Investing in Today s World with Thoughts of Tomorrow. Presented by: Jeff Matthias, CFA

Transcription

1 Investing in Today s World with Thoughts of Tomorrow Presented by: Jeff Matthias, CFA Wisconsin Coalition of Annuitants May 11, 2018

2 Today s Key Takeaways Investor Inputs Market Recap Investment Outlook 2

3 Investor Inputs 3

4 Why People Invest (the primary reasons) To achieve financial goals To increase current income To accumulate wealth To increase financial security To have funds available during retirement 4

5 Retirement Concerns Not having enough to do Isolation / loneliness Relationship challenges / marital 5

6 Retirement Concerns Unexpected health crisis Outliving savings/inflation Costs of long-term care A stock market crash Not having enough to do Isolation / loneliness Relationship challenges / marital 6

7 Retirement Income 100% Sources of Retirement Income 80% 60% 40% 20% 0% Investment Income Social security Pension Required Minimum Distributions Source: theretirementmanifesto.com 7

8 Retirement Concerns For 2017, the funding ratio for public pension plans in Wisconsin was 61.5%. Yikes! Source: Madison, American Legislative Exchange Council 8

9 Retirement Concerns Funded Ratios for State Pension Plans, 2016 Only 4 states had at least 90% of the assets needed to pay promised benefits. Source: Madison, American Legislative Exchange Council 9

10 Market Recap 10

11 YTD Performance 1% Year-to-Date Returns (as of ) 0% -1% -2% -3% -4% 3-month Tbills U.S. Aggregate Muni Corps High Yield EM Debt S&P 500 Russell 3000 Cash Fixed Income Equities MSCI World (Ex US) MSCI Emerging Markets 11

12 Sector Performance S&P 500 Sector Returns ( thru ) Information Technology Consumer Discretionary Energy S&P 500 Financials Health Care Industrials Materials Utilities Real Estate Telecom Services Consumer Staples -5% -3% -1% 1% 3% 5% 7% 9% 11% thru

13 Sector Performance S&P 500 Sector Returns Year-to-Date (as of ) Information Technology Consumer Discretionary Energy S&P 500 Financials Health Care Industrials Materials Utilities Real Estate Telecom Services Consumer Staples -15% -10% -5% 0% 5% 10% 15% Year-to-date thru

14 Sector Performance (what changed?) 4% 3% 2% 1% Fed Funds & 10-Year Treasury Yields Stock Market Volatility (VIX) 0% year Treasury Federal Funds Contributing Factors: Macroeconomics Inflation expectations Policy uncertainty Financial conditions Threat of trade wars Shape of yield curve Tax reform Market volatility 14

15 Investment Outlook Source: Madison, Morningstar 15

16 Macroeconomics 18% Gross Domestic Product (GDP) 13% 8% 3% -2% -7% -12%

17 Macroeconomics Frequency Length of Historical Economic Cycles Year Denotes End of Growth Phase Longest Expansions Rank Start Months Date to Beat 1 Mar Jul Jun May Feb Nov < 36 mths 36 to to to 108 > 108 Source: Madison, National Bureau of Economic Research 17

18 Macroeconomics Economic Surprise Indices Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 U.S. Euro area 18

19 Inflation Consumer Price Index April 2018 Cumulative 1-Year CPI Category Weight Weight Change Housing 1 42% 42% 3.0% Transportation 17% 58% 4.1% Food and Beverages 14% 72% 1.4% Medical Care 9% 81% 2.2% Education and Communication 7% 87% 0.1% Recreation 6% 93% -3.6% Fuels and Utilities 5% 98% 2.2% Apparel 2% 100% 1.1% 1 - Owners' equivalent rent of residences represents 23.6%. Source: Madison, Bureau of Labor Statistics 19

20 Inflation Inflation Expectations 2.2% 2.1% 2.0% Jan Feb Mar Apr 10-year Treasury minus 10-year Treasury Inflation Protected Securities 20

21 Inflation Average Hourly Earnings 4% 3% 2% 1% 0%

22 Policy Uncertainty U.S. Policy Uncertainty Index Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 22

23 Policy Uncertainty Federal Budget Deficit and Public Debt Outstanding $21 trillion! Surplus (deficit) 10.0% 5.0% 0.0% -5.0% -10.0% $21,000 $19,000 $17,000 $15,000 $13,000 $11,000 $9,000 $millions Suplus (deficit) Public Debt Outstanding Largest Holders of U.S Treasuries: Federal Reserve, China, Japan, Ireland, Brazil, Cayman Islands, U.K. and Switzerland. Source: Madison, Treasury International Capital System 23

24 Central Bank Policy Country Policy Rate 2-year 10-year U.S. 1.75% 2.53% 2.96% Canada 1.25% 1.97% 2.40% Germany -0.59% 0.55% France Euro area -0.51% 0.80% -0.40% Italy -0.26% 1.93% Spain -0.34% 1.31% U.K. 0.50% 0.78% 1.43% Japan -0.05% -0.14% 0.05% Switzerland -0.75% -0.77% 0.03% 24

25 Financial Conditions 685% Household and Non-Profit Networth as Percentage of Disposable Personal Income 635% 585% 535% 485% 435%

26 Financial Conditions 1.5 Financial Conditions Index Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 26

27 Financial Conditions 50% BBB-rated Corporate Bonds as Percentage of Outstanding Investment Grade Bonds 45% 40% 35% 30%

28 Financial Conditions Trailing High Yield Option-Adjusted Spread Trailing Baa Option-Adjusted Spread 8% 3% 6% 2% 4% 2% %

29 Threat of Trade Wars Countries Vulnerable to a U.S. Trade War U.S. trade balance as % GDP 3% China South Korea 2% Japan Germany India 1% Canada France Russia 0% -1 0 % -5 % 0% 5% 10% Exports as % of GDP 29

30 Threat of Trade Wars Trade Surplus (Deficit) by Major Category Trade Surplus Business Services Travel Intellectual Property Trade Deficit Food/Beverages Transport Industrial supplies Capital Goods Automotive Consumer Goods -20% -15% -10% -5% 0% 5% Trade Surplus (Deficit) 30

31 Shape of Yield Curve 3% Treasury Yields 2% 1% Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 2-year 10-year 31

32 Shape of Yield Curve 1.50% Difference in Treasury Yields 10-year minus 2-year 1.25% 1.00% 0.75% 0.50% 0.25% Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 32

33 Shape of Yield Curve 50 History of Flat Yield Curves Months The bars represent the number of months the spread between 10-year and 2-year Treasuries narrowed to 0.50% or less prior to the onset of a recessionary period Jan Jul 1980 Jul Nov 1982 Jul Mar 1991 Mar Nov 2001 Dec Jun 2009 Recessionary Periods 33

34 Tax Reform Estimated Effective Tax Rates Across Industries (based upon Stern's January 2017 analysis) Environmental & Waste Services Business & Consumer Services Retail (Grocery and Food) Engineering/Construction Banks (Regional) Insurance (Prop/Cas.) Household Products Chemical (Basic) Aerospace/Defense Drugs (Pharmaceutical) Semiconductor Equip Paper/Forest Products The estimated average corporate tax rate is 26.2%. Oil/Gas (Integrated) 0% 5% 10% 15% 20% 25% 30% 35% 34

35 Tax Reform Comparison of Pre-Tax Equivalent Yields (Before and After 2017 Tax Legislation) 4.5% Top Personal Tax (39.6% to 37%) Corporate Tax (35% to 21%) 4.0% AA Muni (before), 4.32% AA Muni (after), 4.14% AA Muni (before), 4.02% AA Corp, 3.79% AA Corp, 3.79% 3.5% AA Muni (after), 3.30% 3.0% UST, 2.98% UST, 2.98% Corporate tax rate 2.5% Pre-Tax Equivalent Yields for various tax brackets Tax Bracket PTE Yield 37% 4.14% 35% 4.02% 32% 3.84% 24% 3.43% 22% 3.35% 21% 3.30% 12% 2.97% 35

36 Stock Market Volatility S&P 500 Price Volatility (1-day price change) +3% to +4% 1% +2% to +3% 20% +1% to +2% 37% -1% to +1% 26% -2% to -1% -3% to -2% -4% to -3% < -4% 8% 6% 1% 1% Frequency (trading days)

37 Valuations Investment Grade Corporate Bond Spreads January 2010 through May 8, Average Yield +/- 1 Standard Deviation Month-End Yield 37

38 Valuations S&P 500 Index: Forward P/E Ratio (based on next 12 months expected earnings) year average: 15.1x '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 38

39 Valuations 10% The Earnings Yield for Stocks is Still Compelling Compared to Bond Yields S&P 500 Earnings Yield 9% 8% 7% 6% 5% 4% Corporate Bond Yield (Baa) 3% '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 39

40 Valuations S&P 500 Level Implied by Price to Earnings (P/E) Combinations Earnings Per Price Earnings Multiple Share 12X 14X 15X 16X 17X 19X 20X 22X $ 178 2,136 2,492 2,670 2,848 3,026 3,382 3,560 3,916 $ 176 2,112 2,464 2,640 2,816 2,992 3,344 3,520 3,872 $ 174 2,088 2,436 2,610 2,784 2,958 3,306 3,480 3,828 $ 172 2,064 2,408 2,580 2,752 2,924 3,268 3,440 3,784 $ 170 2,040 2,380 2,550 2,720 2,890 3,230 3,400 3,740 $ 168 2,016 2,352 2,520 2,688 2,856 3,192 3,360 3,696 $ 166 1,992 2,324 2,490 2,656 2,822 3,154 3,320 3,652 $ 164 1,968 2,296 2,460 2,624 2,788 3,116 3,280 3,608 $ 162 1,944 2,268 2,430 2,592 2,754 3,078 3,240 3,564 $ 160 1,920 2,240 2,400 2,560 2,720 3,040 3,200 3,520 $ 158 1,896 2,212 2,370 2,528 2,686 3,002 3,160 3,476 $ 156 1,872 2,184 2,340 2,496 2,652 2,964 3,120 3,432 $ 154 1,848 2,156 2,310 2,464 2,618 2,926 3,080 3,388 $ 152 1,824 2,128 2,280 2,432 2,584 2,888 3,040 3,344 $ 150 1,800 2,100 2,250 2,400 2,550 2,850 3,000 3,300 March 31 S&P 500 Level 2,640 P/E Multiple 2017 Estimated Earnings $ X 2018 Estimated Earnings $ X 2019 Estimated Earnings $ X 40

41 Outlook Our Equity Scorecard Madison Macro Factor Scorecard (Munis) Considerat ions: Economic Growth - M M + Global U.S. Economy n/c n/c Corporate Profits - M Interest Rates Regulatory/Tax State/Local (fiscal) Credit Trends Liquidity n/c n/c n/c n/c Inflationary Pressures Interest Rate Pressures Rate - M - M Issuance / Fund Flows Liquidity - M Valuations - Negative for Munis - Current + Positive for Munis - Prior n/c - No change Sentiment Valuation - M - M M + Negative for Equities Positive for Equities 41