Economic Overview First Quarter Partnering With Families To Make Life Better

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1 Economic Overview First Quarter 2018 Partnering With Families To Make Life Better

2 Market Summary Data Through March 31, 2018 Last 3 Months Last 12 Months Last 5 Years Last 10 Years Last 15 Years FIXED INCOME Municipal Bonds (Barclays 1-10 Year Muni Bond Index) (0.71) Taxable Bonds (Barclays Aggregate Bond Index) (1.46) High Yield Bonds (Barclays High Yield Credit) (0.86) DOMESTIC EQUITIES Large Cap Stocks ( Index) (0.75) Large Cap Growth (Russell 1000 Growth) Large Cap Value (Russell 1000 Value) (2.83) Small Cap Stocks ( Core) (0.08) Small Cap Growth ( Growth) Small Cap Value ( Value) (2.64) INTERNATIONAL EQUITIES Non-U.S. Stocks ( Index) (1.53) Non-U.S. Stocks LC ( Local Currency Index) (4.28) All Country World Index ex-us (MSCI:ACWI ex-us) (1.08) (MSCI Index) Non-U.S. Small Cap ( Small Cap Index) OTHER (EPRA/NAREIT Developed) (4.53) (Bloomberg Commodity Index) (0.40) 3.71 (8.32) (7.71) (0.49) (Alerian MLP Index) (11.12) (20.07) (5.85) SAMPLE DIVERSIFIED PORTFOLIOS 90% Equities / Fixed Income (1.08) % Equities / 30% Fixed Income (1.11) % Equities / 50% Fixed Income (1.11) *See Appendix for Sample Allocations. allocation removed from sample diversified portfolios as of 9/30/17 2

3 Market Recap The return of market volatility A broad, synchronized upswing in global growth remained a supporting backdrop to the early market strength in Talk of tariffs, a potential trade war along with geopolitical tensions rattled the global markets. Earnings growth in the U.S. is expected to accelerate thanks in part to the corporate tax cut. Source: FactSet, JP Morgan Central banks are raising rates across the globe on the backs of improved economic growth. Concerns about inflation have reemerged. The tech sector that had led both the U.S. and global markets higher for the past year saw a tipping point as calls for regulation and questions into business practices for some tech leaders weighed on sentiment. 3

4 Trade and Uncertainty Both the U.S. and China have announced tariffs, but what makes it into actual policy remains uncertain, and investors remain concerned. Although the specific direct impact of what s been proposed is relatively small in economic terms, the second order effects fuel uncertainty among potentially affected industries and countries. A full-scale trade war could disrupt many business models, but to varying degrees all of which will be near impossible to assess with any accuracy. Remaining diversified across geographies, sectors, and business models may be the most effective strategy to ride out any potential volatility. Source: Breckinridge Capital Advisors : Aggregate Sector Geographic Revenue Exposure (%) The United States Main Trading Partners Figures for 2017 Source: Agence France-Presse, U.S. Census Bureau Source: FactSet 4

5 Annual Returns vs. Intra-Year Declines During any given calendar year, the equity market can experience a notable decline in value that can be quite jarring to an investor. These periods tend to elicit concern about allocations with temptations to reduce exposure to equities. As shown in the chart below, despite the concerning intra-year drawdowns (red dots), the annual returns of the S&P 500 have been positive in 29 out of the last 38 years (blue bars). 40% 30% 20% 0% - -20% -30% -40% -50% -60% 26% - 15% 17% -17% -18% -17% -7% 1% -13% 26% 15% -8% -9% 2% -34% 12% Intra-Year Declines vs. Calendar Year Returns 27% -20% 26% 4% 7% 34% 20% 31% 27% -2% -7%-6% -6% -5% -3% -8% -8% -9% -8% -11% -19% 20% - -12% -13% -17% -23% -30% -34% 26% -14% 9% 3% 14% 4% -8% -7% -8% - -38% -49% 23% -28% 13% 13% 30% 11% 19% 0% -1% -1% -3% -6% -7% - -12% -11% - -16% -19% Source: J.P. Morgan Asset Management, FactSet Returns are based on price index and do not include dividends. Intra-year drop refers to the largest market drop from a peak to a trough during the calendar year. 5

6 Cash Starts to Earn Something Again For almost 10 years, holding cash or cash equivalents has earned next to nothing in terms of interest. With the Fed actively raising rates, the rates on short-term investment instruments are starting to also climb. From a pure yield standpoint, short-term Treasuries (e.g. 3-month and 1-year) are approaching the yields seen on the Index and the Barclays Muni Index (1-10). 6% Yields on Stocks, Munis and Short-term Treasuries 5% Annualized Yields 4% 3% 2% 1% 0% Muni Bond Yield Div Yld 3-Mo T-Bill 1-Yr T-Bill Source: FactSet Muni Bond Yield represents the yield to maturity on the Bloomberg Barclays Municipal Bond Blend Index 1-10 Year Investment decisions shouldn t be made on yield differential alone. Cash tends to be part of most portfolio allocations, and optimizing its ability to offer a modest return can help mitigate any volatility seen in the broader equity or fixed income markets. 6

7 Don t Bail on the Bonds Rising rates mean rising income Interest rates and bond prices have an inverse relationship. When interest rates go higher - as we ve seen in the U.S. - bond prices go down. The price return on bonds is certainly an important component of the investment, but it tends not to be the most critical to earn a return. Looking at the total return components for a municipal bond index (top right chart) and a broad bond index (bottom right chart), we find that the majority of return came from the coupon or yield, with capital gains or price returns being less of a return driver. 45% 40% 35% 30% 25% 20% 15% 5% 0% Bloomberg Barclays Municipal 1-10 Year Blend Index Principal and Income Breakdown of Total Return (as of 12/31/17) 3.5% 2.0% 1.5% 5.9% 5.8% Source: Income Research + Management, Bloomberg Barclays 10.5% 9.5% 0.1% 1.0% 41.9% 24.2% 1 YR 3 YR 5 YR 10 YR Total Return Income Price Return 17.7% In a rising interest rate environment, there are certainly concerns that bond portfolios are going to see prices fall. But rising rates also bring the benefit of rising coupon or interest income as yields go higher. This has been the key return driver for the asset class over the long term, and investors with that horizon can benefit from this dynamic of compounding interest. Income Component is Primary Driver of Total Return Income return is calculated by taking the yield to worst of the index, and the price return is the difference between the total return and income return. Assumes income return is reinvested at the yield of the index at year end. Source: Income Research + Management, Bloomberg Barclays 7

8 Valuations and Dividend Yield U.S. Equity Markets International Equity Markets 8

9 Performance 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 11.5% 8.7% 6.0% 14.8% 14.0% 8.9% 7.1% Returns of Example s vs Indexes as of 3/31/ % 1.2% 1.8% 6.5% 7.0% 6.3% 5.2% 5.4% 9.5% 9.6% 10.1% 8.3% 8.6% 6.9% 2.7% 3.3% 3.4% 1 year 5 Year 10 Year 15 Year 90/10 Portfolio 70/30 Portfolio 50/50 Portfolio Barclays Muni 1-10 Drawdown Experience 0 () (20%) (30%) (40%) (50%) (60%) /10 Portfolio 70/30 Portfolio 50/50 Portfolio S&P:500 MSCI:EAFE Blmbg:Muni 1-10 Yr 90/10 Portfolio 1 70/30 Portfolio 50/50 Portfolio 32% 48% 24% 36% 30% 16% 24% 5 Bonds/Cash Domestic Equity International Equity Tangibles * Domestic equity includes 70% large cap and 30% small cap; International equity includes 80% core, emerging markets, and small cap; Tangibles is split equally between commodities, REITs, and. 9

10 Having a Correct (Time) Frame of Mind Taking a look at asset class leaders and laggards over a rolling 10-year time frame shows a different outcome for the popular Index market proxy. Each of the columns below represents average annual returns over 10-year timeframes to highlight a longer-term view of performance. Investors with longer horizons can appreciate the performance and volatility-reduction benefits of a diversified allocation. Rolling 10-Year Returns for Various Asset Classes and a YTD % 18.3% 15.5% 9.8% 15.9% 13.9% 9.2% 9.8% 9.6% 16.5% 7.1% 9.5% 9.0% 16.5% 6.5% 6.3% 6.6% 12.1% 15.0% 5.1% 5.8% 5.8% 11.9% 11.2% 3.9% 5.4% 5.6% 9.7% 9.5% 13.8% 3.5% 4.6% 4.8% 8.2% 9.1% 8.4% 8.0% 1.2% 3.5% 4.7% 7.9% 8.8% 7.8% 8.7% 7.1% 8.7% 9.8% -1.0% 1.4% 2.9% 7.1% 7.4% 7.7% 7.3% 7.0% 8.5% 9.5% 4.3% 7.2% 6.9% 6.8% 5.0% 6.1% 6.5% 4.1% 6.9% 6.6% 5.7% 3.7% 5.8% 6.3% 3.8% 6.0% 5.4% 3.0% 5.8% 5.6% 0.9% 4.4% 4.6% 2.2% 4.1% 4.2% 4.0% 4.1% 1.8% 3.6% 3.3% -1.9% 3.6% 0.8% 1.9% 3.0% 3.0% -5.6% 1.7% 2.7% -6.4% -6.8% -7.7% Source: Callan Associates 10