2017 Investment Outlook

Transcription

1 2017 Investment Outlook Presentation By: Gordon Telfer Senior Vice President Client Portfolio Manager Global Equities Ten Predictions January 2017 NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE

2 2016 Recap 1. Recession fears gave way to better economic growth 2. End of 35-year bull market in bonds (10-year Treasury: 1.37% on July 8, 2016) 3. Equities declined % to February low and then rose 23.7% to year end 4. Oil bottomed and then doubled in price 5. Rise of nationalism: Brexit, Trump election, Italian referendum 6. Bizarre election cycle 7. To end the year, stocks rose and bonds fell, with better economic data and post-election hopes Data source: FactSet as of 12/31/ Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate; Equities: S&P 500 Index. 2

3 2016 Recap 2016 RETURNS 90-Day Treasury Bills 0.3% 10-Year U.S. Treasury 0.1% U.S. Bonds 2.6% High Yield Corporate Bonds 17.1% S&P % MSCI World ex U.S. 3.3% MSCI Emerging Markets 11.6% Commodities 9.6% Data source: Morningstar Direct as of 12/31/16. 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. 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. 3

4 2016 Ten Predictions Scorecard 1. U.S. real GDP remains below 3% and nominal GDP below 5% for an unprecedented tenth year in a row. 2. U.S. Treasury rates rise for a second year, but high yield spreads fall. 3. S&P 500 earnings make limited headway as consumer spending advances are partially offset by oil, the dollar and wage rates. 4. For the first time in almost 40 years, U.S. equities experience a single-digit percentage change for the second year in a row. 5. Stocks outperform bonds for the fifth consecutive year. 6. Non-U.S. equities outperform domestic equities, while non-u.s. fixed income outperforms domestic fixed income. 7. Information technology, financials and telecommunication services outperform energy, materials and utilities. 8. Geopolitics, terrorism and cyberattacks continue to haunt investors but have little market impact. 9. The federal budget deficit rises in dollars and as a percentage of GDP for the first time in seven years. 10. Republicans retain the House and the Senate and capture the White House. 8.5 Correct MUDDLE THROUGH CONTINUES Scorecard based on Bob Doll's 2016 Ten Predictions with data as of December

5 2017: A Year of Transition Moving From Moving To Economic & Market Environment Monetary easing Globalization Disinflation Safety Beta Fiscal stimulus Nationalism Inflation Volatility Alpha Investment Goals & Preferences Yield Perceived safety Low volatility Total return More risk Increased volatility Investment Implications Bonds Sovereign Large cap Growth Defensive Stocks Credit Small cap Value Cyclical 5

6 PREDICTION 1 U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro U.S. & Global GDP Remain Subdued but Should Strengthen Modestly U.S. GLOBAL REAL GDP NOMINAL GDP REAL GDP NOMINAL GDP % 3.8% 4.3% 9.0% E E E Data sources: Bureau of Economic Analysis, Haver Analytics, Strategas Research Partners for Used with permission. Data for is based on estimates from Nuveen Asset Management, Morgan Stanley, Merrill Lynch and JP Morgan. 6

7 PREDICTION 1 U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro Does Rising Confidence Signal an Economic Pickup? CEO and Consumer Confidence Measures 8 _ CEO Confidence _ Average _ Consumer Confidence 120 _ Average Measure of Confidence (points) Data source: Bloomberg L.P., 12/31/06 11/30/16. CEO Confidence: Conference Board Measure of CEO Confidence Index. Consumer Confidence: Conference Board Consumer Confidence Index. 7

8 PREDICTION 1 U.S. and global economic growth improves modestly as the dollar strengthens and reaches parity with the euro U.S. Dollar Has Started Appreciating and Rising Versus the Euro _ Trade Weighted Dollar _ Euro vs U.S. Dollar Data source: Bloomberg L.P., 12/31/96 12/31/16. Past performance is no guarantee of future results. Trade Weighted Dollar: U.S. Trade Weighted Dollar Index, U.S. Dollar vs Euro: U.S. Dollar to Euro Exchange Rate. 8

9 PREDICTION 2 Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession Lower Unemployment Will 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 11/30/16. Used with permission. 9

10 PREDICTION 2 Unemployment drops to its lowest level in 17 years as wages increase at the fastest pace since the Great Recession Wage Growth Has Been Accelerating Since Mid-2014 Average Hourly Earnings (All Employees) 4.0% 3.5% Year-Over-Year Percentage Change (%) 3.0% 2.5% 2.0% 1.5% Data sources: Bureau of Labor Statistics, Haver Analytics and RBC Capital Markets, 8/31/07 11/30/16. Used with permission. 3-Month Moving Average. 10

11 PREDICTION 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 How Interest Rates Have Changed Over the Last 15 Years Federal Funds Target Rate Rate Data source: Bloomberg L.P., 12/31/01 12/31/16. Federal Funds Target Rate Index. 11

12 PREDICTION 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 Bond Bull Market Lasted 35 Years 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 12/31/16. Past performance is no guarantee of future results. 10-Year U.S. Treasury Bond: 10-year Treasury Constant Maturity Rate. 12

13 PREDICTION 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 LIKELY PATH OF RATES 1. Overdue rise in yields (normalization has arrived) 2. Moves are seldom smooth and predictable : expect more normalization of rates 4. Base case: modest rise in real growth and inflation 5. Modest rise in rates likely: long rates 50 bp per year; short rates bp per year 6. Periods of tantrum possible with offsetting bond rallies 7. Low rates overseas provide some ceiling to U.S. rates FORECAST FED FUNDS 10-YEAR TREASURY Y/E % 2.50% Y/E Y/E Fixed income preferences Equities Municipal Bonds Credit Sovereign Bonds Forecast is from Nuveen Asset Management. 13

14 PREDICTION 4 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 Regulatory reform Pent up demand for housing and capex Repatriation Continued share buybacks Sparkle and Fade. Morgan Stanley 2017 Strategy Outlook Multiples Could Come Under Pressure Rising inflation Rising interest rates Economic acceleration shortens cycle (closer to peak of cycle) Slower growth in China 14

15 PREDICTION 4 Stocks hit their 2017 highs in the first half of the year as earnings rise but price/earnings multiples fall Scenario Forecasting PROBABILITY 2017 EPS P/E S&P 500 % CHANGE 20% Less Growth/ More Inflation $130 (+10%) 16.0x % 50% Base Case $128 (+8%) 18.0x % 30% "Transitions" Successful $128 (+8%) 20.0x (18x $ EPS) % Target (Weighted Average) % Significant uncertainties Tax reform vs. tax cuts Timing of tax cuts Extent of base broadening 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. 15

16 PREDICTION 5 Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Stocks Have a Recent History of Outperforming Bonds 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% Data source: Morningstar Direct as of 12/31/16. 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. 16

17 PREDICTION 5 Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Stocks Outperform Bonds From , stocks outperformed bonds In 2013, bond returns were negative In 2016, rising yields and better earnings occurred prior to the election, but accelerated since the election 2017 is likely to be a year where stocks beat bonds because bonds are down Observations Equities are vulnerable to corrections in response to rising bond yields, but a major de-rating of stocks is unlikely as long as growth and earnings are improving If yields rise as we expect, cash is a better diversifier than bonds July likely marked the end of the 35-year bond bull market (10-year Treasury yields fell from 15.84% on September 30, 1981 to 1.37% on July 8, 2016) Data source: Morningstar Direct and FactSet as of 12/31/16. Past performance is no guarantee of future results. 10-Year U.S. Treasury Bond: Bloomberg Barclays U.S. Aggregate Bond Index. 17

18 PREDICTION 5 Stocks outperform bonds for the sixth year in a row for the first time in 20 years while volatility rises Issues Increasing Stock and Bond Volatility 1. Policy uncertainties details and timing 2. Change in Fed path, dollar pattern, election cycles in Europe, China issues 3. Low volatility stocks are failing and will likely fail again in High beta stocks are cheap relative to low volatility investments 5. Distribution of possible outcomes is wider than it has been (boom and bust tails have non-zero probabilities) 6. Economic conditions Slow growth Faster growth Slow reflation Faster reflation Slow policy normalization Faster policy normalization 18

19 PREDICTION 6 Small caps, cyclical sectors and value styles beat large caps, defensive and growth areas Why Small > Large? U.S. dollar appreciation Effective tax rates for corporations - R2000: 32% - S&P 500: 26% Domestic focus (weak global trade) Why Cyclical > Defensive? Growth acceleration Yield to underperform Valuation Why Value > Growth? GDP acceleration Inflation increases Valuation Data source for tax rates: Credit Suisse. 19

20 PREDICTION 7 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 20

21 PREDICTION 7 The financials, health care and information technology sectors outperform energy, utilities and materials Strength of Defensive Sectors Began Waning in Second Half of 2016 Sector Performance Has Shifted Since Mid % 25% First Half of 2016 Second Half through December 31 24% 24% 28% 20% Total Return (%) 15% 10% 5% 0% -5% -10% -5% 0% 15% 10% 12% -6% 10% -4% 9% 9% 6% 12% 4% 8% 1% 6% 0% 0% -3% 14% -5% -15% Utilities Telecommunications Energy Real Estate Consumer Staples Materials Industrials Russell 1000 Index Consumer Discretionary Health Care Technology Financials Data source: FactSet, 1/1/16 12/31/16. Past performance is no guarantee of future results. Sector performance based on the Russell 1000 Index. 21

22 PREDICTION 8 Active managers performance improves as flows into equities rise Will 2017 Be the Year for Equity Flows? Stock and Bond Mutual Fund Flows _ U.S. Stock Flows _ U.S. Bond Flows $1,000,000 $800,000 $600,000 Mutual Fund Flows ($M) $400,000 $200,000 $0 -$200,000 -$400,000 -$600,000 -$800,000 -$1,000, October 2016 Data source: Strategas Research Partners, 1/01/08 10/31/16. 22

23 PREDICTION 8 Active managers performance improves as flows into equities rise 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 12/16/16. 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. 23

24 PREDICTION 9 Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Thoughts on Nationalism, Populism, Protectionism and Foreign Trade 1. A new breed of populist leaders is hardening national borders, resulting in fewer exports, less migration and reduced capital flows 2. Since 2015, global exports have been almost flat and have lagged GDP growth 3. A proposal that all imports be subject to a border tax to help pay for a U.S. corporate tax cut has protectionist overtones 4. The momentum of global trade is perhaps the single most reliable indicator of emerging market asset performance 5. The 1930 Smoot-Hawley tariff was disastrous in part because it contributed to the Great Depression, but also because it led to a breakdown of international relations when fascism was on the rise 24

25 PREDICTION 9 Nationalist and protectionist trends rise as pro-domestic policies are pursued globally Will Protectionist Commentary Fade This Time? Protectionism News Story Count Recession Periods 0.35% % of Total Stories (Bloomberg) 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Data source: Cornerstone Macro, 3/31/00 12/16/16. Used with permission. 25

26 PREDICTION 10 Initial optimism about the Trump agenda fades in light of slow legislative progress Implications of a Trump Victory OPPORTUNITIES 1. More real growth 2. Tax cuts 3. Less regulation 4. Stronger dollar 5. More M&A RISKS 1. More inflation/higher interest rates 2. Higher deficits 3. Protectionism threats 4. Higher geopolitical risks 5. Potential improper business dealing risks 26

27 PREDICTION 10 Initial optimism about the Trump agenda fades in light of slow legislative progress The U.S. Has Become More Divided 30% 25% 2004 MEDIAN Democrat MEDIAN Republican 30% 25% 2014 MEDIAN Democrat MEDIAN Republican Polarization in the U.S. today 20% 15% 10% 5% 20% 15% 10% 5% 1. Income inequality and immobility 2. Generational warfare 3. Geographical segregation 0% Consistently Liberal Consistently Conservative 0% Consistently Liberal Consistently Conservative 4. Immigration 5. Media polarization Source: Pew Research Center, June, 2014, "Political Polarization in the American Public." Source: BCA Research. 27

28 2017 Outlook 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 bonds (Fed funds rate and longer-term rates should rise) 4. Fed raises rates two (or three) times 5. Dollar moves unevenly higher 6. Keep a careful eye on inflation 7. Overall returns are likely to be mediocre Bullish Equities Financials U.S. dollar Bearish Sovereign bonds Yield Japanese yen 28

29 Risks 1. Policy changes are less bold and successful than expectations 2. Policy changes don t take effect until Inflation increases 4. Fed tightens more than expected 5. Interest rates increase too much 6. Dollar rises too much (weighs on earnings) 7. China stumbles 29

30 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 Investments, Inc. 30

31 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. The CEO Confidence Index is based on a monthly survey of 100 CEOs that seeks to gauge the economic outlook of CEOs. The Chicago Board Options Exchange Volatility Index (VIX) shows the market s expectation of 30-day volatility. It is often referred to as the "investor fear gauge." 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. 31

32 Index Definitions The Merrill Lynch Option Volatility Estimate (MOVE) Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options that are weighted on the 2, 5, 10, and 30 year contracts. 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-0117D INV-Y-01/18 32