Southeastern Council of Foundations 49th Annual Meeting

Transcription

1 Southeastern Council of Foundations 49th Annual Meeting

2 Southeastern Council of Foundations 49th Annual Meeting Here be Dragons Wednesday, November 7th, 8-9:3 AM FEATURING: Paul Eitelman, Senior Investment Strategist Russell Investments

3 Bear markets are usually caused by recessions CALENDAR YEAR S&P 5 INDEX RETURNS Recession year Within 12 months of a recession *coloring only shown for down years in markets RATES OF RETURN % -4% -3% -2% -1% % 1% 2% 3% 4% 5% 6% Represented by the S&P 5 Index from Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

4 The peak in equities usually predates the recession The lead time averages about 6 months S&P 5 Index, market peak= recession 12m lead S&P 5 Index, market peak= recession 1m lead S&P 5 Index, market peak=1 198 recession Months from onset of recession Months from onset of recession Months from onset of recession S&P 5 Index, market peak= recession 1 8m lead S&P 5 Index, market peak=1 199 recession no lead S&P 5 Index, market peak=1 21 recession Months from onset of recession Months from onset of recession Months from onset of recession S&P 5 Index, market peak=1 28 recession m lead Months from onset of recession Source: Russell Investments, Thomson Reuters Datastream, NBER. The blue lines above are cut off when the recession ends and the next economic expansion gets underway. Past performance is no guarantee of future results. 8m lead no lead Time from market peak to recession onset: Average 6 months Minimum no lead time Maximum 12 months Selloff from mkt peak to onset of recession: Median -5.4% Minimum no change Maximum -22.3% Selloffs deepen further until a couple of months before the recession ends

5 The peak in credit often happens even earlier The lead time varies more but averages about 22 months BAA, chg in spreads from cycle low, bps 1969 recession BAA, chg in spreads from cycle low, bps 1973 recession BAA, chg in spreads from cycle low, bps 198 recession 2 46m lead 25 3m lead 25 18m lead Months from onset of recession Months from onset of recession Months from onset of recession BAA, chg in spreads from cycle low, bps 1981 recession HY, chg in spreads from cycle low, bps 199 recession HY, chg in spreads from cycle low, bps 21 recession 25 no lead 8 33m lead 8 48m lead Months from onset of recession Months from onset of recession Months from onset of recession Time from spread bottom to recession onset: Average 22 months Minimum no lead time Maximum 48 months Selloff from mkt peak to onset of recession: (199 onwards for the high yield index only) Average 372bps Minimum 253bps Maximum 485bps The peak in spreads usually lands right at the end of the recession (+/- 2 months) HY, chg in spreads from cycle low, bps 28 recession 18 6m lead Months from onset of recession Source: Russell Investments, Thomson Reuters Datastream, NBER. The blue lines above are cut off when the recession ends and the next economic expansion gets underway. BAA spreads are used as a proxy from 1966 to Past performance is no guarantee of future results.

6 Output gap Risk level: US output gap % of potential GDP % Source: Russell Investments, Federal Reserve Board staff FRBUS model estimate. August 218.

7 Labor market stack Risk level: US Headline Unemployment and NAIRU % Headline unemployment (U3, I.axis): 4.1% Non-Accelerating Inflation Rate of Unemployment (NAIRU) Recession Source: Thomson Reuters Datastream, August 18

8 Household debt service US Household debt service ratio Risk level: % US household debt service payments as % of disposable income (debt service ratio) Average Source: Thomson Reuters Datastream, Q1 18

9 Non-financial corporate debt levels US Non-financial corporate debt as %GDP Risk level: % GDP US Non-financial corporate debt: 45.3% Source: Thomson Reuters Datastream, Q1 218.

10 The stance of Fed policy When will Fed policy turn restrictive? Risk level: % Laubach-Williams nominal neutral rate Federal funds target Source: Thomson Reuters Datastream, Q2 18

11 Risk level: The slope of the yield curve The yield curve has flattened but is still a ways from inverted % US Yield Curve (1Y-2Y) Recession Source: Thomson Reuters Datastream, 9/13/18

12 Business Cycle Index (BCI) BCI model historical forecasted recession probabilities Risk level: Recession Forecasted 1 month ahead recession probability Forecasted 3 month ahead recession probability Forecasted 12 month ahead recession probability Source: Russell Investments, September 218.

13 Expected Returns US Fixed Interest (1 Yr) Asset June 218 USD_Govt_Short 3.2% USD_Govt_Medium 3.3% USD_Govt_Long 3.1% USD_Credit_Short 4.1% USD_Credit_Medium 4.2% USD_Credit_Long 3.3% USD_FI_Agg 3.6% USD_Govt_IL_Short 3.% USD_Govt_IL_Medium 3.% USD_Govt_IL_Long 2.9% Cash 3.2% Source: Russell Investments, 6/3/18. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no guarantee that any stated results will occur.

14 Equity analysts are the most bullish that they ve been since the late 199s Expected EPS growth next five years Realized EPS growth next five years average average Source: Thomson Reuters Datastream. Consensus estimates are bottom up estimates from IBES. Data as of August 218.

15 Global Equity Components 1 Yr Strategic Planning vs Market Conditional Region Strategic Planning Market Conditional Australia 8.8% 7.7% Canada 7.7% 6.4% Europe 7.% 5.4% UK 8.% 8.2% Japan 5.9% 6.2% New Zealand 8.8% 4.8% US 8.% 2.8% 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Global equity components Strategic planning Market conditional AUS CAD EUR GBP JPN NZD USD Source: Russell Investments, 6/3/18. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no guarantee that any stated results will occur.

16 Decomposition of Total Returns US Equities Annualized Cumulative Return Annualized Cumulative Return 6.% 5.% 4.% 3.% 2.% 1.%.% US Equity 5 Yr Horizon 1.9% 1.% 2.1% 1.3% -3.7% Inflation Earnings Growth D/P Ratio Multiple Reversion Total Return US Equity 1 Yr Horizon 2.% Annualized Cumulative Return 2.1%.8% -3.5% 1.4% Inflation Earnings Growth D/P Ratio Multiple Reversion Total Return Annualized Cumulative Return 8.% 6.% 4.% 2.%.% US Equity Equilibrium Horizon 2.2%.% 6.2% 2.1% 2.% Inflation Earnings Growth D/P Ratio Multiple Reversion Total Return Source: Russell Investments, 6/3/18. Source: Russell Investments, 6/3/18.

17 What can we do about all of this?

18 Important information and disclosures Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Russell Investments ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments management. Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the FTSE RUSSELL brand. Copyright 218 Russell Investments Group, LLC. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Date of first use: June 218, Revised September 218 AI THIS CONFERENCE MATERIAL WAS CREATED BY RUSSELL INVESTMENTS AS AN EDUCATIONAL TOOL, AND IS NOT FOR FURTHER DISTRIBUTION.

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20 Special Thanks to our 218 Annual Meeting Sponsors

21 Thank you! Any questions?