2017 Investment Outlook

Transcription

1 2017 Investment Outlook Presentation By: Robert C. Doll, CFA Senior Portfolio Manager Chief Equity Strategist Ten Predictions October 2017 NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE 1

2 U.S. Capital Markets Update (as of 9/30/17) 2017 YEAR TO DATE 90-Day Treasury Bills 0.6% 10-Year U.S. Treasury 2.4 U.S. Bonds 3.1 High Yield Corporate Bonds 7.0 S&P MSCI World ex U.S Russell MSCI Emerging Markets 28.1 Commodities -4.3 Data source: Morningstar Direct as of 9/30/17. Past performance is no guarantee of future results. Performance for periods greater than one year is annualized. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 90-Day Treasury Bills: BofAML 3-Month U.S. Treasury Bill Index; 10-Year U.S. Treasury: 10-year Treasury Constant Maturity Rate; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Bond Index; High Yield Corporate Bonds: Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; Commodities: Thomson Reuters/CoreCommodity CRB Index. 2

3 U.S. Equity Market Scenarios PROBABILITY SCENARIO STOCK MARKET 60% More of the Same + Real growth at 2% Inflation remains low Central banks slowly normalize rates Earnings growth remains good Icing on the cake : Corporate tax rate falls to mid-20s 25% Something Goes Wrong Inflation finally picks up, forcing the Fed s hand Administration loses more talent Geopolitics goes awry (e.g., North Korea) 15% Melt Up ++ Cash returning zero is moved into equities Investors capitulate 3

4 Bear Case vs. Bull Case BULL CASE BEAR CASE Tax reform will pass Washington Policy GOP dysfunction/nothing gets done Episodic spikes in volatility Geopolitics A secular increase in volatility Still in the middle innings Market Cycle It s late cycle Liquidity remains ample Monetary Policy Global central banks are tightening Dollar and rates rebound The Dollar and Rates Dollar weakness and falling rates Leadership transition = upside surprises China Credit bubble = Hard landing Improving supply/demand dynamics Commodity Prices Oil remains low/copper is a bubble Source: Wolfe Research Portfolio Strategy. 4

5 Financial Market Highlights U.S. equities have increased 35% since the early 2016 low 1 The 35-year U.S. Treasury bull market ended on July 8, 2016, with the 10-year Treasury yield falling to 1.37% U.S. earnings recession ended with huge upside U.S. and global economic growth is improving U.S. equities are no longer dominating geographically Domestic and geopolitical environment is volatile, but hardly impacting the markets. 1 Data source: FactSet. The S&P 500 Index returned 41.22% from 2/11/16 to 9/25/17. 5

6 2017: A Year of Transition Moving From Moving To Investment Goals & Preferences Yield Perceived safety Low volatility Total return More risk Increased volatility Economic & Market Environment Monetary easing Globalization Disinflation Beta Fiscal stimulus Nationalism Inflation Alpha Investment Implications Bonds Sovereign Large cap Growth Defensive Stocks Credit Small cap Value Cyclical 6

7 2017 Ten Predictions Late Summer Assessment A YEAR OF TRANSITION Headed in the Right Direction 2. Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession. 7. The financials, health care and information technology sectors outperform energy, utilities and materials. 8. Active managers performance improves as flows into equities rise. 9. Nationalist and protectionist trends rise as pro-domestic policies are pursued globally. 10. Initial optimism about the Trump agenda fades in light of slow legislative progress. Headed in the Wrong Direction 6. Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas. Looking to be Half Correct 1. U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro. 5. Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises. Still Too Close to Call 3. Treasury yields move higher for a third consecutive year for the first time in 36 years as the Fed raises rates at least twice. 4. Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall. 7

8 U.S. Unemployment Drops to Lowest Level in 17 Years as Wages Increase at the Fastest Pace Since the Great Recession Lower Unemployment Should Lead to Increased Wage Inflation _ U.S. Unemployment Rate _ U.S. Average Hourly Earnings Recession Periods U.S. Average Hourly Earnings U.S. Unemployment Rate 10% 9% 8% 7% 6% 5% 4% 3% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Data source: Cornerstone Macro, 1/31/84 5/31/17. Used with permission. 8

9 Employment Data Will Add to Uncertainty Workers Unable to Work Due to Bad Weather in September 1,600 1,400 Hurricanes Harvey and Irma 1,200 Thousands of Workers 1, Hurricane Katrina Hurricane Ivan Hurricane Ike Data source: Cornerstone Macro, 9/30/82 9/30/17. Used with permission. 9

10 Stocks Have a Recent History of Outperforming Bonds We Expect the "Stocks Over Bonds" Theme Will Persist S&P 500 BLOOMBERG BARCLAYS U.S. AGGREGATE BOND % 4.2% % -2.0% % 6.0% % 0.5% % 2.6% 5-YEAR RETURN 15.1% 2.3% 2017 YTD 14.2% 3.1% Data source: Morningstar Direct as of 9/30/17. Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 10

11 The Bond Bull Market Lasted 35 Years Yield Trough Reached in July 2016; Yields Should Rise Slowly 10-Year U.S. Treasury Bond Yield 18% 16% 14% 12% Yield (%) 10% 8% 6% 4% 2% Yield Trough: 1.37% July 8, % Data source: FactSet, 12/31/79 9/30/17. Past performance is no guarantee of future results. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate. 11

12 Stocks Hit Their 2017 Highs in the First Half of the Year as Earnings Rise But Price/Earnings Multiples Fall Earnings Are Set to Improve Improving economic growth Tax reform/tax cuts Sparkle and Fade. Regulatory reform Pent up demand for housing and capex Repatriation Morgan Stanley 2017 Strategy Outlook Continued share buybacks Multiples Could Come Under Pressure Rising inflation Rising interest rates Economic acceleration shortens cycle (closer to peak of cycle) Slower growth in China 12

13 The Financials, Health Care and Information Technology Sectors Outperform Energy, Utilities and Materials OVERWEIGHTS FINANCIALS Beneficiary of asset reflation Higher interest rates, regulation easing Stocks cheap, despite recent rise Risk: Global financial accident HEALTH CARE Revenue and earnings growth strong Innovation and expenditure growth Discount valuations Risk: Political and headline risk INFORMATION TECHNOLOGY Good growth and value characteristics Strong balance sheets and free cash flow Beneficiary of improved capital spending outlook Risk: Dollar rising farther, hampering earnings growth UNDERWEIGHTS ENERGY Persistent oversupply Oil prices in a low trading range Stocks expensive relative to price of oil Risk: OPEC agreement holds, oil trades higher UTILITIES Rising rates Little earnings growth expected in 2017 Elevated valuations, despite recent underperformance Risk: Economy weakens, rates fail to rise MATERIALS Slowing China Rising dollar Infrastructure rally overdone Risk: Dollar weakness, massive infrastructure spending 13

14 Health Care Spending Reaches an All-Time High Nearly 20% of Consumer Spending Is Going Toward Health Care Health Care Services as a Percentage of Personal Consumption Expenditures Health Care Services as a % of Personal Consumption Expenditures 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Data source: Deutsche Bank Research, May Used with permission. 14

15 Investors May Be Paying More Attention to Politics than Fundamentals Assumptions about Washington Politics Continue Modest tax cut in 2018 (e.g., 25% corporate) Less regulation Little to nothing on infrastructure No health care legislation Continued turmoil/chaos But Remember: Earnings Trump Politics 15

16 Can Tax Reform Spark a Virtuous Cycle? Stronger Economic Growth Rising Business and Consumer Confidence Catalysts Corporate Tax Cuts Individual Tax Cuts Regulatory Reform Increased Lending Faster Productivity and Wage Growth Higher Capex and Consumption Source: Wolfe Research Portfolio Strategy 16

17 The U.S. Economy Is Decelerating and Investor Preference Has Shifted Which Region s Equity Market Is Preferred by Investors? Investors Favorite Regions 60% Clients Favoring Each Area 50% 40% 30% 20% 10% 0% 47.7% 31.8% 9.1% 9.1% 2.3% Eurozone Emerging Markets United Kingdom United States Japan Data source: Cornerstone Macro Strategy Team, CSM Client Survey May Used with permission. 17

18 Good News: Equity Mutual Fund Performance Improves More Large Cap Funds Are Beating the Benchmarks Large Cap Funds Outperforming Their Benchmarks 80% 70% Large Cap Funds Outperforming Their Benchmarks 60% 50% 40% 30% 20% 10% 0% Data sources: Strategas Research Partners, 5/18/17. Used with permission. Past performance is no guarantee of future results. 18

19 The Number of Global Market Indexes Now Exceeds the Number of U.S. Stocks The Rise of the Benchmark Number of Indexes Number of Stocks 8k 7k 6k 5k 4k 3k 2k 1k 0k Data source: Strategas Technical Analaysis, 12/31/16. Used with permission. 19

20 A Stock-Pickers Market: Equities Reach Lowest Correlations in 10 Years Stock-to-Stock Correlation of the S&P 500 Index Correlation Data sources: Strategas Research Partners, Bloomberg, 12/29/06 5/31/17. Past performance is no guarantee of future results. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of 1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. 20

21 It s Not Just the Largest Stocks Carrying the Market Combined Weight of 10 Largest S&P 500 Stocks Is Below Average 28% 10 Largest Stocks Average March 31, 2000: 27% 26% 24% Weighting 22% 20% 18% 16% September 30, 2017: 19% 14% Source: Strategas Technical Analysis, 12/31/90 9/30/17. Used with permission. 21

22 Bull Market Top Checklist This Bull Market Is Old, But Not Over CURRENT 1. Blow-off top X 2. Heavy inflows into equity market funds X 3. Big pickup in M&A activity X 4. IPO activity X 5. Rising real interest rates X 6. Weakening upward earnings revisions X 7. Erosion in breadth (new highs) 8. Shift toward defensive leadership 9. Widening credit spreads X Source: Strategas Research Partners. Used with permission. 22

23 Despite Curve Flattening, a Recession Is Unlikely Yield Curve Inversions Are the Best Signal of Recessions 10-Year U.S. Treasury Yield Less the Federal Funds Rate 5% Recession Periods 4% Yield Differential (%) 3% 2% 1% 0% -1% -2% Data source: Bloomberg L.P., 1/31/84 5/31/17. Past performance is no guarantee of future results. Chart represents the difference between the 10-Year U.S. Treasury yield and the Federal Funds Target Rate Index. 23

24 Positioning Guidelines 1. Overweight equities (but could be bumpy) 2. The average stock beats its benchmark (small > large equal weighted portfolio > cap weighted portfolio active outperforms) 3. Underweight interest-rate-sensitive assets (Fed funds rate and longer-term rates should rise) 4. Fed raises rates two (or three) times 5. Keep a careful eye on inflation 6. Neutralize U.S./non-U.S. 7. Overall returns are likely to be mediocre 24

25 Summary of Positioning OVERWEIGHTS UNDERWEIGHTS ASSETS Stocks Bonds SECTORS Financials Energy Technology Materials Health Care Utilities STYLES Value Growth Cyclicals Small/Mid Cap Defensives Large/Mega Cap 25

26 Where Are We in the Market Cycle? Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. Sir John Templeton 26

27 Think About the Long-Term and Remain Diversified 10-YEAR RETURN FORECAST BY ASSET CLASS FORECASTED RETURN RANGE EQUITIES 5 7% U.S. 5 7% Non-U.S. Developed Markets 4 6% Emerging Markets 7 9% BONDS 2 4% U.S. Government 0 2% U.S. Investment Grade 2 4% U.S. High Yields 4 6% Emerging Market Sovereign 5 7% CASH 2 3% INFLATION 2 3% DIVERSIFIED PORTFOLIOS Conservative 3 5% Balanced 4 6% Aggressive 5 7% Data sources: MRB Partners, Nuveen Asset Management as of December The forecast data reflects the opinion of the author, Bob Doll, and not the firm. The information provided herein is not intended to be a forecast or guarantee of future events or results. It is not a recommendation to buy or sell any specific securities and should not be considered investment advice of any kind. Investing in securities involves risk of loss that clients should be prepared to bear. There is no assurance that an investment will provide positive performance over any period of time. Past performance is no guarantee of future results and different periods and market conditions may result in significantly different outcomes. 27

28 Set Your Sights Higher 20-Year Annualized Returns by Asset Class % 10.9% Average Annualized Total Returns (%) 10% 8% 6% 4% 2% 8.2% 7.6% 5.3% 5.2% 4.8% 4.2% 3.2% 2.2% 2.1% 0% REITs U.S. Equities 60/40 Portfolio U.S. Bonds Gold Non-U.S. Equities Homes Oil Inflation Average Investor Data sources: Morningstar Direct, Bloomberg L.P., Federal Reserve Bank of St. Louis, Nuveen Asset Management and DALBAR, Inc. Quantitative Analysis of Investor Behavior (QAIB), Data from 1/1/96-12/31/15. Past performance is no guarantee of future results. Used with permission. REITs: FTSE NAREIT Equity REIT Index; U.S. Equities: S&P 500 Index; 60/40 Portfolio: 60% S&P 500 / 40% Bloomberg Barclays U.S. Aggregate Bond Index; U.S. Bonds: Bloomberg Barclays U.S. Aggregate Index; Gold: USD/troy oz.; Non-U.S. Equities: MSCI EAFE Index; Homes by the median sale price of existing single-family homes; Oil: West Texas Intermediate (WTI) Index; Inflation: Consumer Price Index; Average Asset Allocation Fund Investor by DALBAR, Inc. Quantitative Analysis of Investor Behavior (QAIB), 2016, Average Asset Allocation Fund Investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. 28

29 Important Disclosures This presentation is for general information purposes only and should not be construed as specific tax or investment advice. The statements contained in this presentation are the opinions of Nuveen Asset Management, LLC and data available at the time of publication, and is not intended to be a forecast or guarantee of future events or results. It contains information from third party sources believed to be reliable but are not guaranteed as to accuracy and not intended to be all inclusive. It does not constitute an offer, solicitation, or recommendation regarding securities or investment strategy and is not intended to predict or depict performance of any investment. Past performance is no guarantee of future results. A Word on Risk Equity investments are subject to market risk, active management risk, and growth stock risk; dividends are not guaranteed. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. The use of derivatives involves additional risk and transaction costs. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, derivatives risk, income risk, and other investment company risk. As interest rates rise, bond prices fall. Credit risk refers to an issuer s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Foreign investments involve additional risks as noted above. Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC. 29

30 Index Definitions One basis point equals.01%, or 100 basis points equal 1%. The Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index tracks the performance of U.S. non-investment-grade bonds and limits each issuer to 2% of the index. The Bloomberg Barclays U.S. Treasury Bellwethers 10-Year Index is a universe of Treasury bonds, and used as a benchmark against the market for long-term maturity fixed-income securities. The index assumes reinvestment of all distributions and interest payments. The BofA Merrill Lynch 3-Month U.S. Treasury Bill Index is an unmanaged index of Treasury securities maturing in 90 days that assumes reinvestment of all income. Capital expenditures (capex) are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are about to the economy in the near future. The Consumer Price Index (CPI) is an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Earnings per share (EPS) is the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of a company's profitability. The federal funds rate is the interest rate at which U.S. depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. It is composed of the board of governors, which has seven members and five reserve bank presidents. The FTSE NAREIT Equity REIT Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Gross domestic product (GDP) is a primary indicator used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period. Real GDP is adjusted for inflation. Nominal GDP is not adjusted for inflation. 30

31 Index Definitions The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets countries. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index ex-u.s. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets minus the United States. The Russell 1000 Index is a large-cap index measuring the performance of the largest 1,000 U.S. incorporated companies. The Russell 1000 Growth Index is a market-capitalization-weighted index that measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value Index is a large-cap value index measuring the performance of the largest 1,000 U.S. incorporated companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Index is composed of the 2,000 smallest stocks in the Russell 3000 Index and is widely regarded in the industry as the premier measure of small cap stock performance. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure the performance of the broad domestic economy. The Thomson Reuters/CoreCommodity CRB Index tracks the performance of 19 different commodities. The troy ounce is used in the pricing of metals such as gold, platinum and silver. There are troy ounces in a pound. The Trade Weighted U.S. Dollar Index: measures the value of the U.S. dollar relative to other world currencies. The U.S. Treasury T-Bill Constant Maturity Rate 10 Yr. Index is published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a 10-year maturity. The West Texas Intermediate (WTI) Index is used as a benchmark for pricing much of the world s crude oil production. GPP-10PRED-0917D INV-Y-01/18 31