Global Equity Market % +6.14% +6.14% % % Total U.S. Market % +7.07% +7.07% % %

Size: px

Start display at page:

Download "Global Equity Market % +6.14% +6.14% % % Total U.S. Market % +7.07% +7.07% % %"

Emerald Lee
5 years ago
Views:

CLS s WEEKLY 3 What You Need To Know About the Markets JANUARY 23, 2019 1. Brexit update: What does the future hold, and what does it mean for the markets? 2. Bear markets aren t fun, but some interesting stats may make them easier to stomach.

1 CLS s WEEKLY 3 What You Need To Know About the Markets JANUARY 23, Brexit update: What does the future hold, and what does it mean for the markets? 2. Bear markets aren t fun, but some interesting stats may make them easier to stomach. 3. Lessons from a legend: how John C. Bogle s ideas and innovations have benefited investors. Market Performance Equities LAST WEEK QTD YTD 19 3-YEAR 10-YEAR Global Equity Market % +6.14% +6.14% % % Total U.S. Market % +7.07% +7.07% % % Domestic Large-Cap Equity % +6.32% +6.32% % % Domestic Small-Cap Equity % % % % % International Equity % +5.42% +5.42% % +8.20% Developed International Equity % +5.53% +5.53% +8.80% +7.82% Emerging Market Equity % +5.09% +5.09% % +9.93% Diversifiers LAST WEEK QTD YTD 19 3-YEAR 10-YEAR U.S. Investment Grade Bonds % -0.02% -0.02% +1.72% +3.36% Cash Equivalent % +0.13% +0.13% +1.04% +0.36% Commodity % +8.38% +8.38% +7.97% -1.26% Diversified Alternatives % +1.25% +1.25% +1.82% +4.48% 1 Morningstar GblMkt Large-Mid Index 2 Morningstar U.S. Market Index 3 Morningstar U.S. Large Cap Index 4 Morningstar U.S. Small Cap Index 5 Morningstar Gbl xu.s. Large-Mid Index 6 Morningstar DM xus Large-Mid Index 7 Morningstar EM Large-Mid Index 8 Morningstar U.S. Core Bd Index 9 Morningstar Cash Index 10 Morningstar Gbl Lng-Only Cmdty Index 11 Morningstar Diversd Alt Index As of 1/18/2019 Week in Review Global equity markets were generally up on the week. Domestic equities were standout performers across both large and small-caps, driven in part by better-than-expected corporate earnings from several large banks. Within international, emerging markets outperformed developed but still only amounted to about half of the return of the U.S. market. The 10-year U.S. Treasury yield rose slightly last week, ending at 2.79%, leading to negative returns for the broad bond market. Commodities had a strong week with oil prices rising amid hopes for a U.S.-China trade deal and potential production cuts from OPEC. In economic news, markets favored Chinese efforts to stimulate their local economy as well as willingness to reduce its trade surplus to achieve a trade deal. In Europe, the Brexit drama continues, read on for more detail on the matter.

2 Brexit Update and Outlook Blagged? Speak English. This country spawned the language, and nobody seems to speak it. -Cousin Avi, Snatch (2000) Brexit dominated the headlines last week and even influenced market activity. The British government voted against the latest Brexit deal proposed by Prime Minister Theresa May; it wasn t even close. Shortly thereafter, a no confidence vote was proposed for May s government (a vote to remove her and her administration). She narrowly survived. Now it s back to the drawing board to revise a plan that everyone can get behind, but time is short as the deadline for the U.K. s exit is March 29. But how is it possible that Brexit is still making headlines? The referendum vote that set it in motion was more than two years ago (see timeline below). What is taking so long? Let s review some of the key questions surrounding Brexit and what they may mean for the future. What is Brexit? It is a clever word used to describe the United Kingdom leaving the European Union. The European Union includes 28 European countries; it began after World War II to create a single market where goods and people could move freely. The U.K. joined the EU in 1973 (it was called the European Economic Community back then). But it is one of a few countries that never joined the monetary union nor adopted the euro as its currency. Why leave the EU? A referendum was held in June 2016 for the entire U.K. population to decide if they wanted to leave the EU. About 72% of people showed up, and the leave vote won with 51.9%, a slim margin. Some of the reasons cited for leaving include: reduced regulations, more control over domestic affairs, reduced immigration from poorer countries that would also improve security, and reduced costs (there is a membership fee to be in the EU larger economies pay more). When will the U.K. leave? The U.K. invoked Article 50 of the Lisbon Treaty, which allows both sides exactly two years to agree on the terms of the split. It did not want an abrupt fall off a cliff. But this deadline expires in just a couple of months. Stopping the process would be difficult because May has put it into British law. A delay would be possible if all EU countries agreed or if the U.K. law was changed. After the official leave, there will be an 18-month transition period to implement the terms of the agreements. What is included in this Brexit deal? The EU has officially endorsed the agreement, but not everyone in the U.K. has, creating delays. The text of the agreement details the terms of the U.K. divorce. It covers such things as how much money the U.K. owes the EU, what happens to non-u.k. citizens living in the U.K. and vice-versa, what happens to the Northern Ireland border, and it generally describes how the U.K. 5/7/2015: David Cameron wins reelection on Brexit referendum promise 7/13/2016: Theresa May becomes new prime minister 3/29/2017: Article 50 triggered: Official start of Brexit process with two-year deadline 6/19/2017: First round of Brexit negotiations begin 11/14/2018: Withdrawal agreement finally published; key secretaries resign the next day 12/11/2018: May narrowly survives a vote of no confidence in her leadership 3/29/2019: Brexit day: deadline when the U.K. will officially leave the EU 6/23/2016: Referendum held: Pro- Brexit gets 51.9% of votes; Cameron resigns the next day 2/2/2017: U.K. government publishes white paper on Brexit 6/8/2017: May loses majority in general elections but emerges as head of largest party 3/19/2018: U.K. and EU agree on several key issues 11/25/2018: EU officially endorses the agreement 1/15/2019: Vote on Brexit deal rejected in parliament, and May survives another noconfidence vote 12/31/2020: End of 18-month transition period

3 Brexit Update and Outlook (Cont.) and EU will coexist in terms of trade and defense. What are the implications of Brexit for the markets? After an initial negative market reaction to the referendum vote in mid-2016, the U.K. market quickly snapped back and generally moved up until 2018, at which point the U.K. trended downward, along with many other countries. But the U.K. market has generated more than a 20% return since the referendum in local currency, compared to a global market index at about 27% in local currency over the same period. That doesn t seem too bad. But not so fast! In U.S. dollar terms, the U.K. has only generated about a 6% return versus 25% for the global market. This means that the pound has taken a huge hit (about 14%) over this time period, which is quite a discount, while other currencies only dropped about 2%. It would appear that much of the negative sentiment surrounding Brexit has been priced in, both for the U.K. market and the currency. If a deal is finalized and the deadline passes, uncertainty should begin to dissipate, and hopefully we can soon put this all behind us and focus on what really drives markets valuations and fundamentals, meaning how far have prices been depressed relative to how much money companies are making. Valuations currently point to the U.K. being one of the most attractive countries in the world thanks to Brexit, a situation that active managers like CLS love to see and take advantage of. Kostya Etus, CFA Senior Portfolio Manager Konstantin Kostya Etus specializes in international investments. He is a co-manager on two mutual funds (aggressive allocation and international) and manager on various separate account strategies, including Core Plus ETF and ESG. In addition, he manages 529 plans. Mr. Etus began his career at CLS in 2011 as a Trading Specialist and became a Research/ Portfolio Analyst in early In 2016, he was promoted to Portfolio Manager. Prior to working at CLS, Mr. Etus worked as an Associate Financial Analyst at ConAgra Foods, Inc., managing the company s global cash network. He graduated from the University of Nebraska at Omaha with a Bachelor of Science degree in Business Administration and obtained Master of Investment Management and Financial Analysis and Master of Business Administration degrees from Creighton University. He holds the FINRA Series 65 securities registration and the Chartered Financial Analyst (CFA) designation. Did you know? Kostya grew up in Soviet Russia.

4 Fun Bear Market Stats I know you want this to be over. I m right here. I will be right here. But you don t give up. You hear me? As long as you can still grab a breath, you fight. You breathe. Keep breathing. -Hugh Glass, The Revenant (2015) Let s face it, bear markets are not fun. But stats are! Well, they are for some people. I will do my best to make them fun for everyone! We took a look at daily S&P 500 returns going back to 1927 and identified every period with a drop of more than 20% from peak to trough (bear market) separated by increases of more than 20% (bull markets). Here are some of our findings: 1. How many bear markets have there been? There have been 12. This would suggest that over the 90-year evaluation period, a bear market happens about every 7.5 years on average. Obviously, since each bear market is followed by a bull, we are currently in the midst of our thirteenth bull market. Since we are about 10 years into the current bull market, we may be due for a bear market sooner than later. With that said, the longest we have gone without a bear market is 12 years, between 1988 and How long does the average bear market last? The average bear market lasts just over 22 months. But the average bull market lasts over five years, more than double the length. Trying to time the market may be difficult, and given the market s tendency to favor bull runs, it is better to stay invested long term while staying balanced and diversified to prepare yourself for the eventual bear market. 3. What is the average loss during a bear market? The average loss is 41% cumulative (-27% annualized). On the other hand, the average bull market results in a 188% cumulative return (22% annualized). The reason the annualized number for bull markets is lower is that markets generally move up more slowly than they drop. But the cumulative return differences show that the up periods are overwhelmingly longer and stronger than the down periods. Lastly, the current bull market return of 271% seems a bit long in the tooth compared to historic averages. 4. How many years has the S&P 500 Index spent in a bear market? Bear markets have consumed about 22 years of the S&P 500 s history. That means that 68 years (roughly 75% of the time) have been spent in a bull market. This goes to show, yet again, that the market is more than just a coin flip, but you need to be invested for the long run to realize that benefit. 5. Have bear markets changed over time? They have become shorter since the World War II era. The average length of a bear market post-1950 is only 15 months. However, average performance per bear market has not meaningfully changed. Meanwhile, the average bull market has increased in length by about six months during this more recent period. Logarithmic Scale 1.7 Yrs 78% 40% 4.8 Yrs 321% 35% 2.7 Yrs -86% -52% 5.1 Yrs -60% -16% 4.1 Yrs 157% 26% 3.0 Yrs -28% -10% S&P 500 Index Bull and Bear Markets 7.1 Yrs 265% 20% 1.2 Yrs -21% -18% 4.1 Yrs 86% 16% 0.5 Yrs -28% N/A% 3.6 Yrs 79% 17% 2.1 Yrs 47% 20% 0.7 Yrs -21% -31% 2.6 Yrs 74% 23% 1.5 Yrs -36% -26% 1.7 Yrs -48% -32% 6.2 Yrs 126% 14% 1.7 Yrs -27% -17% 5.0 Yrs 229% 27% 0.3 Yrs -34% N/A% 12.3 Yrs 582% 17% DURATION % TOTAL RETURN % ANNUALIZED Bull Bear Recession 2.5 Yrs -49% -23% 5.0 Yrs 100% 15% 1.4 Yrs -57% -45% 9.8 Yrs 271% 14% Source: S&P 500 price data is from Morningstar, Recession data is from nber.org, 1/3/ /31/2018

5 Fun Bear Market Stats (Cont.) 6. Does a bear market always happen with an economic recession? There have been 14 recessions over this time period, so off the bat we know that they don t always go hand in hand. Nine of the recessions happened in conjunction with a bear market (about 65% of the time). Sometimes a recession occurs at the beginning of a bear market and sometimes at the end, so we get a chicken-or-egg situation, wondering which one caused the other. But that means five recessions happened in the middle of bull markets, and three bear markets did not accompany a recession. Thus, just because we have one doesn t mean we will get the other. The chart on the previous page shows all of the bull and bear markets and recessions since The main takeaway is that while bear markets and recessions do happen regularly, they are not as scary as they sound when you look at the big picture. They are relatively short-lived compared to bull markets and are, in fact, largely overshadowed. Staying out of the markets because of fear may lead you to miss out on those long and strong bulls at a detriment to your retirement savings. Our advice, as always, is to stay balanced, diversified, and invested for the long term.

6 The Contributions of John C. Bogle: A Lifetime of Staying the Course By Dustin Dorhout, Junior Investment Research Analyst Stay the course. Regardless of what happens in the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor. -John C. Bogle, Founder of The Vanguard Group Wednesday, January 16, 2019, John Bogle, the father of the index fund and founder of The Vanguard Group, passed away at the age of 89. Despite some disagreements with Bogle s ideas, as an eager learner of financial markets, it is impossible not to look back at his career with admiration and respect. Bogle s passion was driven by an obsession to do right by everyday investors, advocating for asset growth in a low-cost way and emphasizing simplicity and a long time horizon. It has always been my belief that to understand someone whose character and passion you wish to emulate, you must go back to their beginning to understand the drivers and inputs that shaped them. For Bogle, who was born in 1929 into a family whose fortune was nearly wiped out by the Great Depression, the idea of helping others reach financial security was always close to home. Bogle took this passion with him to Princeton, where he worked on a senior thesis titled, The Economic Role of the Investment Company, which would later be used as the bedrock for founding Vanguard. This thesis earned him a position with the Wellington Fund, where he was mentored by Walter Morgan, who he says provided him the opportunity of a lifetime. After an eventual disagreement of ideas, Bogle was released from the firm and went on to start Vanguard. There, his firm focused on simplicity in investment strategy, reducing costs and expenses, a long-term investment horizon, and a reliance on rational analysis in decision making. These core beliefs led him to do something that had been talked about but never acted on (because it wasn t in the industry s best interest): creating the index fund. In 1976, Bogle launched the first Index Investment Trust, which is known today as the Vanguard 500 Index Fund. The idea was not to outperform the market but to enable the everyday investor to at least return the market by keeping costs low and allowing the power of compound interest to work its magic. However, the timing was poor, and the fund was considered a complete flop, reaching $11 million out of its $150 million goal for assets under management (AUM). Over the next several years, aside from poor asset gathering, the index fund trailed 75% of actively managed funds. Bogle s patience was admirable and speaks to something that resonates with me: If you believe in something, do not focus merely on the shortterm results. Instead, focus on the overwhelming amount of evidence that you started with, as time will bring the expected results to fruition. And come to fruition they did. Bogle s ideas garnered Vanguard more than $5 trillion in AUM business by making investing cheaper, simpler, and more accessible, thus lifting the financial well-being of many. CLS has also benefited from his innovations and ideas, and we share many similar values: With a focus on the long term, we can realize the value of compounding returns and low portfolio turnover that Bogle so staunchly advocated. Through the utilization of ETFs, we create portfolios with reduced costs and expenses for the end client. ETF fees started low to compete against the mutual fund counterparts created by Bogle. Through a multifactor analysis, investments made in CLS portfolios avoid the disruptions of emotional decision-making and instead create a financial plan and behavioral discipline that helps investors reach their goal. By sticking to these principles, we focus on understanding the needs of customers. CLS, through its partnership with advisors, allows the end investor to gain professional money management through a firm focused on being a fiduciary above all else, while having a personal relationship with an advisor who can counsel them to stay the course and further aid their financial well-being. With so much to say about a man who was known for his energy, passion, and unwavering spirit to live, even up to the end of his life, it is impossible to write a piece that does his life justice. But one thing is certain: We can all learn something from the man who Warren Buffet believes to be the person who has done the most for American investors.

7 The Morningstar Global Market Large-Mid Index is an index that measures the performance of the global market s equity markets targeting the top 90% of stocks by market capitalization. The Morningstar U.S. Market Index is an index that measures the performance of U.S. securities and targets 97% market capitalization coverage of the investable universe. It is a diversified broad market index. The Morningstar U.S. Large Cap Index is an index that measures the performance of U.S. large-cap stocks. These stocks represent the largest 70% capitalization of the investable universe. The Morningstar U.S. Small Cap Index is an index that measures the performance of U.S. small-cap stocks. These stocks fall between the 90th and 97th percentile in market capitalization of the investable universe. In aggregate, the Small Cap Index represents 7% of the investable universe. Morningstar Global ex U.S. Large-Mid Index is an index that measures the performance of Global Markets (ex-u.s.) equity markets targeting the top 90% of stocks by market capitalization. The Morningstar DM ex U.S. Large-Mid Index is an index that measures the performance of developed markets ex-u.s. equity markets targeting the top 90% of stocks by market capitalization. The Morningstar EM Large-Mid Index is an index that measures the performance of emerging markets targeting the top 90% of stocks by market capitalization. The Morningstar U.S. Core Bond Index is an index that measures the performance of fixed-rate, investment-grade USD-dominated securities with maturities greater than one year. It is market-capitalization weighted. The Morningstar Cash Index is an index that measures the performance of a Treasury Bill with six to eight weeks until maturity in the U.S. market. The Morningstar Global Long-Only Commodity Index is an index is fully collateralized commodity futures index that is long all in equitable commodities. This index provides investors with a means of understanding the performance of commodity futures markets and serves as a benchmark for investment performance of commodities as an asset class. The Morningstar Diversified Alternatives Index is an index that provides diversified exposure to alternative asset classes in the ProShares ETF lineup. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index. Any graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing. While some CLS portfolios may contain one or more of the specific funds mentioned, CLS is not making any comment as to the suitability of these, or any investment product for use in any portfolio. The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. The CFA is a globally respected, graduate-level investment credential established in 1962 and awarded by CFA Institute the largest global association of investment professionals. To learn more about the CFA charter, visit 70-CLS-1/23/2019

Global Equity Market % +6.41% +6.41% % % Total U.S. Market % +6.93% +6.93% % %

Global Equity Market % +6.41% +6.41% % % Total U.S. Market % +6.93% +6.93% % % CLS s WEEKLY 3 What You Need To Know About the Markets JANUARY 29, 2019 1. Avoiding the market drama through Risk Budgeting 2. The true diversification benefits of liquid alternatives 3. Where are we in