Long-Term Capital Market Assumptions And Model Portfolios February Investment Strategy Group

Transcription

1 Long-Term Capital Market Assumptions And Model Portfolios February 2018 Investment Strategy Group

2 2018 Long-Term Capital Market Assumptions Every year we update our risk, return and correlation assumptions for the major asset classes for the long-term (7-10 year time horizon). We then use an optimizer with minimum and maximum constraints for all asset classes to determine optimal portfolio allocations based upon risk tolerance. Our near-term outlook is discussed throughout the year in several different Investment Strategy Group publications, including Outlook 2018, Outlook 2018 Mid-Year Update, and Global Asset Allocation. These near-term and long-term recommendations can then be incorporated into various wealth management asset allocation models, allowing for both tactical and strategic allocations. The Long-term capital market assumptions are summarized in the slides that follow. 1

3 2018 Long-Term Capital Market Assumptions Our long-term outlook calls for muted returns across most asset classes. This is primarily driven by lower potential economic growth rates due to aging demographics and a slow growing labor force. Our current starting point also has relatively full stock market valuations, a mature economic cycle, and corporate profit margins that are near all-time highs. In the longer-run (2020 and beyond), the Federal Reserve projects short-term interest rates to be about 3.0%. This return level is low by historical standards and reflects the lower level of potential economic growth. We assume cash investments will provide a similar 3.0% return for our long-term projections. We project the 10-year Treasury note to yield 4.0% in the longer-run. This is consistent with the Federal Reserve s and Congressional Budget Office s projections of about 2.0% economic growth and 2.0% inflation over the longer-run. Investment grade corporate bonds should see yields average about 1.0% higher than the equivalent Treasury bond while high yield bonds should see yields about 2.5% higher than the equivalent Treasury. This is consistent with bond yields over the last several economic cycles. In aggregate, we would expect longer-term returns from a portfolio of Treasuries and corporate bonds to provide about 4.0% returns which is consistent with the returns assumed above. We anticipate U.S. large cap stocks and U.S. REITs to both provide 7.5% returns. This is consistent with lower potential economic growth, full current valuations, and elevated profit margins. Small cap stocks are projected to have 8.5% returns. These returns are consistent with a 4.0% 10-year Treasury and a 3.5%-4.5% equity risk premium below historical averages of the last century due to factors mentioned above. For developed world stocks, demographics and potential economic growth are less favorable than in the U.S. and we anticipate lower stock market returns of 7.0%. We see more favorable long-term economic growth conditions for emerging markets and expect returns of 8.5%. These returns are also below historical averages of the last century. We continue to have structural concerns for most commodities including excess supply and weak demand and expect returns of 5.0%, consistent with historical returns of the last 20-years. We assume alternatives provide returns of about 4.0%. This is consistent with alternative returns over the last 15 years and the lower future returns expected from stocks and bonds. The following pages present the risk and return tradeoffs for our long-term asset class assumptions, including portfolios that are optimized with minimum and maximum asset class weight constraints. 2

4 2018 Long-Term Capital Market Return Assumptions The red line is an unconstrained efficient frontier. The square symbols represent recommended portfolios with constraints. 3

5 2018 Long-Term Capital Market Return Assumptions 4

6 Disclosures and disclaimer This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Janney makes no representation that an account will obtain gains or losses similar to those illustrated. There are distinct differences between hypothetical performance and performance achieved by actual trading platforms. Hypothetical results in practice are prepared with the benefit of hindsight. Additionally, hypothetical trading does not involve the risks and cannot account for the impact of risk in actual trading. There are other factors related to markets in general that cannot be accounted for in the preparation of hypothetical performance results. Performance data quoted represents past performance and is no guarantee of future results. Current returns may be either higher or lower than those shown. Individual account performance may not match the results shown and will depend upon various factors including market conditions at the time of investment. Janney investment professionals are available to discuss the suitability and risks involved with various financial products and strategies. We will be happy to provide a prospectus, when available, and other information upon request. 5