Investment Research Team Update

Transcription

1 Economic & Market Commentary Market Update February 2015 February was a great month for global stocks! The S&P 500 ( large cap stocks) was up 5.7% and small stocks (Russell 2000) gained 5.9%. The jobs report was strong and the unemployment rate ticked down to 5.5%. Developed international stocks outperformed stocks across the board as large stocks returned 6.0% and international small stocks returned 6.1%. Emerging markets returned a more modest 3.1%. Bond returns were negative as the 10 year Treasury yield rose to 2.0%, up from 1.7% last month. intermediate term bonds declined 0.7%, international bonds fell 0.5%, and inflation protected bonds fell 1.2%. REIT returns were negative ( 1.6%), but commodities gained 2.6%. For questions call For more information go to NASDAQ Reaches 5000: Another bubble? It s amazing it was only 15 years ago. All the hype. All the excitement. And all the profits! The technology industry was booming in the 90s and everyone wanted to be a part of it. Sure there were still disciplined index investors, but at the time those investors felt like they were being lapped. When their portfolios returned only 10% for the year, they would have been happy if their neighbor wasn t bragging about a company he tripled his money on. The rapid rise in technology startups gave way to some of the most exciting times in investment history. Economy The second estimate of fourth quarter real GDP growth came in at 2.2%, slightly below the initial estimate of 2.6%. Inflation (CPI) in the most recent month was negative at 0.7% bringing the year over year inflation rate to 0.1%. The February jobs report was strong with 295,000 jobs added in February. The unemployment rate ticked down to 5.5%. Stocks The S&P 500 Index returned 5.7% and small stocks returned 5.9%. Returns were strong across all sectors except for utilities ( 6.4%). Developed international large cap stocks returned 6.0%. Progress with Greece s creditors and the anticipation of quantitative easing in the Eurozone provided a tailwind. Emerging markets gained 3.1% as Russia recovered and lifted the index with a 22.8% gain. The 10 Year Treasury yield rose substantially to 2.0%, up from 1.7% the month prior. As a result, bond returns were generally negative in February. The Federal Reserve also confirmed that if economic conditions continue to improve, they will raise short term interest rates. Alternatives REITs declined 1.6% and commodities gained 2.6% helped by higher energy prices. But on March 10, 2000, that was all about to change. The NASDAQ peaked at 5,133 and didn t bottom out until October 8, 2002, falling all the way to 1,110. Take a second to catch your breath, that s nearly an 80% drop. And that s for the investors wise enough to at least diversify among their technology holdings. Investors with just a handful of holdings may have watched their portfolios go to $0 as companies that were expected to make millions went bankrupt and never made a penny. So it is understandable why investors may express concern rather than excitement when they see the NASDAQ reach the 5,000 level again 15 years later. But in hindsight the explanation for the decline is simple. Stock prices were not supported by earnings. So the big question is: are prices better supported today? And the answer is absolutely. Toward the peak of the tech bubble the P/E (price/earnings) ratio of the NASDAQ soared well above 100. In other words, stocks were very expensive compared to the earnings they were generating. For reference, the average historic P/E ratio for the NASDAQ is 24.4, and the index currently sits at 23.0 (as of 3/6/2015). This means that stocks today are selling at a discount to historic averages even as corporate earnings appear strong and continue to grow. So as we pause in a moment of silence for the money lost, it is important that we learn from the mistakes of others. Some people will always prefer a flashy investment strategy because of the thrill that comes from gambling. But for those of us who want a more secure future, diversification will always be the best strategy. Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com DID YOU KNOW... you can follow us on

2 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -1.0% -2.0% -3.0% World Stock Index (AC) S&P 500 MARKET RETURNS One Month as of 2/28/2015 Emrg Mkts TIPS Short- Term Inter- Term 1 Month 5.6% 5.7% 5.0% 5.9% 4.8% 6.0% 6.3% 6.1% 6.3% 3.1% -1.2% -0.7% -0.5% -1.6% 2.6% Global REITs 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% -1.0% -2.0% World Stock Index (AC) S&P 500 MARKET RETURNS Year-To-Date as of 2/28/2015 Emrg Mkts TIPS Commodities Short- Term Inter- Term Global REITs Commodities YTD 4.0% 2.6% 0.8% 2.5% 1.8% 6.5% 6.0% 6.6% 7.0% 3.7% 1.9% 0.1% 1.0% 1.4% 3.8% -0.8% Source: Morningstar Direct. Indices used in above graphs: S&P 500 Index, -MSCI Prime Market Index, -Russell 2000 Index, -MSCI Index, -MSCI EAFE Index, -MSCI EAFE Index, -S&P EPAC Index, -S&P EPAC Index, Emerging Mkts-MSCI Emerging Markets Index, World Stock Index-MSCI All Country World IMI Index, TIPS-Barclays Gbl Infl Linked US TIPS Index, Short-Term -Ibbotson 1 Yr Treasury Const Mty Index, Interm-Term -Barclays Interm-Term Govt/Credit Index, Foreign -JPM GBI Global Ex US Hdg, Global REITs-S&P Global REIT Index, Commodities-Bloomberg Commodity Index. Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

3 25.0% % 1 5.0% -5.0% % % World Stock Index (AC) S&P 500 MARKET RETURNS One Year as of 2/28/2015 Emrg Mkts TIPS Short- Term Inter- Term Global REITs Comm - odities 1 Year 6.9% 15.5% 13.3% 5.6% 7.7% -1.6% -0.9% -1.3% 5.0% 3.1% 2.8% 9.1% 19.1% -22.8% MARKET RETURNS - Longer Term Annualized as of 2/28/ Month YTD 1 Year 3 Years 5 Years 10 Years 15 Years EQUITIES S&P % 2.6% 15.5% 18.0% 16.2% 8.0% 4.9% 5.0% 0.8% 13.3% 17.1% 14.9% 7.1% 7.5% 5.9% 2.5% 5.6% 16.6% 16.0% 8.3% 6.6% 4.8% 1.8% 7.7% 16.6% 15.3% 8.2% 11.7% 6.0% 6.5% 9.4% 7.8% 4.8% 3.2% 6.3% 6.0% -1.6% 9.4% 6.9% 4.2% 4.8% 6.1% 6.6% -0.9% 11.8% 11.0% 7.0% 7.1% 6.3% 7.0% -1.3% 12.4% 11.3% 7.3% 9.8% Emerging Mkts 3.1% 3.7% 5.0% -0.3% 3.6% 7.9% 7.2% World Stock Index (AC) 5.6% 4.0% 6.9% 11.7% 11.0% 6.6% 4.1% FIXED INCOME TIPS -1.2% 1.9% 3.1% 0.4% 4.4% 4.6% 6.5% Short-Term 0.1% 0.1% 0.2% 1.9% 2.4% Interm-Term -0.7% 1.0% 2.8% 2.0% 3.4% 4.2% 5.2% International -0.5% 1.4% 9.1% 5.5% 4.9% 4.9% 5.2% ALTERNATIVES Global REITs -1.6% 3.8% 19.1% 14.7% 15.7% 7.8% 12.5% Commodities 2.6% -0.8% -22.8% -11.2% -5.0% -2.7% 2.2% Source: Morningstar Direct. Indices used in above graphs: S&P 500 Index, -MSCI Prime Market Index, -Russell 2000 Index, -MSCI Index, -MSCI EAFE Index, -MSCI EAFE Index, -S&P EPAC Index, -S&P EPAC Index, Emerging Mkts-MSCI Emerging Markets Index, World Stock Index-MSCI All Country World IMI Index, TIPS-Barclays Gbl Infl Linked US TIPS Index, Short-Term -Ibbotson 1 Yr Treasury Const Mty Index, Interm-Term -Barclays Interm-Term Govt/Credit Index, Foreign -JPM GBI Global Ex US Hdg, Global REITs-S&P Global REIT Index, Commodities-Bloomberg UBS Commodity Index. Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

4 12.0% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% -8.0% -1 INTERNATIONAL EQUITY - DEVELOPED COUNTRIES Returns as of 2/28/2015 Japan UK France Australia Germany Switz. Spain Italy Sweden Netherl. 1 Month 6.1% 6.3% 6.5% 7.7% 6.1% 4.6% 7.1% 8.4% 6.8% 6.7% YTD 8.6% 5.2% 7.3% 5.8% 8.0% 5.3% 0.3% 8.4% 9.1% 6.8% 1 Year 9.3% -2.8% -5.3% 0.4% -4.0% 1.0% -6.3% -8.4% -1.0% 3.5% China Brazil INTERNATIONAL EQUITY - EMERGING MARKETS Returns as of 2/28/2015 South Korea Taiwan South Africa India Russia Mexico Indonesia Malaysia 1 Month 3.2% 2.9% 0.6% 3.7% 0.7% 1.9% 22.8% 7.4% 2.2% 3.4% YTD 5.6% -3.7% 3.0% 4.7% 5.3% 9.9% 21.9% 1.0% 1.0% 0.8% 1 Year 19.4% -10.4% -5.9% 17.2% 13.2% 36.9% -24.8% 1.8% 11.8% -8.4% Source: Morningstar Direct. Country returns are the MSCI country index (gross) returns. Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

5 US EQUITY - LARGE-CAP SECTOR RETURNS As of 2/28/ % % 1 5.0% -5.0% -1 Cons Discr Cons Staples Energy Financials Health Care Industrials Info Tech Materials Telecomm Utilities 1 Month 8.6% 4.2% 4.1% 5.9% 4.3% 5.6% 8.2% 8.0% 6.6% -6.4% YTD 5.3% 3.1% -1.0% -1.5% 5.6% 1.8% 4.0% 6.0% 5.4% -4.2% 1 Year 15.5% 21.7% -7.2% 14.2% 23.5% 12.6% 22.5% 11.1% 13.3% 16.1% 1 8.0% 6.0% 4.0% 2.0% -2.0% -4.0% FIXED INCOME - SECTOR RETURNS As of 2/28/2015 Treasury Agency Inv Grade Corp MBS High Yield International Hedged 1 Month -1.5% -0.8% -1.0% -0.2% 2.4% -0.5% YTD 1.0% 0.7% 2.0% 0.7% 3.1% 1.4% 1 Year 4.4% 3.1% 6.5% 4.8% 2.8% 9.1% Source: Morningstar Direct. US Equity indices used: 10 S&P 500 sector indices. Fixed Income indices used: Treasury-Barclays US Treasury Index, Agency-Barclays US Agency Index, Inv Grade Corp-Barclays US Inv Grade Index, MBS-Barclays US Mortgage Backed Securities Index, High Yield- Barclays US High Yield Corporate Index, Govt Hedged-JPMorgan GBI Global ex US Index Hedged. Past performance is historical and does not guarantee or indicate future results. Index returns assume reinvestment of all distributions and unlike mutual funds, do not reflect fees or expenses. It is not possible to invest directly in an index. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

6 US Fixed Income Yields D 96 N 97 O 98 S 99 A 00 J 01 J 02 M 03 A 04 M 05 F 06 J 07 D 07 N 08 O 09 S 10 A 11 J 12 J 13 M Year Treasury US Corporate A Yield US High Yield D 96 US Treasury Yields N 97 O 98 S 99 A 00 J 01 J 02 M 03 A 04 M 05 F 06 J 07 D 07 N 08 O 09 S 10 A 11 J 12 J 13 M 14 3 Month Treasury Bill 10 Year Treasury 30 Year Treasury Treasury Yields 3 Month T-Bill 10 Year Treasury 2.0% 30 Year Treasury 2.6% 10 Year TIPS 0.2% Non-Treasury Yields Corporates (A or better) 2.6% High Yield Corporates 6.0% Municipal 1.6% US Inflation Expectations J 03 S 03 M 04 J 05 S 05 M 06 J 07 S 07 M 08 J Year Treasury S 09 M 10 J 11 S 11 M 12 J Year TIPS S 13 M 14 J 15 Source: Treasury, Federal Reserve Bank of St. Louis, Vanguard. The Treasury ceased publication of the 30-year constant maturity series on February 18, 2002 and resumed that series on February 9, To estimate a 30-year rate during that time frame, the series above includes the Treasury 20-year Constant Maturity rate and an "adjustment factor," which is added to the 20-year rate to estimate a 30-year rate during the period of time in which Treasury did not sell 30-year bonds. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

7 10% Real GDP (% Change From Prior Quarter at Annual Rate) 8% 6% 4% 2% 0% 2% 4% 6% 8% 20 Year Avg: 2.6% 10% J 91 J 92 J 93 J 94 J 95 J 96 J 97 J 98 J 99 J 00 J 01 J 02 J 03 J 04 J 05 J 06 J 07 J 08 J 09 J 10 J 11 J 12 J 13 J 14 The second estimate of fourth quarter economic growth (real GDP) came in at 2.2%. Increases in consumer spending and inventory investment contributed to the growth. Consumer spending increased by 4.3% compared with the third quarter increase of 3.2%. 6% Real GDP (% Change from One Year Ago) 4% 2% 0% 2% 4% 6% J 91 J 92 J 93 J 94 J 95 J 96 J 97 J 98 J 99 J 00 J 01 J 02 J 03 J 04 J 05 J 06 J 07 J 08 J 09 J 10 J 11 J 12 J 13 J 14 real GDP year over year has been positive and is currently 2.4%. The current year over year growth is just below the long term average of 2.6%. Source: Bureau of Economic Analysis. Real GDP data reflects most recently available as of month-end. GDP values shown in top graph are % change vs. prior quarter annualized and reflect GDP revisions since quarter-end. GDP values shown in bottom graph are % change vs. one year ago and reflect GDP revisions since quarter-end. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

8 2.0% CPI (% Change Monthly) 1.5% 1.0% 0.5% 0.5% 1.0% 1.5% 2.0% J 00 J 01 J 02 J 03 J 04 J 05 J 06 J 07 J 08 J 09 J 10 J 11 J 12 J 13 J 14 J 15 Inflation (CPI) for the month of January was negative at -0.7%, held down by cheaper energy prices. 6% 5% 4% 3% 2% 1% 0% 1% 2% CPI (% Change from One Year Ago) 3% J 00 J 01 J 02 J 03 J 04 J 05 J 06 J 07 J 08 J 09 J 10 J 11 J 12 J 13 J 14 The year-over-year inflation level as of January dropped significantly to -0.1%, well below the Federal Reserve's long-term inflation target of 2%. Source: St. Louis Fed, Department of Labor: Bureau of Labor Statistics. CPI data reflects most recently available as of month end. CPI values shown in top graph are % change vs. prior month seasonally adjusted. CPI values shown in bottom graph are % change vs. one year ago. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

9 Labor Market Unemployment (%) Non-Farm Payrolls (change, in 000s) 0 J-91 J-92 J-93 J-94 J-95 J-96 J-97 J-98 J-99 J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J Unemployment (%) Non-Farm Payrolls The unemployment level ticked down to 5.5% in February. The unemployment rate is considerably below the original 6.5% threshold the Federal Reserve was looking for as a signal of a strong, sustainable economy. The economy added 295,000 jobs in February, beating consensus estimates of 240,000 jobs. The economy added nearly 3.0 million jobs in 2014, making it an indisputably stronger labor market than a few years ago. Source: St. Louis Fed, Department of Labor: Bureau of Labor Statistics, Wells Fargo. Unemployment data reflects most recently available as of month end. Non-farm payrolls values are the monthly change in non-farm payrolls (in thousands), seasonally adjusted. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

10 Housing Starts (Number in 000s, Annual Rate) J-80 J-82 J-84 J-86 J-88 J-90 J-92 J-94 J-96 J-98 J-00 J-02 J-04 J-06 J-08 J-10 J-12 J-14 Housing starts dropped to an annual level of 1,065,000. This remains at the low end of the estimated range of 1.0 to 1.5 million needed to help the housing market keep pace with population growth and replacement housing % 1 5.0% 5.0% % Single Family Home Prices (Median, % Change from Prior Year) 2011 New Home Prices % Change YOY Jan 2015 Existing Home Prices % Change YOY The January housing report showed that median new home prices rose 9.1%, and existing home prices rose by 6.3% from one year ago. Low inventories should be supportive of home prices going forward. Source: National Association of Home Builders, Census Bureau. Housing starts are the number of privately-owned housing starts (in 000s) each month at a seasonally adjusted annual rate. The Single Family Home Prices reflect the percentage change in the median sale prices on a year-overyear basis in thousands of dollars, not seasonally adjusted. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

11 Consumer Confidence J 91 J 92 J 93 J 94 J 95 J 96 J 97 J 98 J 99 J 00 J 01 J 02 J 03 J 04 J 05 J 06 J 07 J 08 J 09 J 10 J 11 J 12 J 13 J 14 J 15 Consumer confidence fell to 96.4 in February, down from the month prior. Strong consumer confidence has been critical to the higher consumer discretionary spending. Personal Savings Rate and Household Debt Service Payments (% of Disposable Income) Q80 3Q84 1Q89 3Q93 1Q98 3Q02 1Q07 3Q11 Household Debt Service Personal Savings Rate household debt service as a percent of disposable income peaked in 2007 at a high of 14% and is down to 9.9% as of the fourth quarter of The personal savings rate remained stable in 2014 ending the fourth quarter at 4.6%, up from 4.4% last year end. Source: The Conference Board, Bureau of Economic Analysis. The Conference Board Consumer Confidence Index data is shown in the top graph through month end. Real disposable personal income and personal consumer spending are the % change from the prior month, seasonally adjusted. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.

12 BROAD COMMODITY MARKET RETURNS Returns as of 2/28/ Month YTD 1 Year 3 Years 5 Years 10 Years 15 Years Bloomberg Energy 8.4% 1.1% -42.2% -16.7% -14.2% -15.2% -3.4% Bloomberg Grains 4.3% -4.8% -19.4% -6.6% 0.7% 0.6% -0.2% Bloomberg Livestock -2.7% -10.9% -10.9% -3.6% -0.8% -6.5% -3.6% Bloomberg Precious Metals -4.9% 3.2% -12.3% -14.3% 0.9% 9.5% 9.0% Bloomberg Industrial Metals 1.1% -4.3% -8.1% -11.5% -6.7% 2.5% 4.8% Oil Price, $US per barrel (WTI) Month End: $ J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 Gold Price, $US per ounce (London pm fix) J-00 J-01 J-02 J-03 J-04 J-05 J-06 J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 Month End: $1, Source: Commodity returns-morningstar Direct. Oil Prices-St. Louis Fed, Energy Information Administration, Gold Price-World Gold Council. This report is not intended to provide personalized investment advice. Some information has been produced by unaffiliated third parties, and while it is deemed reliable, the advisor does not guarantee its accuracy or completeness.