2017 Review & Outlook

Transcription

1 2017 Review & Outlook January 8, 2018 PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. ADDITIONAL INFORMATION ON THE SECURITIES MENTIONED IN THIS REPORT IS AVAILABLE UPON REQUEST - This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates 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 to buy or sell the securities herein mentioned. Hefren-Tillotson, Inc. and/or its officers and employees may from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon request, Hefren-Tillotson will be pleased to disclose specific information on such positions or transactions. January 8, of 10

2 2017 Review: Strong & Broad-based Gains Asset Class Returns: 2015 Diversification Benefits Questioned Data as of 12/31/15 Data as of 12/31/17 Asset Class Returns: 2017 Diversification Benefits Realized Year Annualiz ed Emerging Markets (MSCI EM) Int'l Small Caps (MSCI EAFE Small Cap) Foreign Developed Markets (MSCI EAFE) S&P Mid Caps (S&P Mid Cap Index) Small Caps (Russell 2000) Global Bonds (BarCap Global Agg) High Yield Bonds (BarCap High Yield) Hedge Funds (DJCS AllHedge Index) Real Estate (REITS) U.S. Bonds (BarCap Aggregate) TIPS (BarCap TIPS Index) Commodities (Bloomberg Commodity Index) Average Asset Class Return January 8, 2018 Source: Hefren-Tillotson, Bloomberg 2 of 10

3 2017 Review: Low Volatility S&P 500: Calendar Year Returns vs. Intra-year Declines Data as of 12/31/17 January 8, 2018 Source: Hefren-Tillotson, Bloomberg 3 of 10

4 2018 Expectation: Higher Volatility, More Modest Returns S&P 500 Performance after Low Volatility Years Year Maximum Decline Next Year's Maximim Decline Next Year's Return %?? % -8% 20% % -10% 9% % -9% 8% % -11% 26% % -26% -12% % -9% -2% % -23% -17% % -6% 4% % -7% 11% Average -4% -1 2% 5% Data as of 12/31/17 January 8, 2018 Source: Hefren-Tillotson, Strategas 4 of 10

5 Tax Cuts: Two Sides of Every Story Faster Growth Larger Deficits Source: Strategas Largest tax cuts since the 1981 Regan tax cuts will provide a cyclical boost to the economy & corporate profits Source: Ned Davis research Tax cuts have consistently led to larger deficits, which already look troublesome. Large deficits are dollar negative. Data as of 12/31/17 January 8, of 10

6 2018 Expectation: Inflation to Move into Focus 5 nt Unemployment less NAIRU vs. CPI Unemployment less NAIRU Consumer Price Inex Unemployment Rate Higher than NAIRU Unemployment Rate Lower than NAIRU Source: Hefren-Tillotson, Bloomberg Data as of 12/31/ Why we expect inflation to move into focus? 1. Natural cycle tendencies associated with accelerating growth 2. Low unemployment 3. Tax cuts 4. Weaker dollar 5. Low expectations in the market January 8, of 10

7 Valuations Point to Regime Shift Sector Weights as % of S&P 500 Sector Average Weight since 1972 Technology 8% 10% 7% 34% 15% 24% 13% Financials 5% 6% 8% 12% 22% 15% 11% Staples 11% 8% 17% 10% 10% 8% 11% Health Care 5% 6% 10% 9% 12% 14% 10% Consumer Discretionary 22% 10% 11% 8% 11% 12% 13% Industrials 16% 11% 10% 8% 11% 10% 13% Energy 14% 27% 13% 5% 10% 6% 12% Source: Hefren-Tillotson, Ned Davis Research Data as of 12/31/17 Areas benefitting from sub-par expansion, deflation fear, secular stagnation, QE, & risk aversion: 1. Long-term treasuries 2. FAANGs & Growth Stocks/Technology 3. Low Volatility/Dividend Payers 4. U.S. Dollar 5. S&P Low Quality Credit January 8, of 10

8 Valuations Still Favor International U.S. Stocks Expensive on Absolute Basis but are Attractive Relative to Bonds International Markets Still at a Meaningful Discount P/E Ratio P/B Ratio P/S Ratio P/C Ratio S&P Emerging Markets EM Discount to S&P 36% 44% 35% 38% MSCI EAFE EAFE Discount to S&P 23% 46% 45% 35% Data as of 12/31/17 Source: Hefren-Tillotson, Morningstar In our view, international exposure is essential to forward looking returns! Source: Hefren-Tillotson, Ned Davis Research Data as of 12/31/17 January 8, of 10

9 Regime Shift Playbook Favorite Investment Strategies Stocks & hybrid strategies over bonds Value over growth Comments While expensive on an absolute basis, stock earnings yields (earnings divided by share price) remain attractive relative to bonds Growth stocks appear expensive, over-owned, and carry high expectations Economically sensitive sectors such as financials and industrials Short duration strategies and premium bonds with higher yields Inflation-linked bond funds Large caps over small caps International developed and emerging markets Benefit from improving global growth; Financials performance correlated with interest rates and should strengthen if rates rise; Industrials benefit from rising capital spending Benefit from tighter Fed policy; hedge against possibility of higher interest rates/inflation Attractively valued relative to nominal bonds; hedge against possibility of higher inflation Any rally in small caps as a result of tax cuts should be viewed as temporary; best buying opportunity for small caps will be in the next recession/bear market Markets are earlier in economic cycle; cheaper valuations; more exposed to improving global growth dynamics January 8, of 10

10 Summary Accelerating economic growth in a prolonged expansion Tax cuts to provide a cyclical boost to economy & profits, but also deficits Inflation to move into focus Expect more modest returns and a pick-up in volatility Expect a shift in market leadership away from former leaders: U.S. stocks, FANGS and Growth, long-term treasuries, dividend-payers and low volatility strategies, U.S. dollar Favor international stocks, value, short-duration, inflation-linked bonds, economically sensitive sectors (financials & industrials) January 8, of 10