THE SKINNY CG s Market Commentary Third Quarter 2016
THE SKINNY Third Quarter 2016 U.S. EQUITY MARKETS ENDED SEPTEMBER WITH MIXED RESULTS. The Dow Jones Industrial Average posted a 0.41% loss for the month, the S&P Index was up 0.02% and the NASDAQ gained 1.98%. This follows a July where the S&P hit multiple record highs and the Brexit concerns were seemingly forgotten. In August, markets experienced typical summer doldrums with low volatility. Early September served to remind everyone that prices can and do go down, but by the end of the month, markets proved once again that they are resilient. Consumer Sentiment Index - University of Michigan 130 120 110 100 90 80 70 60 50 40 Aug. 1972: -6.2% May 1977: +1.2% Feb. 1975: +22.2% May 1980 +19.2% Mar. 1984: +13.5% Oct. 1990: +29.1% Average 85.1 Sentiment cycle low and subsequent 12-month S&P 500 Index return Jan. 2000: -% Jan. 2004: +4.4% Jan. 2007: -4.2% Mar. 2003: + 32.8% Oct. 2005: + 14.2% Nov. 2008: +22.3% Sep. 2016: 91.2% Aug. 2011: +15.4% 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 SOURCES Standard & Poor s, University of Michigan, Fact Set, J.P. Morgan Asset Management Market Commentary Q3 2016 2
THE RESILIENCY comes in part from favorable and accommodative central bank policies around the world. With short and long-term interest rates remaining low, investments are diverted to riskier assets to achieve a reasonable return. The continued flow of money into global stock markets is a major reason for the sustained results, corporate profits are improving giving the economy continued slow and steady growth. Employment numbers are improving and consumer confidence is at a 9 year high. Consumer confidence is generally believed to be a leading indicator of a strong stock market. The U.S. Federal reserve continued to speak of, but not act on, proposed interest rate hikes. This was the 3rd consecutive quarter where the threat of a 25 basis point rate hike remained only a threat. The Federal Reserve finds itself in a difficult place. Low and even negative global interest rates impact the Fed s ability to raise U.S. short-term rates. While the fed is non-political, they know that a major election is right around the corner and will likely remain neutral. Many expect a 25 basis point hike in December after the dust settles. Unemployment & Wages Civilian unemployment rate and year-over-year growth in wages of production and non-supervisory workers Seasonally adjusted, percent 12% 10% 8% 6% 4% 2% 0% 50-yr. average: 4.2% Unemployment Wage growth 50-yr. average: 6.2% Oct. 2009 10.0% 70 80 90 00 10 SOURCES BLS, FactSet, J.P. Morgan Asset Management Aug. 2016: 4.9% Aug. 2016: 2.5% U.S. Dollar Year-over-year % change, quarterly, USD major currencies index 23% 19% 15% 11% 7% 3% -1% -5% Energy sector contribution to S&P 500 EPS, quarterly $5.0 $3.0 $1.0 -$1.0 -$3.0 S&P 500 revenues U.S. International 56% 44% 3Q16: -1.7% 2Q16: -$0.62 Forecast assumes no change in USD 12 13 14 15 16 17 Energy Sector Earnings 12 13 14 15 16 17 SOURCES Federal Reserve, S&P 500 individual company 10k filings, S&P Index Alert, J.P. Morgan Asset Management AS WE ENTER THE 4TH QUARTER OF 2016, WE EXPECT THE UNEXPECTED. Stock and Bond valuations are high by historical standards. If 3rd quarter earnings beat expectations and interest rates remain low, then the market will be seen as fairly priced and the bull market will likely continue. Any signs of an economic slowdown or rise in central bank interest rates could derail the rally. Other unknowns that can impact the markets include the elections, geopolitical events, market technical factors, the October Effect, and anything else that may roll through our news cycle. While catalysts for volatility exist, the U.S. economy is growing and remains one of the strongest in the world. Market Commentary Q3 2016 3
S&P 500 Price Index Characteristic Mar. 2000 Oct. 2007 Sep. 2016 2,200 Index level P/E ratio (fwd.) Dividend yield 10-yr Treasury 1,527 27.2x 1.1% 6.2% 1,565 15.7x % 4.7% 2,168 16.8x 2.2% 1.6% Sep 30, 2016: P/E (fwd.) = 16.8x 2,168 2,000 1,800 1,600 Mar. 24, 2000: P/E (fwd.) = 27.2x 1,527 Oct. 9, 2007: P/E (fwd.) = 15.7x 1,565 1,400 1,200 +106% +101% +220% 1,000-49% -57% 800 600 Dec. 31, 1996: P/E (fwd.) = 16.0x 741 Oct. 9, 2002: P/E (fwd.) = 14.1x 777 Mar. 9, 2009: P/E (fwd.) = 10.3x 677 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 SOURCES Compustat, FactSet, Standard & Poor s, J.P. Morgan Asset Management Federal Funds Rate Expectations FOMC and market expectations for the fed funds rate 7% FOMC September 2016 forecasts* Percent 2016 2017 2018 2019 Long run 6% 5% Change in real GDP, 4Q to 4Q Unemployment rate, 4Q PCE inflation, 4Q to 4Q 4.8 1.3 4.6 1.9 4.5 4.6 4.8 4% 3% 2% 1% 0.63% 1.13% 0% 99 02 05 08 11 14 17 2.63% 8% 2.88% 0.92%** 0.71% 0.83% 0.49% Long run FOMC year-end estimates Market expectations on 9/21/16 FOMC long-run projection Federal funds rate SOURCES FactSet, Federal Reserve, J.P. Morgan Asset Management Market Commentary Q3 2016 4
IT S BEEN A GOOD YEAR TO OWN FINANCIAL ASSETS. Periods of strong performance are also a very good time to review your portfolio, reassess your risk tolerance and evaluate your comfort level. The 4th quarter may bring higher volatility. If it does, it is better to enter the period prepared, well diversified, and committed to your portfolio and time horizon. Remember that successful investing is measured in years, not weeks or months. S&P 500 Earnings Per Share Index quarterly operating earnings $35 $31 2Q16*: $25.70 $27 $23 $19 $15 $11 $7 $3 S&P consensus analyst estimates SOURCES Compustat, FactSet, Standard & Poor s, J.P. Morgan Asset Management -$1 01 04 07 10 13 16 RATING IS NOT INDICATIVE OF THE ADVISER S FUTURE PERFORMANCE. COMMENTARY SOURCES: JP MORGAN, GOLDMAN SACHS AND MORNINGSTAR Market Commentary Q3 2016 5