Wealth Management Outlook 1 st Quarter 2018

Transcription

1 Wealth Management Outlook 1 st Quarter 2018

2 Goldilocks Economy Too Cold Just Right Too Hot 2

3 Executive Summary Review of the year-to-date performance What causes bear markets? What worries us? What should investors do today? 3

4 % Return Equity Markets 40% 37.8% 35% 30% All equity market returns substantially above longer term average Diversification! 25% 20% 15% 10% 5% 6.6% 21.8% 5.2% 16.8% 3.3% 14.7% 4.2% 25.0% 7.5% 4th Quarter 2017 Last 12 Months 20 Year Average 5 Year Average 0% U.S. Large U.S. Mid U.S. Small International Emerging Markets Source: Zephyr StyleADVISOR, as of December 31, U.S. Large is represented by the S&P 500 Index, U.S. Mid by the Russell 2500 Index. U.S. Small by the Russell 200 Index, International by the MSCI EAFE Index and Emerging Markets by the MSCI EM Index. 4

5 % Return Fixed Income Markets 10% 8% 8.5% 7.5% 6% Very reasonable returns given the challenges of rising rates and insatiable demand 4% 2% 2.4% 4.5% 2.1% 0.5% 4th Quarter 2017 Last 12 Months 20 Year Average 5 Year Average 0% -0.2% -0.2% -2% Long Term Treasury Medium Term Muni Medium Term Govt/Corp High Yield Source: Zephyr StyleADVISOR, as of December 31, Long Term Treasury is represented by the Barclays U.S. Treasury Long Index, Medium Term Muni by Barclays Muni 7-Year Index, Medium Term Corporate by the Barclays Intermediate U.S. Government/Credit Index and High Yield by the Barclays U.S. Corporate High Yield Index. 5

6 What Causes Bear Markets? Recession Falling Earnings Extreme Optimism Extreme Valuation Lack of Fuel Cash Aggressive Central Bank Action External Shock 6

7 Indicators Are Not Pointing Toward A Recession Recessionary Indicators As of December 21, Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass. Source: Credit Suisse; Standard & Poor s, Federal Reserve, Bureau of Labor Statistics, National Statistical Agencies, National Bureau of Economic Research, ISM, Census Bureau, Haver Analytics 7

8 Corporate Profits Current 2018 EPS estimate is $ % increase What s driving earnings synchronized global growth, tax policy, weakening dollar & improving energy sector Source: Compustat, FactSet, Standard & Poor s, J.P. Morgan Asset Management; (Top right) Federal Reserve, S&P 500 individual company 10k filings, S&P Index Alert.EPS levels are based on operating earnings per share. Earnings estimates are Standard & Poor s consensus analyst expectations. Past performance is not indicative of future returns. Currencies in the Trade Weighted U.S. Dollar Major Currencies Index are: British pound, euro, Swedish krona, Australian dollar, Canadian dollar, Japanese yen and Swiss franc. **Year-over-year change is calculated using the quarterly average for each period. USD forecast assumes no change in the U.S. dollar from its December 31, 2017 level. S&P 500 revenue breakdown comes from Standard & Poor s S&P : Global Sales report as of June Guide to the Markets U.S. Data are as of December 31,

9 Extreme Optimism The Investor Psychology Cycle Source: Morgan Stanley. Investment Management, Morgan Stanley Wealth Management GIC. Past performance is no guarantee of future results. Estimates of future performance are based on assumption that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this matertial. Information as of December 29, While investors are turning more optimistic we are far from euphoria Evidence cash on the sidelines, money flows, and valuation 9

10 Valuation Source: Compustat, FactSet, Thomson Reuters, Federal Reserve, Standard & Poor s, J.P. Morgan Asset Management. Dividend yield is calculated as consensus estimates of dividends for the next 12 months, divided by most recent price, as provided by Compustat. Forward price to earnings ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. Guide to the Markets U.S. Data are as of December 31, While valuations are high, we are far from the Golden Age of euphoria as symbolized by the unsustainable valuations of the Dot.com era 10

11 Cash Levels Cash levels remain at historic highs Cash represents approximately 75% of 2017 GDP ($19.5 Trillion) Plenty of fuel for further market expansion Source: FactSet, J.P. Morgan Asset Management; (Left) Bankrate.com; (Right) Federal Reserve System, BEA. Money supply, consumer spending, and mortgage debt are as of 9/30/2017. M2 includes M1 (currency in circulation and checking accounts) plus savings deposits, small-denomination time deposits and retail money market mutual funds. Institutional money market funds are considered memorandum item, not included in M2. Annual income is for illustrative purposes and is calculated based on the 6-month CD yield on average during each year and $100,000 invested. Past performance is not indicative of comparable future results. Guide to the Markets U.S. Data are as of December 31,

12 Global Central Banks Source: Strategic Insight Simfund, J.P. Morgan Asset Management; All data includes flows through August 2017 and captures all registered product flows (open-end mutual funds and ETFs). Simfund data are subject to periodic revisions. World equity flows are inclusive of emerging market, global equity and regional equity flows. Multi-asset flows include asset allocation, balanced fund, flexible portfolio and mixed income flows. Source: J.P. Morgan Asset Management; (Left) Bank of England, Bank of Japan, European Central Bank, FactSet, Federal Reserve System, J.P. Morgan Global Economic Research; (Right) Bloomberg. *Includes the Bank of Japan (BoJ), Bank of England (BoE), European Central Bank (ECB) and Federal Reserve. Balance sheet expansion assumes no more quantitative easing (QE) from BoE; tapering of ECB QE to 30bn EUR in January 2018 and 0 in October 2018; tapering of BoJ QE to 50trn JPY ann. in 1Q18, 40trn JPY ann. in 2Q18, 30trn JPY ann. in 4Q18, and 20trn JPY ann. In 2019; and tapering of Fed QE per the September FOMC statement, incorporating a maturity schedule. **Including: U.S., Eurozone, Japan, UK, Canada, Australia, Sweden, Norway, Denmark and Switzerland. Guide to the Markets U.S. Data are as of December 31, Central banks are slowly removing accommodations Rates are beginning to rise Central bank balance sheets are projected to shrink Slow and steady tighten as long as inflation remains in check 12

13 External Shocks Very Hard To Predict: OPEC Oil Embargo 1987 Black Monday Portfolio Insurance 1990 Iraq s Invasion of Kuwait What s On The Horizon? North Korean Conflict Political Upheaval In Iran U.S. Political Intrigue By definition, external shocks are difficult to predict Historically, Old Age doesn t halt market advance 13

14 Why We Worry Flattening Yield Curve Inflation Spike Causing Aggressive Federal Reserve Action Fixed Income Speculation Increased Volatility 14

15 Flattening Yield Curve An inverted yield curve has preceded every recession since WWII The lag between inversion and recession can be substantial Inversion should be viewed as an early warning signal Source: (Top) FactSet, Morgan Stanley Wealth Management GIC,. Data as of December 29, Past performance is no guide to future performance and the value of investments and income from them can fall as well as rise. Indices are unmanaged and not available for direct investment. They are shown for illustrative purposes only and do not represent the performance of any specific investment. (Bottom): Bloomberg as of October 31,

16 Inflation Could We Get Surprised? Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. one year ago. Core CPI is defined as CPI excluding food and energy prices. The Personal Consumption Expenditure (PCE) deflator employs an evolving chain-weighted basket of consumer expenditures instead of the fixed-weight basket used in CPI calculations. Past performance is not a reliable indicator of current and future results. Guide to the Markets U.S. Data are as of December 31, The Fed (and all central banks) have been pushing for some inflation Starting to see some price movement (wages, commodities) No sign of an inflation spike yet Expect the unexpected 16

17 Fixed Income Yields and Returns Fixed income is swimming against the current during periods of rising rates Chart on the right suggest overweight credit Remember credit trades like equity during stock market/economic downturns Source: Barclays, Bloomberg, U.S. Treasury, Standard and Poor s, FactSet, J.P. Morgan Asset Management. Sectors shown above are provided by Barclays and are represented by Broad Market: U.S. Aggregate; MBS: U.S. Aggregate Securitized - MBS; Corporate: U.S. Corporates; Municipals: Muni Bond 10-year; High Yield: Corporate High Yield; TIPS: Treasury Inflation Protection Securities (TIPS). Floating Rate: FRN (BBB); Convertibles: U.S. Convertibles Composite. Yield and return information based on bellwethers for Treasury securities. Sector yields reflect yield to worst. Convertibles yield is based on US portion of Bloomberg Barclays Global Convertibles. Correlations are based on 10-years of monthly returns for allsectors. Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * -Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2). Chart is for illustrative purposes only. Past performance is not indicative of future results. Guide to the Markets U.S. Data are as of December 31,

18 Speculation????? Any areas in the market showing signs of speculation? 18

19 Increased Volatility Volatility will likely increase next year Source: Bloomberg, Morgan Stanley Wealth Management GIC. Intra-year declines are defined as the peak-to-trough decline during the year. Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material. Average drawdown since 1980 (13.8%)/per year In last 5 years the average drawdown has only been (7.6%) Investors must prepare for a return to normal volatility 19

20 Conclusions 1. Know what you own 2. Validate and embrace your asset allocation 3. Understand the typical downside of your chosen asset allocation 4. Examine your debt/margin position 5. Stay invested 20

21 Asset Class Returns Source: Barclays, Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor s, J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays US Aggregate, REITs: NAREIT Equity REIT Index. The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays US Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/02 12/31/17. Please see disclosure page at end for index definitions. All data represents total return for stated period. Past performance is not indicative of future returns. Guide to the Markets U.S. Data are as of December 31,

22 Risk Management: Long Term Care Insurance 22

23 Sources J.P. Morgan Asset Management Morgan Stanley Applied Equity Advisors Morgan Stanley Global Investment Committee 23

24 Index Definitions 24

25 J.P. Morgan Asset Management Disclosures This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political and economic risks. The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund s portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to stock market risk, meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a fund s securities goes down, an investment in a fund decreases in value. The Fund may invest in derivatives, which may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the Fund s original investment. Many derivatives create leverage, thereby causing the Fund to be more volatile than it would be if it had not used derivatives. The S&P 500 Index is a capitalization-weighted index that measures the performance of 500 large-capitalization domestic stocks representing all major industries. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Chase & Co.,

26 Important Morgan Stanley Disclosures Indexes are not available for direct investment. Index returns consist of income and capital appreciation (or depreciation) and do not take into account fees, taxes, or other charges. Such fees and charges would reduce performance. Past performance is no guarantee of future results. Although the statements of fact and data in this report have been obtained from, and are based upon, sources the firm believes reliable, we do not guarantee their 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. Diversification does not guarantee a profit or protect against loss. Different asset classes present different risks. Some, but not all, of those risks are outlined below. In general, fixed income and equities investments (domestic or foreign) face certain asset class specific risks, which could include, but are not limited to: market risk, credit risk, inflation risk, currency risk, default risk, interest rate risk and political risk. There are also additional risks and traits attributable to asset classes represented in certain indices. Asset classes based on international investments have additional risks associated with international investing, including foreign economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes and differences in financial and accounting standards. International investing may not be for everyone. These risks may be magnified in emerging markets. With respect to real estate investments, property values can fall due to environmental, economic or other reasons, and change in interest rates can negatively impact the performance of real estate companies. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. Depending on your state of residency, some bonds may be exempt from state and local taxes; however, interest may be subject to the federal alternative minimum tax. Morgan Stanley Smith Barney and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Indexes are not available for direct investment. Index returns consist of income and capital appreciation (or depreciation) and do not take into account fees, taxes or other charges. Such fees and charges would reduce performance Morgan Stanley Smith Barney LLC. Member SIPC. Consulting Group and Portfolio Management Group are businesses of Morgan Stanley Smith Barney LLC. CRC /