R e t r e a t s & R e c o v e r i e s S a m S t o v a l l, J u l y 2 5, 2 0 1 7
Stock Market Headwinds & Tailwinds Headwinds Aging bull market & elevated equity valuations Aging economic cycle & rising interest rates Republicans & recessions Tailwinds V-shaped recovery in EPS + tax-cut possibility Stock yields versus bond yields Low inflation supports high P/Es Investment Ideas Nervous Nellies & the Henny Penny Portfolio International reawakening Reversion to the mean Growth or Value? Try the Barbell Approach Seasonal Rotation is now an S&P Custom Index Income investors: Think like a landlord, not a trader Source: CFRA. 7/21/2017. 2
Pullbacks, Corrections & Bear Markets 6 5 4 3 2 1 0 Years Between Market Declines of 5% or More Since WWII Average Number of Years Between Market Declines Since WWII 4.8 1.0 Pullbacks (-5% to - 9.9%) 2.8 Corrections (-10% to -19.9%) Bears (-20%+) Source: S&P DJ Indices. Past performance is no guarantee of future results. Source: CFRA, S&P Dow Jones Indices. Past performance is no guarantee of future results. Data: 12/31/1945-7/21/2017. 3
Republicans & Recessions Every Republican President Since 1901 Had a Recession Start in Their First Term President Recessions Roosevelt (1901-08) 1902-04, 1907-08 Taft (1909-12) 1910-12, 1913-14 Wilson (1913-20) 1918-19, 1920-21 Harding/Coolidge (1921-24) 1923-24 Coolidge (1925-28) 1926-27 Hoover (1929-32) 1929-33 Roosevelt (1933-40) 1937-38, 1945 Truman (1945-52) 1948-49 Eisenhower (1953-60) 1953-54, 1957-58, 1960-61 Kennedy/Johnson (1961-64) None Johnson (1965-68) None Nixon/Ford (1969-1976) 1969-70, 1973-75 Carter (1977-80) 1980 Reagan (1981-88) 1981-82 Bush-41 (1989-92) 1990-91 Clinton (1993-2000) None Bush-43 (2001-08) 2001, 2007-09 Obama (2009-16) None Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. Data: 12/31/1901-12/31/2016. 4
Recessions & Bear Markets Two out of three bear markets since WWII have been accompanied by recession <- Recession Bear -> Market Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. Data: 4/30/1949-7/21/2017. 5
Recession Indicators Low Readings Up to Three Months Prior to the Recession's Start Year-Over-Year % Change in 6 Month % Change in Yield Curve Recession Housing Consumer Leading (10 Year Note- Dates Starts Sentiment Indicators One-Year Bill) 4/60-2/61 (32) -- 0.6 (0.31) 12/69-11/70 (25) -- (2.3) (0.75) 11/73-3/75 (33) -- (3.0) (1.42) 1/80-7/80 (27) (22) (4.5) (2.14) 7/81-11/82 (18) 19 (2.4) (2.10) 7/90-3/91 (18) (4) (1.0) 0.38 3/01-11/01 (10) (19) (6.2) (0.36) 12/07-9/09 (37) (18) (3.8) 0.38 Average (25) (9) (2.8) (0.79) Today 2.1 1.7 2.5 0.99 Source: CFRA, S&P DJ Indices, NBER, Census Bureau, Federal Reserve, Conference Board. Past performance is no guarantee of future results. Data: 7/31/1957-7/21/2017. 6
Progression of EPS Estimates Full-year 2017 EPS Estimates are not collapsing as they did in 2015 and 2016 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY 2015 FY 2016 FY2017-2.0% Prior Current Year Source: CFRA, S&P Capital IQ. Past performance is no guarantee of future results. Data: 12/31/2013-7/21/2017. 7
S&P 500 EPS Actuals vs. Estimates Actual Qtly EPS exceeded estimates in 21 of 21 quarters by an average of 3.6% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Estimate Actual Average (3.6%) Source: CFRA, S&P Global Market Intelligence. A=Actual, E=Estimated. Past performance is no guarantee of future results. Data: 6/30/2014-7/21/2017. 8
Stocks Still Look Attractive vs. Bonds Average S&P 500 Price Change 12 Months After Dividend Yield vs. 10-Year Yield Differentials 20% 18% 18% 16% 14% 13% 12% 11% 10% 8% 6% 4% 5% 3% 2% 0% Div. Yld. >10Y Yld. 10Y> Div. Yld. by 0% to 1% 10Y> Div. Yld. by 1% to 2% 10Y> Div. Yld. by 2% to 3% 1% 10Y> Div. Yld. by 3% to 4% 10Y> Div. Yld. by More Than 4% Source: CFRA, S&P DJ Indices. Data: 5/31/1953-6/30/2017. 9
Inflation & Valuations Average P/Es Within Core CPI Quintiles 1958-2017 30X 25X 23X 25X 22X Today 20X 16X 15X 10X 11X 5X 0X Lowest 20% (<=1.7%) Next 20% (1.8%-2.3%) Next 20% (2.4%-3.3%) Next 20% (3.4%-5.1%) Highest 20% (>=5.2%) Source: CFRA, S&P Global. Past performance is no guarantee of future results. Data: 12/31/1947-7/21/2017. 10
S&P 500 Declines & Recoveries On Average, the S&P Equal Weight 500 Experienced Quicker Declines and More Rapid Recoveries from Pullbacks, Corrections & Bear Markets Since WWII Average Peak-to-Trough Declines Months to Type (% Decline) Count % Change Months Recovery Pullbacks (5.0%-9.9%) 56 (7) 1 2 Corrections (10.0%-19.9%) 21 (14) 5 4 All Bears (20%+) 12 (33) 14 25 >"Garden Variety" (20%-40%) 9 (26) 11 14 >"Mega-Meltdown" (40%+) 3 (51) 23 58 Source: CFRA, S&P Dow Jones Indices. Past performance is no guarantee of future results. Data: 12/31/1945-7/21/2017. 11
The Henny Penny (Chicken Little) Portfolio The Benefit of a Hypothetical 60/40 Diversified Portfolio was Improved by Substituting Equity Benchmarks With Their Low Volatility Subsets $44,000 $39,000 $34,000 $29,000 $24,000 $19,000 $14,000 $9,000 1997-17 Standard Freq. of Worst CAGR Deviation Annual Rise Month 7.3% 10.3 79% -11.6% 8.2% 7.3 89% -9.2% $46,100 $39,452 30% S&P 500 / 10% S&P MC 400 / 5% S&P SC 600 / 10% BMI-Ex U.S. / 5% BMI-EM / 40% BBBI 30% 500 LV / 10% 400 LV / 5% 600 LV / 10% Int'l Dev. LV / 5% Emerging LV / 40% BBBI Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. Data: 12/31/1997-6/30/2017. 12
MSCI-EAFE: Bouncing Off The Bottom? On a rolling 5-year total return basis, the MSCI-EAFE Index recently bounced off an extreme low: One standard deviation below the S&P 500. 240 200 Rolling 12-Mo. Relative Strength +1 Std. Deviation (>100=MSCI Outperformance) -1 Std. Deviation (<100=MSCI Underperformance) 160 120 80 40 Source: CFRA, MSCI. Data: 7/21/2017. 13
The Direction of the Dollar Actual and projected values of the Federal Reserve s U.S. dollar index 95 94 93 92 93.7 94.3 93.1 91.5 91.7 91.9 92 91 90 89 88 89.6 90.3 87 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17E Q4 '17E Q1 '18E Q2 '18E Source: CFRA, Action Economics. Data: 7/21/2017. 14
Growth or Value? The Barbell Approach Compound Annual Growth Rates (CAGRs) for the S&P 500 and a 50/50 Weighting to the S&P Pure Growth & Pure Value Indices (Rebalanced Annually) CAGR % Freq. of Mkt. Benchmark/Portfolio (w/divs.) Outperformance S&P 500 Index 8.6 NA 50% Pure Growth/ 50% Pure Value 11.6 48% S&P MidCap 400 Index 11.7 NA 50% Pure Growth/ 50% Pure Value 12.5 52% S&P SmallCap 600 Index 10.7 NA 50% Pure Growth/ 50% Pure Value 11.2 57% S&P Composite 1500 Index 8.9 NA 1/6th S&P 500/400/600 PG/ 1/6th Each of PV 11.9 52% Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. Data: 12/31/1995-6/30/2017. 15
Let the Market Take You Where It Wants to Go Compound Annual Growth Rates for Benchmarks and the CFRA-Stovall Seasonal Rotation Custom Indices 25% 20% Benchmark Seasonal Rotation Custom Index 16.1% 15% 10% 5% 7.6% 13.7% 9.4% 10.1% 13.8% 5.7% 11.6% 0% S&P 500 S&P EW 500 S&P SC 600* S&P Global 1200* http://www.customindices.spindices.com/custom-index-calculations/cfra/all Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. Annualized data 4/30/90-6/30/17. *4/30/90-6/30/17. 16
Feb-90 Jun-91 Oct-92 Feb-94 Jun-95 Oct-96 Feb-98 Jun-99 Oct-00 Feb-02 Jun-03 Oct-04 Feb-06 Jun-07 Oct-08 Feb-10 Jun-11 Oct-12 Feb-14 Jun-15 Oct-16 Income Investors Should Think Like a Landlord Price and Rolling 12-Month Dividend by Exxon (XOM 80***), a Dividend Aristocrat $110 $100 $90 $80 $70 $60 $50 $40 12-Month Income Stream $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $30 $- Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results.. 17
Feb-90 Jun-91 Oct-92 Feb-94 Jun-95 Oct-96 Feb-98 Jun-99 Oct-00 Feb-02 Jun-03 Oct-04 Feb-06 Jun-07 Oct-08 Feb-10 Jun-11 Oct-12 Feb-14 Jun-15 Oct-16 Income Investors Should Think Like a Landlord Price and Rolling 12-Month Dividend by Exxon (XOM 80***), a Dividend Aristocrat $110 XOM price (Left Scale) 12-Month Income Stream (Right Scale) $3.50 $100 $3.00 $90 $80 $70 $60 $50 $2.50 $2.00 $1.50 $1.00 $40 $0.50 $30 $- Source: CFRA, S&P DJ Indices. Past performance is no guarantee of future results. 18
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