Quarterly Update. Jessica Burbrink, CFP, CTFA. Clayton Bill, CFA. Kathy Clark. Andrew Heck, JD, CTFA, CFIRS

Transcription

1 Quarterly Update Jessica Burbrink, CFP, CTFA Clayton Bill, CFA Kathy Clark Andrew Heck, JD, CTFA, CFIRS

2 RATE OF RETURN (%) Capital markets PERIODS ENDING DECEMBER 2017 Capital Market Returns U.S. Equity Non-U.S. Developed Eq Emerging Markets U.S. Bonds Global REITs Commodities Q Year 3-Years 5-Years 10-Years Annualized U.S. equity: (Russell 3000 Index) U.S. stock index which includes the 3,000 largest U.S. stocks as measured by market capitalization Non-U.S. developed equity: (MSCI EAFE Index) International market index that includes Western Europe, Japan, Australia and Canada Emerging markets: (MSCI Emerging Markets Index) Emerging markets index that includes S. Korea, Brazil, Russia, India and China U.S. bonds: (Bloomberg Barclays U.S. Aggregate Bond Index) Broad index for U.S. Fixed Income market Global REITs: (FTSE EPRA/NAREIT Developed Index) Index for global publicly traded real estate securities Commodities: (Bloomberg Commodity Index Total Return) Broad index of common commodities CAPITAL MARKETS DECEMBER 31, 2017: U.S. equity up on strong earnings growth and newly signed tax bill Developed non-u.s. stock markets continued upward on strong consumer confidence and low inflation Emerging markets up on improving economic growth and strong technology performance U.S. bonds up as markets priced in higher growth and inflation Global real estate up across most regions as interest rates remained basically unchanged in 2017 Commodities up for 2017, but the various sector returns were mixed Source: Russell Investments, Barclays, Bloomberg, MSCI and FTSE NAREIT. 2

3 What a difference a year can make 3-YEARS ENDING DECEMBER 2016 Annualized % YEAR RETURN REFLECTS Dropping % -1.7% Adding % +25.0% 3-YEARS ENDING DECEMBER 2017 Annualized % % +37.3% % +15.0% +3.5% +10.4% % +1.7% U.S. Equity Non-U.S. Stocks Emerging Markets U.S. Bonds Global REITS Commodities U.S. Stocks Non-U.S. Stocks Emerging Markets U.S. Bonds Global REITS Commodities 2017 was a strong reminder why investment decisions should be based on more than what s been working Market leadership can switch quickly Global diversification helps to position portfolios for what s next U.S. Equity: Russell 3000 Index; Non-U.S. Stocks: MSCI World ex USA Index; Emerging Markets: MSCI Emerging Markets Index; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Index; Global REITS: FTSE/NAREIT EPRA Index; Commodities: Bloomberg Commodity Indexes. 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. 3

4 The greater the reward, the greater the risk? Not in 2017 U.S. EQUTIES DELIVERED ABOVE AVERAGE RETURNS, HISTORICALLY LOW RISK 20 YEARS OF S&P 500 MONTHLY RETURNS (%) JAN FEB MARCH APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC STD DEV % CALENDAR YEAR RETURN Beat 20-year annualized return of 7.2% 3.9% STANDARD DEVIATION Lowest ever annual volatility* 0 DOWN MONTHS First time in history* Source: Morningstar Direct, Russell Investments Standard Deviation based on monthly returns * Since inception of S&P 500 Index in

5 500 points ain t what it used to be DON T BE COERCED INTO ACTION BY HEADLINES IN ,000 Dow 20,000 DOW JONES INDUSTRIAL AVERAGE (DJIA) went up almost 5,000 points in 2017 Dow 21,000 Dow 22,000 Dow 23,000 Dow 24,000 Volatility was historically low in 2017; that may not continue in ,000 23,000 22,000 At a DJIA of 25,000, a 1% decrease is equal to 250 points 21,000 20,000 19,000 A 250 point loss today (1%) is equal to nearly a 10% decrease in 1987 PULLBACK IN PERCENTAGE TERMS DOW LEVEL -1% -5% -10% -15% -20% PULLBACK IN POINT TERMS Aug-87 2,597 (26) (130) (260) (390) (519) Oct-95 5,000 (50) (250) (500) (750) (1,000) Oct-99 10,877 (109) (544) (1,088) (1,632) (2,175) Sep-07 13,930 (139) (697) (1,393) (2,090) (2,786) Dec-17 24,719 (247) (1,236) (2,472) (3,708) (4,944) Source: Factset, Russell Investments As markets go higher, volatility will create the appearance of greater gains and losses Be prepared, not afraid 5

6 U.S. stock market valuations are elevated With valuations above long term averages, the likelihood increases for below-average long term returns - although that outcome is far from given in the near-term. S&P 500 Index: Forward P/E ratio 26x Valuation measure Description Latest 25-year avg.* Std. dev. Over-/under- Valued P/E Forward P/E 18.2x 16.0x x CAPE Shiller s P/E Div. Yield Dividend yield 2.0% 2.0% x P/B Price to book x 18x +1 Std. dev.: 19.2x P/CF Price to cash flow EY Spread EY minus Baa yield 1.3% -0.2% -0.8 Current: 18.2x 16x 25-year average: 16.0x 14x 12x -1 Std. dev.: 12.8x 10x 8x '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: FactSet, FRB, Thomson Reuters, Robert Shiller, Standard & Poor s, J.P. Morgan Asset Management. Price to earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since December 1989, and FactSet for December 31, Average P/E and standard deviations are calculated using 25 years of FactSet history. Shiller s P/E uses trailing 10-years of inflation-adjusted earnings as reported by companies. Dividend yield is calculated as the next 12-month consensus dividend divided by most recent price. Price to book ratio is the price divided by book value per share. Price to cash flow is price divided by NTM cash flow. EY minus Baa yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) minus the Moody s Baa seasoned corporate bond yield. Std. dev. over-/under-valued is calculated using the average and standard deviation over 25 years for each measure. *P/CF is a 20-year average due to cash flow data availability. Data are as of December 31,

7 $450 Markets rally post global financial crisis POTENTIALLY MORE ROOM FOR NON-U.S. EQUITY GROWTH? GLOBAL EQUITY MARKETS Growth of $100 March December % CURRENT P/E vs MAX MED $400 $350 $300 $250 $200 $150 $100 $50 $0 +175% US EAFE CURRENT P/B vs US EAFE CURRENT P/CF vs MIN R3000 EAFE Sources: U.S./R3000: Russell 3000 Index; EAFE: MSCI EAFE Index; P/E: Price to Earnings, P/B: Price to Book, P/CF: Price to Cash Flow. Blue and orange triangles represent current readings for U.S. and EAFE, respectively. US EAFE 7

8 Weakening dollar bolsters international markets Local currency returns were strong outside the U.S., and a dramatic rally in the euro and yen boosted returns even higher for USD-based investors. Country / Region Regions / Broad Indexes Returns 15-year ann. 15-year realized volatility AC World ex-u.s U.S. (S&P 500) EAFE Europe ex-uk Emerging markets Weights in MSCI All Country World Index % global market capitalization, float adjusted Emerging markets 12% United States 52% Europe ex-uk 15% Pacific 4% Canada 3% MSCI: Selected Countries United Kingdom France Germany Japan China India Brazil Russia Global equity market correlations Rolling 1-year correlations, 30 countries Sep. 2009: Dec. 2017: '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17 Source: FactSet, MSCI, Standard & Poor s, J.P. Morgan Asset Management. All return values are MSCI Gross Index (official) data and are in U.S. dollars. Volatility values are also based on U.S. dollar returns and are calculated based on the annualized quarterly standard deviation. 15-year return and volatility figures are calculated for the time period 12/31/02-12/31/17. Chart is for illustrative purposes only. Please see disclosure page for index definitions. Countries included in global correlations include Argentina, South Africa, Japan, UK, Canada, France, Germany, Italy, Australia, Austria, Brazil, China, Colombia, Denmark, Finland, Hong Kong, India, Malaysia, Mexico, Netherlands, New Zealand, Peru, Philippines, Portugal, Korea, Spain, Taiwan, Thailand, Turkey, United States. Past performance is not a reliable indicator of current and future results. Data are as of December 31,

9 The yield curve flattened in 2017 LONGER-TERM INTEREST RATES CHANGED LITTLE DESPITE FED RAISES FED FUNDS RATE VS. 10-YEAR U.S. TREASURY YIELD: Don t bail on bonds just because the Fed is 2.00 raising rates YIELD (%) 1.50 THE GAP BETWEEN THE FED FUNDS RATE AND THE 10-YEAR U.S. TREASURY CONVERGED IN 2017 The Federal Reserve raised the Fed Funds target rate three times in Longer-term rates stayed relatively flat for the year 0.50 Most investors bond exposure is to medium- 10 Year U.S. Treasury Fed Funds Target Rate term rates Source: Russell Investments 9

10 This man (briefly) was one of the richest people in America Source: The Wall Street Journal, December 14, 2017, "Bitcoin Made This Man (Briefly) One of the Richest People in America" 10

11 Bitcoin.com? EUPHORIA OR DANGER? AMAZON.COM OR PETS.COM? 1900% CUMULATIVE RETURN OF BITCOIN AND EMERGING MARKETS EQUITY IN 2017 DOTCOM DELUSION pets.com amazon.com MCI 1400% Bitcoin Emerging Market Equity Google broadcast.com -35% in 14 days 900% -21% in 4 days CRYPTOCURRENCY CRAZE 400% -31% in 7 days -27% in 18 days -36% in 35 days -35% in 13 days 37% -100% D J F M A M J J A S O N D MONERO ripple DOGECOIN bitcoin ethereum Source: Russell Investments. Bitcoin price: coindesk. EM Equity: MSCI Emerging Markets Index. All company and service names referenced here are for identification purposes only. Use of these names and brands does not imply endorsement. 11

12 Past is not prologue Probability that the stock market will rise in a given calendar year... Source: The Hulbert Financial Digest, HulbertRatings.com 12

13 Individual investor tax code changes ORDINARY INCOME / SHORT-TERM CAPITAL GAINS NONQUALIFIED DIVIDENDS 10% 12% 10% 15% 22% 25% TAX CUTS & JOBS ACT (TCJA) 24% 32% 35% CURRENT LAW (2017) 28% 33% 35% 39.6% 37% LONG-TERM CAPITAL GAINS / QUALIFIED DIVIDENDS TCJA AND CURRENT (No Change) 0% 15% 18.8% 23.8% $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 TAXABLE INCOME FOR MARRIED FILING JOINT WHAT S NOT CHANGING? Tax rates/thresholds for long-term capital gains / qualified dividends 3.8% Net Investment Income Tax (NIIT) Treatment of municipal bond interest Cost Basis Rules: No FIFO rules WHAT IS CHANGING? Lower rates/new income thresholds Higher std. deduction/no personal exemption* Reduced limits to mortgage interest deduction $10k limit state/local taxes & property taxes Estate Tax exemption = $11.2 million per ind. Individual changes sunset after 2025 Source: Russell Investments, *Reduced Personal Exemption if legally blind, or over 65 years of age. 13