far off from the overall market (S&P 500 Index). Valuation multiples during the Tech bubble of March 2000 were unusually high, but that is not the case today. Source: WSJ’s The Daily Shot, June 13, 2017. 14 Valuation
Equity Fundamentals Are Stronger Than Prior Peaks March 27 October 11 July 3 2000 2007 2017 S&P 500 Index Price 1,527 1,576 2,429 Trailing Earnings per Share $53 $85 $113 Trailing P/E Multiple 29x 19x 22x Free Cash Flow Yield 2.6% 2.3% 4.7% Net Debt/EBITDA 4.1x 4.5x 1.5x 10 ‐ Year U.S. Treasury 6.2% 4.6% 2.4% Equity fundamentals are stronger than the prior peaks of 2000 and 2007 due to higher cash flow generation and less debt. Sources: Lazard Asset Management; Knall/Cohen Group. 15 Valuation
Global Equity Market Valuation 30 Forward Price ‐ to ‐ Earnings Multiples 25 Current Median (July 2017) 10 ‐ Year Median 20 18 16 15 15 15 15 13 13 12 10 5 0 S&P 500 MSCI Europe MSCI Japan MSCI Emerging Markets Similar to the U.S., valuation multiples outside the U.S. are slightly above their historical averages. Sources: Lazard Asset Management (July 4, 2017). 16 Valuation
High Yield Bond Market Seems Priced for Perfection The high yield bond index has a yield below 6%, while the spread above U.S. Treasuries is approaching a multi ‐ decade low. This indicates that high yield bonds are generally not cheap. Sources: Stifel Research Brief, June 28, 2017; Bloomberg, Knall/Cohen Group. *OAS: Option Adjusted Spread 17 Valuation
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