FAS Monthly Economic & Market Update

Contents Economic Conditions 3 Market Conditions 4 A Leg-Up for Active Management?..... 5 Disclosures. 7 2

Economic Conditions The second estimate for third quarter gross domestic product (GDP) was revised upward to 3.2% from 2.9% in the advance estimate released in late October. The upward adjustment was mainly driven by an increase in personal consumption expenditures (consumer spending) which was greater than previously estimated. This is the strongest growth the US has seen since third quarter of 2014. After-tax earnings for US companies grew 5.2% last quarter on a year-over-year basis and was the first annual increase since 2014. Unemployment fell in November hitting a nine year low at 4.6%. As consumption and corporate profits continue to increase and the labor market continues to tighten, the case for a rate hike by the Fed, who will meet on Dec 13-14, is becoming more imminent. 3

Market Conditions The S&P 500 began the month in the middle of a 9 day losing streak (the longest since 1980, however not nearly the Index Returns Nov '16 YTD magnitude) as the presidential polls tightened and oil continued to S&P 500 3.42% 7.58% fall. The slow and steady decline showed that while investors DJIA 5.41% 9.75% weren t panic selling, they were weary about the potential results of NASDAQ 2.59% 6.32% the election. This was a far cry from where the index ended the month, hitting an all time high four times in November (reaching new highs in December). The Dow Jones Industrial Average and Barclays Aggregate (2.37%) 2.50% NASDAQ also hit record highs in November. Investor sentiment quickly reversed course after the initial shock on election night with the hopes that President Elect Trump will follow through with his promises of fiscal stimulus and aggressive spending plans. Oil snapped back at the end of November as well, as the Organization of Petroleum Exporting Countries (OPEC) reached a deal to cut oil production, causing oil prices to surge back above $50 for the first time in months. As we discussed last month in this update and in an email in early December, this month has not been a positive one for fixed income investors. The 10-Year Treasury yield jumped from 1.86% to 2.40% in under a month, as the Barclays US Bond Aggregate fell 2.37% last month. While the pain from the declines in the bond markets may not be entirely palatable in the shortterm, this is a good thing for bonds and in the long-run should create a better, higher yielding environment for fixed income investors. MSCI EAFE (2.16%) (5.05%) 4

A Leg-Up for Active Management? Over the past several years actively managed funds have come under fire. Claims have been made against active portfolio managers regarding their abilities to consistently outperform the benchmark. A study by S&P Dow Jones Indices written in mid-2016 found that over 85% of all US large-cap, mid-cap and small-cap managers underperformed their benchmarks over a one, five and 10-year time horizon. The popularity of passively managed ETFs and mutual funds has grown exponentially since the start of the recovery from the 08 recession. A large part of that growth in recent years can be attributed to the emergence of robo advisors, with whom investors place their assets to be managed passively in a portfolio of ETFs with automatic rebalancing throughout the year. However, the tides may very well be shifting in favor of active management, as dispersion among sectors has increased and correlation among sectors has decreased. Since the election, certain sectors have outperformed others by significant amounts; more than what we have seen during this recovery. This is mainly due to the uncertainty of policy changes that are anticipated to be made under a Trump presidency. The graph to the right, taken from Bloomberg, shows the biggest disparity in returns that investors are getting from the various sectors in the markets since 2009. 5

A Leg-Up for Active Management? Likewise, the correlation of stocks in the S&P 500 is at its lowest level since the recession. Correlation is a statistic that measures the degree to which two securities move together and ranges from -1 to +1. Two securities with a -1 correlation to one another means that the two move perfectly opposite of each other. Vice versa, a correlation of +1 means that two securities move in lockstep with each other. You will see that the graph below shows the correlation recently between securities in the S&P 500 has fallen dramatically. This is significant because when you purchase, for example, an S&P 500 Index ETF/ mutual fund, you are essentially buying a portion of every stock that is included in the index. That passively managed fund cannot deviate from the index at all as it is designed to track the index as closely as possible. However, if you were to invest in an actively managed fund, a manager could potentially be able to identify certain sectors or securities within the index that are poised to outperform the broader index. This outperformance relative to the manager s benchmark is known as alpha. While a manager s skill has a great deal to do with adding alpha to a portfolio, market environments like these with higher dispersion and lower correlation among sectors and securities could offer more opportunities for managers to add value to your portfolio. Graph Source: S&P, Compustart, FactSet, and RBC Capital Markets 6

Disclosures & Index Definitions Copyright 2016 Financial Advisory Service, Inc. All rights reserved. Under style performance boxes, indexes referenced in the equities section for large, mid and small reference the Russell 1000, Russell MidCap and Russell 2000 stock indices, respectively. The Barclays US Government, Barclays Credit and Barclays High Yield fixed income indices refer to Gov t, Corp, and HY, respectively. Short, Intermediate and Long refer to the time frame of the investments and their positions on the yield curve. The information and opinions stated in this presentation are not intended to be utilized as an overall guide to investing; nor should they be taken as recommendations to buy, sell or hold any particular investment. This presentation is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of presenter. The opinions and views conveyed are for informational purposes and make no recommendations in regards to how a client s portfolio should be managed, as that involves inquiring, in depth, of a client s or prospective client s risk tolerance, investment objectives, time frame for investing and any other details pertinent to said client s or prospective client s financial situation. The presentation may not be suitable to be relied on for accounting, legal or tax advice. Past performance is not indicative of future returns. Prices and values of investment vehicles will rise and fall as broad market conditions change. Investors portfolios may fluctuate, to varying degrees, in tandem with market conditions. Diversification neither guarantees returns nor does it eliminate the risk of a portfolio decreasing in value. Equity securities tend to be more volatile than bond/fixed income products and carry greater risk factors than that of fixed income products. Smaller capitalization equities (i.e. mid and small caps) typically involve more risk than that of larger capitalization stocks. Political, economic, and currency risk are all risks subsumed under the additional risk factors of investments in international securities, to include those in both developed and emerging markets. In addition, political conditions in emerging markets can tend to be more volatile than in those of developed markets. Investments in bonds will be subject to credit risk, market risk and interest rate risk. Interest rates will have an inverse effect on prices of bonds. Bonds of lower credit ratings, also known as High Yield bonds which hold a rating of less than investment grade (BB+ and below), will have greater risks attached than will those of investment grade bonds and will experience greater volatility. All dates are as of Nov 30, 2016 unless stated otherwise. Presentation prepared by Financial Advisory Service, Inc., an SEC Registered Investment Adviser. Securities offered through FAS Corp., an affiliated insurance agency and broker/dealer. Any dissemination, distribution, copying, or other use of this presentation or any of its content by any person other than the intended recipient is strictly prohibited. FAS only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses to this presentation that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. Index Definitions The S&P 500 Index is based on the market capitalizations of 500 large companies whose stocks are listed on the NYSE and NASDAQ. This is widely regarded as the single best gauge of large cap US Equities. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. It is used as a barometer of how shares if the largest US companies are performing. The NASDAQ is a market capitalization weighted index of the more than 3000 common equities listed on the NASDAQ Stock Exchange. These securities include American Depository Receipts, common stocks, real estate investment trusts, and tracking stocks. The MSCI EAFE (Europe, Australasia, Far East) Net Index is recognized as the pre-eminent benchmark in the US to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America, Europe, Australia, and the Far East. The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 822 countries, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Barclays US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS, and CMBS. All index information has been gathered from public sources who are assumed to be reliable, although we cannot guarantee the accuracy or completeness of those public sources. 7