Eric C. Elbell, CFA, CAIA Area Senior Vice President. Kyongdo Min, CPA, CFA Area Vice President. April 11, 2018

Transcription

1 Eric C. Elbell, CFA, CAIA Area Senior Vice President Kyongdo Min, CPA, CFA Area Vice President April 11, 2018

2 Agenda We will address three key topics: Headline events that impacted markets during the quarter How different capital markets performed during the quarter Gallagher s asset class outlooks and strategy considerations heading into Q

3 Headline Events

4 Stocks Winning Streak is Halted -6.4% +7.0% +1.4% +2.5% +3.9% +3.8% +6.1% +3.1% +4.5% +6.6% -0.8% U.S. stocks registered their first quarterly decline since Q3 of % correction from Jan. 29 th Feb. 8 th Contributing factors: February - rising interest rates, inflation fears, technical trading factors March trade tensions, technology stocks 3

5 Market Volatility Awakens The CBOE Volatility Index spiked to its highest level since August, 2015 This ended an extended period of market calm Q average VIX of 10.3 was the lowest since 1989 Number of daily moves of +/- 1% for the S&P 500: 2017: 8 Q1 2018: 23, JP Morgan 4

6 Trade Tensions Simmer In early March, President Trump imposed tariffs on imported steel (25%) and aluminum (10%) The U.S. also announced a 25% tariff on $50 billion of Chinese imports; China retaliated by announcing tariffs on 106 U.S. products The economic impact of these measures is to be determined Multiple countries/regions representing 70% of U.S. steel imports were temporarily exempted 5

7 Q U.S. Economic Review Strengths Industrial indicators GDP Jobs reports Sentiment surveys Corporate earnings Weaknesses High level of household debt Weak productivity Disappointing retail sales Opportunities Corporate tax reform benefits Capital spending Hiring M&A Stock buybacks Infrastructure stimulus (?) Threats Rising short-term interest rates Reversal of central bank liquidity measures Accelerating inflation Trade tensions 6

8 Q Global Capital Markets Review

9 Global Capital Markets Performance Q /31/2018 Index 3 Mo 1 Yr 3 Yrs 5 Yrs 10 Yrs Global Equity MSCI All-Country World ($, net) -1.0% 14.8% 8.1% 9.2% 5.6% U.S. Equity S&P % 14.0% 10.8% 13.3% 9.5% Russell % 11.8% 8.4% 11.5% 9.8% Non-U.S. Equity MSCI EAFE ($, net) -1.5% 14.8% 5.6% 6.5% 2.7% MSCI Emerging Markets ($, net) 1.4% 24.9% 8.8% 5.0% 3.0% Fixed Income Bloomberg Barclays U.S. Aggregate -1.5% 1.2% 1.2% 1.8% 3.6% Real Assets Bloomberg Commodity -0.4% 3.7% -3.2% -8.3% -7.7% FTSE NAREIT Equity Composite -8.2% -4.5% 1.1% 5.9% 6.4% Source: MSCI, Standard & Poor s, Russell, Bloomberg, FTSE Russell 8

10 U.S. Equities U.S. equities experienced a choppy quarter Stocks jumped out the gate in 2018, as the S&P 500 gained 7.6% from Jan. 1 st through Jan. 26 th Over the next nine trading days, however, the S&P 500 suffered a 10.1% correction +7.6% +8.2% -5.2% Stocks then rebounded 8.2% through early March -10.1% The quarter ended on a weak note, as the S&P 500 declined more than 5% from March 9 th through quarterend 9

11 U.S. Equities Performance by Size and Style Both large caps and small caps posted losses; growth stocks again outperformed value stocks U.S. Equities: Performance by Size and Style Russell 1000 Russell % -0.1% 14.0% 11.8% Russell 3000 Value -2.8% 6.8% 21.1% Russell 3000 Growth 1.5% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 1Q 2018 One Year Small cap stocks modestly outperformed large caps in Q1 Large caps still hold the edge over the one-year period Growth stocks posted a gain in Q1 on the strength of technology stocks Growth stocks have vastly outdistanced value stocks over the one-year period 10

12 U.S. Equities Performance by Sector Only two sectors were positive in Q1 Only two sectors posted gains in Q1: technology consumer discretionary The consumer discretionary sector s gains were keyed by Amazon and Netflix quasi -tech stocks As interest rates rose, higher dividend-paying stocks lagged consumer staples real estate telecom utilities S&P 500 Index: Sector Performance Cons. Discretionary 3.1% 16.9% Cons. Staples -7.1% -0.9% Energy -5.9% -0.2% Financials -1.0% 18.0% Health Care -1.2% 11.3% Industrials -1.6% 14.0% Info. Technology 3.5% 27.7% Materials -5.5% 10.5% Real Estate -5.0% 1.7% 1Q 2018 Telecom Services -7.5% -4.9% One Year Utilities -3.3% 1.9% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Source: Standard and Poor's Returns 11

13 U.S. Equities Technology While positive for the quarter, tech stocks dragged down the market in March The S&P 500 Information Technology sector fell 3.9% in March, vs. a 2.5% loss for the broad S&P 500 Index From March 13 th through quarter-end, the tech sector lost 7.5%, vs. the S&P 500 s 5.2% loss 12

14 U.S. Equities Technology Even the FAANGs were not immune in March Q March 2018 Mar 13 Mar 29 S&P 500 Tech Index 3.5% -3.9% -7.5% Facebook -9.5% -10.4% -13.5% Apple -0.5% -5.8% -7.7% Amazon 23.8% -4.3% -9.5% Netflix 53.9% 1.4% -8.1% Alphabet -1.5% -6.1% -11.1% 13

15 U.S. Equities - Valuation U.S. equity valuations receded in Q1, but remain somewhat elevated 14

16 U.S. Equities - Valuation Long-term U.S. equity valuations also remain extended 15

17 International Equities Major international markets also struggled in Q1 16

18 International Equities Performance by Region Emerging markets and Asia continued to outperform MSCI EAFE MSCI Emerging Markets International Equity Returns -1.5% 14.8% 1.4% 24.9% Emerging markets eked out a gain in Q1, furthering their recent string of outperformance Double-digit gains were seen in Brazil, Egypt, Pakistan and Peru MSCI AC Europe -1.8% 14.7% MSCI AC Asia Pacific 0.0% 20.3% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1Q 2018 One Year In U.S. $ terms Asia Pacific stocks were flat, besting European stocks China and Japan, which together represent approximately 55% of the Asia Pacific Index, were each modestly positive 17

19 International Equities Currency Effects Positive foreign currency conversion effects continued to boost returns to U.S. investors The U.S. dollar declined versus other currencies again in Q Index Returns 1Q 2018 One Year MSCI EAFE Local -4.3% 5.3% MSCI EAFE USD -1.5% 14.8% Currency Impact +2.8% +9.5% MSCI Em. Markets Local 0.7% 22.1% MSCI Em. Markets USD 1.4% 24.9% Currency Impact +0.7% +2.8% 18

20 International Equities Valuation Valuations in developed markets remain more reasonable than in the U.S. Favors developed int l markets Favors U.S. markets 19

21 International Equities Valuation Valuations in emerging markets have advanced, but still appear reasonable Favors emerging markets Favors developed markets 20

22 Fixed Income Yields Yields rose in Q1 The 10-year U.S. Treasury yield spiked in the first half of Q1 The yield curve shifted upwards across all maturities 21

23 Fixed Income Yields Short-term rates have increased measurably from post-crisis lows 22

24 Fixed Income Rate Path Policymakers expect 2-3 more rate hikes in 2018 FRB Governors Expectations Fed Funds Target Rate (%) Current target range: % Source: Federal Open Market Committee; March 21,

25 Fixed Income Yield Curve The U.S. Treasury yield curve has flattened significantly in recent years 24

26 Fixed Income - Spreads Corporate bond spreads ticked up in Q1 but remain near multi-year lows 25

27 Fixed Income Performance by Sector and Duration Bonds posted losses across the board in Q1 Fixed Income: Performance by Sector BBC U.S. Aggregate BBC U.S. Treasury -1.5% -1.2% 1.2% 0.4% BBC IG Corporate -2.3% 2.7% BBC High Yield -0.9% 3.8% BBC MBS -1.2% 0.8% BBC TIPS -0.8% 0.9% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 1Q 2018 One Year Fixed Income: Performance by Duration BBC Short Duration Gov/Credit BBC Inter. Duration Gov/Credit -0.2% 0.2% -1.0% 0.4% BBC Long Gov/Credit -3.6% 5.1% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 1Q 2018 One Year All sectors recorded losses Long duration bonds underperformed given the rise in yields 26

28 Fixed Income Interest Rate Sensitivity Fixed income assets are more sensitive today to interest rate changes 27

29 Fixed Income Global Yields Yields rose in most areas of the globe in Q1 28

30 Real Assets Real assets recorded losses in Q1 Real Assets Returns FTSE NAREIT Equity REITs -8.2% -4.5% REITs suffered as interest rates rose Bloomberg Commodity -0.4% 3.7% -12.0% -8.0% -4.0% 0.0% 4.0% 8.0% 1Q 2018 One Year Commodities also experienced volatility in Q1, and finished slightly in the red 29

31 Real Assets Energy Oil and natural gas price trends offset in Q1 Crude oil prices continued to grind upward on global demand and sustained OPEC production cuts Natural gas prices dropped significantly in February due to excess supplies 30

32 Real Assets Metals Metals prices were mixed in Q1 Gold remained largely range-bound between $1,300 and $1,350 Declining copper and iron ore prices led the Industrial Metals index lower 31

33 Real Assets - Inflation Inflation expectations continued to increase in Q1 32

34 Other Assets Bitcoin Bitcoin is down nearly 60% from its highs in December, 2017 Bitcoin/USD Spot Rate Source: Thomson Reuters 33

35 Asset Class Outlooks and Strategy Considerations 3/31/2018

36 Economic and Market Backdrop Q On the one hand Global economic growth and corporate earnings are presently strong U.S. fiscal policy is supportive on the other hand The bull market in U.S. stocks is nine years old; valuations remain extended Market volatility has returned Global central bank policies are transitioning towards tightening Federal Reserve policy and (potentially) higher inflation could put further upward pressure on interest rates Corporate bond credit spreads remain low 35

37 Short-to-Intermediate Term Asset Class Outlooks 1Q 2018 Each quarter, Gallagher s Research Committee develops short-to-intermediate term outlooks for asset classes based on current market characteristics and valuation metrics. These views, intended to complement our long-term (10-year) Capital Market Assumptions, may support current portfolio positioning decisions made within a long-term strategic asset allocation framework. The unique investment and operational characteristics of each institution should be carefully considered before implementing any change in portfolio or investment strategy based on these views. 36

38 Strategy Considerations Q Manage portfolio beta exposures U.S. stocks Rebalance to a neutral asset class weight and across style/size factors Consider strategies expected to limit broad market exposure or exhibit more defensive characteristics (long/short equity, low beta defensive strategies) Increase active management exposure Bonds Consider strategies that have greater flexibility and/or can protect against rising interest rates (unconstrained strategies, bank loans) Capitalize on relative values International equities Consider non-traditional, less-correlated assets Multi-asset strategies Private markets 37

39 Thank you!

40 Disclosures An index, such as but not limited to the S&P 500, is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly into an index. Past performance does not guarantee future results. The index returns are all Total Return with dividends reinvested which means the returns include not only the change in price for the securities in the index, but any income generated by those securities. All data for any index prior to its launch date is an historical estimation using available data. The information provided by Information Providers, even if generally applicable, cannot possibly take into account all of the various factors that may affect you, your company, or your particular situation. Your attorney and accountant should be consulted for legal and tax implications. Gallagher Fiduciary Advisors does not provide legal or tax advice. Investment advisory, named and independent fiduciary services are offered through Gallagher Fiduciary Advisors, LLC, an SEC Registered Investment Adviser. This document contains confidential and proprietary information that belongs to Gallagher Fiduciary Advisors, LLC and is protected by copyright, trade secret and other State and Federal laws. Any copying, redistribution, or retransmission of any of the contents without the written consent of Gallagher Fiduciary Advisors, LLC is expressly prohibited. Gallagher Fiduciary Advisors, LLC is a single-member, limited-liability company, with Gallagher Benefit Services, Inc. as its single member. Neither Arthur J. Gallagher & Co., Gallagher Fiduciary Advisors, LLC nor their affiliates provide accounting, legal or tax advice. Gallagher Fiduciary Advisors, LLC does not express an investment opinion regarding any specific commodity, sector or individual security. 39