weekly review february 16, 2018...feb 16, 2018 · 1) bond risk premia (also known as “term...

Weekly Market Review

Chart of the Week

February 19, 2018Weekly ReviewFebruary 16, 2018

1

Weekly Highlights

Talking Points

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• Stock markets have staged a comeback from last week’s significant correction. The gains were distributed broadly across the market caps and sectors. In the process, market volatility, as measured by theCBOE Volatility Index (VIX), has declined significantly, especially during the latter part of the week.

• The big story this week was inflation. As reported by the Bureau of Labor Statistics (BLS) on Thursday morning, the Consumer Price Index (CPI) rose 2.1% over the last 12 months, which is slightly higher than the expected 1.9%. Core inflation (less food and energy) rose by 1.8% over the last 12 months, slightly higher than the consensus reading of 1.7%. The rising inflation story was confirmed also on Thursday morning, when the BLS reported Producer Price Index (PPI) statistics, with PPI year-over-year increase coming in at 2.7% versus expectations of 2.5%.

• Thursday’s Retail Sales Report showed weakness in January, with month-over-month sales declining by 0.3%, whereas expectations were for a 0.2% increase. Auto sales were a big drag, as Retail Sales ex Autos were flat versus expectations for a 0.4% increase.

• Strong equity returns were relatively evenly split across large cap versus small cap, while growth slightly outperformed value. International developedstocks provided similar strong results relative to domestic equities, and emerging market equity returns outpaced those from developed markets.

• 10-year Treasurys have added nearly five basis points of yield since last Friday’s close of 2.83%, with the largest jump coming on Thursday morning, when higher-than-expected inflation readings were revealed.

• Commodity indices rose slightly from last week.

• Defying the rising yields, the dollar has weakened this week, with the EUR/USD rate rising from about 1.22 at Friday’s close to above 1.245 by mid-day on Thursday.

• Echoing the Retail Sales Report, business inventories exhibited a month-on-month increase of 0.4% for January, versus expectations of0.3%.

February 16, 2018

0.7Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18Jan-16

Source: Bloomberg

Wealth Index|Growth of $1: Trailing 24 Months1.9

1.7

1.5

1.3

1.1

0.9S&P 500 Dow Industrials Small Cap EAFE Emerging Mkts.

L

S

Source: Bloomberg

One WeekValue Growth

3.86% 4.34% 4.76%

4.04% 4.27% 4.55%

3.88% 4.45% 4.97%

YTDValue Growth

0.45% 2.59% 4.48%

-0.89% 0.71% 2.78%

-1.07% 0.52% 2.01%

S&P 500 Index: Trailing 180 Days3000

2900

2800

2700

2600

2500

2400

2300

22008/21 9/4 9/18 10/2 10/1610/3011/1311/2712/1112/25 1/8 1/22 2/5

Source: Bloomberg

Sector Performance:S&P/Global Industry Classification Sectors (GICS)

% Wgt in Week %S&P 500 Chg. YTD %Chg.

Consumer Discretionary 12.7 3.92% 6.2%Consumer Staples 7.8 3.42% -2.7%Energy 5.6 1.93% -6.2%Financials 15.0 4.72% 3.6%Health Care 13.9 4.01% 3.2%Industrials 10.3 4.60% 1.8%Information Technology 24.5 5.83% 5.5%Materials 2.9 3.50% 0.0%Real Estate 2.6 1.75% -7.1%Telecom Services 1.9 2.42% -4.2%Utilities 2.7 2.85% -5.3%

Source: Bloomberg

Source: Bloomberg; Index % change is based on price.

Last Price Change % Chg. YTD %Russell Global EM 3,772.15 174.39 4.85% 3.5%10-Year US Treas. 2.88 5 bps NM NMDJ UBS Comm. Idx. 88.20 2.56 2.99% 0.0%Gold $1,347.67 $31.36 2.38% 3.5%Crude Oil $61.68 $2.44 4.12% 2.0%Dollar Index 89.11 -1.32 -1.46% -3.3%VIX Index 19.46 -9.60 -33.04% 76.3%

Last Price Change % Chg. YTD %S&P 500 2,732.22 112.67 4.30% 2.2%Dow Industrials 25,219.38 1,028.48 4.25% 2.0%Nasdaq 7,239.47 364.97 5.31% 4.9%Russell 2000 1,543.55 65.71 4.45% 0.5%Euro Stoxx Index 380.62 12.01 3.26% -2.2%Shanghai Composite 3,199.16 -110.10 -3.33% -3.3%Russell Global 2,173.87 83.27 3.98% 1.4%

Market Dashboard

VIX Index: Trailing 180 Days43

38

33

28

23

18

13

8Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18

Source: Bloomberg

2

Endowment Wealth ManagementWeekly Market Review-Feb 16-2018


February 16, 2018

The Economy and Markets

A Macro View – Why Are Yields Rising, and Should We Care

Warren Buffett once said, “Interest rates act like gravity on valuations.” In physics, gravity translates mass into weight, so the higher the gravity, the harder it is for previously levitating objects to continue to do so. So why, after many years of almost zero “financial gravity,” are yields suddenly spiking?

To answer the above question, we first need a brief review of the components of yields. Nominal yields can be broken down into three main components:1 1) bond risk premia (also known as “term premia”), 2) the market’s expectations of the average real short-term interest rate, and3) the market’s expectation of inflation rates. The last two components are measured over the lifetime of the bond.

Investors are assessing two things when contemplating what a “fair” price (or, equivalently, yield) on a long-term nominal bond should be: the sequence of short-term real rates over the lifetime of the bond and the sequence of inflation rates over that same period. Additionally, the harder it is for investors to determine the future path of real short-term rates and inflation (e.g., due to large and erratic recent inflation readings) or the more fearful they are feeling (e.g., due to general economic malaise), the higher additional yield bond risk premium they will require on their long-term bond investment as an additional reward for greater uncertainty. This component also responds to supply-demand imbalance for long-term debt. To wit, the various iterations of the Federal Reserve’s (Fed) quantitative easing (QE) were aimed at compressing this component by increasing the demand for Treasurys through outright purchases of these securities.

Keeping in mind the above-noted three components of nominal yields, we can understand why they have changed so drastically over the last several months, with the yield on the 10-year Treasury Note rising from 2.33% on November 15 to 2.91% on February 14—a nearly 60-basis points rise (see chart on page 8).

First, note that inflation expectations are very stable through time, and all survey-based evidence points to these expectations staying close to the Fed’s current 2% inflation target. Second, the estimates show2 that the expected average nominal short-term interest rate (or the sum of two out of the three components that make up the yield) rose by about 24 basis points during the span of November 15 through February 14.Incidentally, the Tax Cuts and Jobs Act of 2017 was making its final rounds through Congress during mid- to late November. This suggests that tax reform was the impetus behind the rise in expected future real short-term rates, as the tax bill’s aim was to raise the US economy’s productivity.

Finally, the term premium rose by about 35 basis points over a span of about 10 days—between February 2 and February 122 . The timing of this rise in term premium suggests that it was related to inflation uncertainty as well as supply/demand imbalance issues, which we analyze next.

During this time, the unit labor costs in nonfarm business sector increased significantly.3 Also, Congress passed a budget agreement that will add a “temporary”4 increase in discretionary spending.5 The Committee for Responsible Federal Budget estimates6 that this could add $2 trillion to the more than $20 trillion of existing US government debt, which is unsustainable.7 Also, Washington is currently abuzz with President Trump’s fiscal year (FY) 2019 budget proposal, which prominently features trillions of dollars for infrastructure spending. Finally, the Fed has begun the process of normalizing its massively bloated balance sheet,8 which calls for not rolling over an increasing portion9 of maturing Treasury debt. The result is the Fed has increased supply by not purchasing around $44 billon (and counting) worth of Treasurys since October of 2017, which constitutes a significant percentage of US debt sold by the Treasury.

These events combined have created an excess supply of Treasurys, which has caused the term premia to expand, resulting in significantly higher long-term yields. If the Fed sticks to its guns about maintaining stable and low future inflation, then the above-mentioned budgetary issues will likely lead to higher future real rates. Everything else being equal, this “financial gravity’s” rise should inexorably precipitate an end to stocks’ decade-long levitation.

1 In what follows, we will focus on U.S. Treasury yields, but the same analysis forms the basis for dissecting the yield of any bond.2 See https://www.newyorkfed.org/research/data_indicators/term_premia.html3 https://www.bls.gov/news.release/prod2.nr0.htm4 In light of this “temporary” increase, it is perhaps fitting to quote Milton Friedman – a Nobel Prize laureate and a former professor in economics at The University of Chicago, who famously quipped: “Nothing is as permanent as a temporary government program.”5 https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/bipartisanbudgetactof2018.pdf6 http://www.crfb.org/press-releases/budget-deal-could-lead-2-trillion-deficits7 https://www.treasurydirect.gov/govt/reports/pd/pd_debttothepenny.htm8 https://www.clevelandfed.org/en/our-research/indicators-and-data/credit-easing.aspx9 https://www.newyorkfed.org/markets/opolicy/operating_policy_170920

3



https://www.newyorkfed.org/research/data_indicators/term_premia.htmlhttps://www.bls.gov/news.release/prod2.nr0.htmhttps://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/bipartisanbudgetactof2018.pdfhttp://www.crfb.org/press-releases/budget-deal-could-lead-2-trillion-deficitshttps://www.treasurydirect.gov/govt/reports/pd/pd_debttothepenny.htmhttps://www.clevelandfed.org/en/our-research/indicators-and-data/credit-easing.aspxhttps://www.newyorkfed.org/markets/opolicy/operating_policy_170920

February 16, 2018

12/22 1/5 1/19 2/2

Thou

sand

s

Initial Jobless Claims-Trailing 12 Wks.270

250

230

210

190

170

15011/24 12/8

Source: Bloomberg

Economic Data

0.6

0.5

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3Dec-17

Mon

thly

%Ch

g.Consumer Price Index-Trailing 12 Mos.

Feb-17 Apr-17 Jun-17 Aug-17Headline CPI

Oct-17 Core CPI

Source: Bloomberg

130.0

128.0

126.0

124.0

122.0

120.0

118.0

116.0

114.0

112.0

110.0

108.0

Apr-17 Jun-17 Aug-17 Oct-17 Dec-17

Inde

x

Consumer Board Confidence Index - Trailing 12 Mos.

Feb-17Source: Bloomberg

300

250

200

150

100

50

0Apr-17 Jun-17 Aug-17 Oct-17 Dec-17

Thou

sand

s

Non-Farm Payrolls-Trailing 12 Mos.

Feb-17Source:Bloomberg

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0Mar-16 Sep-16 Mar-17 Sep-17

%

Real GDP Growth Rate - Annualized - 12 Qtrs.

Mar-15 Sep-15Source: Bloomberg

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4.0

3.9

3.8Jun-17 Aug-17 Oct-17 Dec-17

%

Unemployment Rate-Trailing 12 Mos.

Feb-17 Apr-17Source: Bloomberg

4



February 16, 2018

SELECTED EUROPEAN SOVEREIGN YIELD PERFORMANCE

Source: Bloomberg Basis points (bps)

Last Change % Chg. YTD % Last Change % Chg. YTD %Germany 10-Yr. Govt. 0.70 4 bps NM NM France 10-Yr. Govt. 0.95 3 bps NM NMGreece 10-Yr. Govt. 4.24 -13 bps NM NM Ireland 10-Yr. Govt. 1.11 2 bps NM NMItaly 10-Yr. Govt. 1.98 5 bps NM NM Portugal 10-Yr. Govt. 1.99 9 bps NM NMSpain 10-Yr. Govt. 1.46 2 bps NM NM Netherlands 10-Yr. Govt. 0.75 1 bps NM NMBelgium 10-Yr. Govt. 0.98 2 bps NM NM U.K. 10-Yr. Govt. 1.58 -2 bps NM NM

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

12/4 12/18 1/1 1/15 1/29 2/12

%

Germany 10-Year Government Bond Yield

11/20Source: Bloomberg

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

12/4 12/18 1/1 1/15 1/29 2/12

%

Spain 10-Year Government Bond Yield


1.1

1.3

1.5

1.7

1.9

2.1

2.3

12/4 12/18 1/1 1/15 1/29 2/12

%

Italy 10-Year Government Bond Yield


Eurozone

0.0

1.0

2.0

3.0

4.0

5.0

6.0

12/4 12/18 1/1 1/15 1/29 2/12

%

Greece 10-Year Government Bond Yield


5Tel. (920) 785-6010 www.EndowmentWM.com Fax (920) 227-0521


February 16, 2018

Inde

xNasdaq Composite-Trailing 90 Days

7,600

7,400

7,200

7,000

6,800

6,600

6,400

6,20011/20 12/4 12/18 1/1 1/15 1/29 2/12

Source: Bloomberg

2,200

2,000

2,600

2,400

3,000

2,800

3,600

3,400

3,200

3,800

12/18 1/1 1/15 1/29 2/12

Inde

x

Shanghai Composite Index-Trailing 90 Days

11/20 12/4Source: Bloomberg

300

320

340

360

380

400

420

12/18 1/1 1/15 1/29 2/12

Inde

x

Euro Stoxx Index-Trailing 90 Days


Inde

x

6

Dow Jones Industrial Average -Trailing 90 Days27,000

26,000

25,000

24,000

23,000

22,000

21,00011/20 12/4 12/18 1/1 1/15 1/29 2/12

Source: Bloomberg

WORLD MARKETPERFORMANCE


Last Change % Chg. YTD % Last Change % Chg. YTD %S&P 500 2,732.22 112.67 4.30% 2.19% Swiss Market Index 8,986.72 304.72 3.51% -4.21%Dow Industrials 25,219.38 1028.48 4.25% 2.02% CAC 40 Index (France) 5,281.58 202.37 3.98% -0.58%Nasdaq Composite 7,239.47 364.97 5.31% 4.87% DAX Index (Germany) 12,451.96 344.48 2.85% -3.60%Russell Global 2,173.87 83.27 3.98% 1.4% Irish Overall Index 6,833.41 233.74 3.54% -2.91%Russell Global EM 3,772.15 174.39 4.85% 3.5% Nikkei 225 21,720.25 -170.61 -0.78% -4.59%S&P/TSX (Canada) 15,452.64 418.11 2.78% -4.67% Hang Seng Index 31,115.43 664.16 2.18% 4.00%Mexico IPC 48,882.78 1066.05 2.23% -0.99% Shanghai Composite 3,199.16 -110.10 -3.33% -3.27%Brazil Bovespa 84,524.58 3625.88 4.48% 10.63% Kospi Index (S. Korea) 2,421.83 25.27 1.05% -1.85%Euro Stoxx 600 380.62 12.01 3.26% -2.20% Taiwan Taiex Index 10,421.09 49.34 0.48% -2.08%FTSE 100 7,294.70 202.27 2.85% -5.11% Tel Aviv 25 Index 1,490.20 11.68 0.79% -1.30%

IBEX 35 (Spain) 9,832.10 192.50 2.00% -2.11% MICEX Index (Russia) 2,255.27 58.15 2.65% 6.90%

Equities



February 16, 2018

EMERGING AND FRONTIER MARKET PERFORMANCE


Last Change % Chg. YTD% Last Change % Chg. YTD %Mexico IPC 48,882.78 1066.05 2.2% -1.0% Hang Seng Index 31,115.43 664.16 2.2% 4.0%Brazil (Bovespa Index) 84,524.58 3625.88 4.5% 10.6% India (Sensex 30) 34,010.76 5.00 0.0% -0.1%MICEX Index (Russia) 2,255.27 58.15 2.6% 6.9% Malaysia (KLCI Index) 1,838.28 -1.16 -0.1% 2.3%Czech Republic (Prague) 1,112.34 6.28 0.6% 3.2% Singapore (Straits Times Index) 3,443.51 27.61 0.8% 1.2%Turkey (Istanbul) 116,510.97 2920.70 2.6% 1.0% Thailand (SET Index) 1,805.89 19.44 1.1% 3.0%Egypt (Hermes Index) 1,485.12 8.07 0.5% 3.4% Indonesia (Jakarta) 6,591.58 46.95 0.7% 3.7%Kenya (Nairobi 20 Index) 3,713.25 -27.77 -0.7% 0.0% Pakistan (Karachi KSE 100) 43,627.10 -181.70 -0.4% 7.8%Saudi Arabia (TASI Index) 7,510.47 107.32 1.4% 3.9% Vietnam (Ho Chi Minh) 1,059.73 48.13 4.8% 7.7%Lebanon (Beirut BLOM Index) 1,166.78 -3.28 -0.3% 1.6% Sri Lanka (Colombo) 6,563.69 20.79 0.3% 3.1%Palestine 590.10 14.51 2.5% 2.7% Cambodia (Laos) 952.79 -17.27 -1.8% -4.6%

Inde

x

Inde

x

Brazil (Bovespa Index)-Trailing 90 Days India (Sensex Index)-Trailing 90 Days90,000 37,000

80,000 36,000

70,00035,000

34,00060,000

33,000

50,00032,000

40,000 31,000

30,000 30,00011/21 12/5 12/19 1/2 1/16 1/30 2/13 11/20 12/4 12/18 1/1 1/15 1/29 2/12

Source: Bloomberg Source: Bloomberg

Inde

x

Inde

x

7

Egypt (Hermes Index)-Trailing 90 Days Singapore (Straits Times Index)-Trailing 90 Days1,600 3,650

1,4003,600

3,550

1,2003,500

1,000 3,450

8003,400

3,350

6003,300

400 3,25011/19 12/3 12/17 12/31 1/14 1/28 2/11 11/20 12/4 12/18 1/1 1/15 1/29 2/12


Equities – Emerging and Frontier Markets



February 16, 2018

YIELD CURVES

SELECTED INTERESTRATES

Source: Bloomberg

Last Change % Chg. YTD % Last Change % Chg. YTD %

2-Yr. U.S. Treasury 2.19% -2 bps NM NM Prime Rate 4.50% 0.00 NM NM

5-Yr. U.S. Treasury 2.63% 11 bps NM NM Fed Funds Rate 1.50% 0.00 NM NM

10-Yr. U.S.Treasury 2.88% 5 bps NM NM Discount Rate 2.00% 0.00 NM NM

30-Yr. U.S.Treasury 3.14% 0 bps NM NM LIBOR (3 Mo.) 1.87% 5 bps NM NM

German 10-Yr. Govt. 0.70% 4 bps NM NM Bond Buyer 40 Muni 3.87% 7 bps NM NM

France 10-Yr. 0.95% 3 bps NM NM Bond Buyer 40 G.O. 3.84% NA NM NMItaly 10-Yr. 1.98% 5 bps NM NM Bond Buyer 40 Rev. 4.33% NA NM NM

Fed 5-Yr Fwd BE Inf. 2.15% -4 bps NM NM

1M 1Y 3Y 5Y 8Y 10Y 15Y 20Y 30Y0.00

1.00

2.00

3.00

4.00

5.00

6.00

US Treasury Actives Curve 20180209US Treasury Actives Curve 20180216 USD Composite (A) BFV Curve 20180217USD Composite (BBB) BFV Curve 20180217

10/21 11/21 12/21 1/21

Yiel

d%

10-Year Treasury Yield - Trailing 180 Days3.10

2.90

2.70

2.50

2.30

2.10

1.90

1.70

1.508/21 9/21

Source: Bloomberg

1.50

10/21 11/21 12/21 1/21

Inde

x

BBB/Baa- 10-Yr Treas. Spread Rising Line = Risk Aversion

1.45

1.40

1.35

1.30

1.25

1.20

1.15

1.10

1.05

1.008/21 9/21

Source: Bloomberg

8

Source: Bloomberg

Interest Rates



February 16, 2018

U.S. Dollar Index - Trailing Six Months Euro - U.S. Dollars per Euro96 1.30

95 1.25

94 1.2093 1.1592 1.1091

901.05

891.00

88 0.95

87 0.90

86 0.85

85 0.808/21 9/21 10/21 11/21 12/21 1/21 8/21 9/21 10/21 11/21 12/21 1/21


SELECTED CURRENCY PERFORMANCE

Source: Bloomberg

Last Change % Chg. YTD % Last Change % Chg. YTD %Dollar Index 89.12 -1.319 -1.46% -3.26% Chinese Yuan 6.34 0.038 -0.60% 2.61%Euro 1.24 0.016 1.28% 3.37% Swiss Franc 0.93 -0.011 1.21% 5.06%Japanese Yen 106.27 -2.530 2.38% 6.04% New Zealand Dollar 0.74 0.014 1.89% 4.14%British Pound 1.40 0.020 1.42% 3.77% Brazilian Real 3.23 -0.072 2.22% 2.42%Canadian Dollar 1.25 -0.003 0.24% 0.16% Mexican Peso 18.52 -0.178 0.96% 6.14%

Chinese yuan - yuan per U.S. Dollar Japanese yen - Yen per U.S. Dollar6.70 116.00

6.60 114.00

6.50 112.00

6.40 110.00

6.30 108.00

6.20 106.00

6.10 104.00

6.00 102.008/21 9/21 10/21 11/21 12/21 1/21 8/21 9/21 10/21 11/21 12/21 1/21


9

Currencies



February 16, 2018$

perb

arre

l

1,380

1,360

1,340

1,320

1,300

1,280

1,260

1,240

1,220

1,200

1,1809/21 10/21 11/21 12/21 1/21

$ pe

roun

ce

Gold - Spot gold price ($ per ounce)


10/21 11/21 12/21 1/21

$ pe

rbus

hel

Corn - Active Contract390

380

370

360

350

340

330


SELECTED COMMODITY MARKETPERFORMANCELast Change % Chg. YTD % Last Change % Chg. YTD %

Bloomberg Comm. Idx. 88.20 2.56 2.99% 0.04% Platinum Spot $1,005.90 $40.27 4.17% 8.34%Crude Oil $61.68 $2.44 4.12% 1.99% Corn 375.00 5.25 1.42% 4.46%Natural Gas $2.57 -$0.02 -0.58% -11.60% Wheat 471.50 10.50 2.28% 7.10%Gasoline ($/Gal.) $2.54 -$0.05 -1.74% 2.29% Soybeans 1,032.50 39.00 3.93% 6.12%Heating Oil 191.39 5.79 3.12% -6.40% Sugar 13.28 -0.27 -1.99% -11.58%Gold Spot $1,348.07 $31.36 2.38% 3.47% Orange Juice 149.90 1.90 1.28% 8.78%Silver Spot $16.68 $0.32 1.92% -1.52% Aluminum 2,165.00 42.00 1.98% -4.54%Source: Bloomberg; % change is based on price. Copper 7,182.00 427.00 6.32% -0.90%

Commodities

Inde

x

10

Crude Oil - Light Crude ($ per barrel)70

60

50

40

30

20

10

08/21 9/21 10/21 11/21

Source: Bloomberg12/21 1/21

Copper7,400

7,200

7,000

6,800

6,600

6,400

6,200

6,000

5,8008/21 9/21 10/21 11/21 12/21 1/21

Source: Bloomberg



February 16, 2018In

dex

Inde

x

Inde

x

HFRX Equity Market Neutral - Trailing 90 Days IQ Fixed Income Beta Arb Index - Trailing 90 Days1,025 1,485

1,020 1,480

1,0151,475

1,0101,470

1,005

1,0001,465

995 1,460

990 1,45511/20 12/4 12/18 1/1 1/15 1/29 2/12 11/20 12/4 12/18 1/1 1/15 1/29 2/12


Inde

x

11

HFRX Global Hedge Fund Index - Trailing 90 Days HFRX Equity Hedge Index - Trailing 90 Days1,330 1,340

1,320

1,3101,320

1,300 1,3001,290

1,280 1,280

1,270 1,2601,260

1,250 1,240

1,2401,220

1,230

1,220 1,20011/20 12/4 12/18 1/1 1/15 1/29 2/12 11/20 12/4 12/18 1/1 1/15 1/29 2/12


SELECTED ALTERNATIVE INVESTMENT INDEX PERFORMANCE


Last Change % Chg. YTD% Last Change % Chg. YTD %HFRX Global Hedge Fund Index 1287.48 13.28 1.04% 0.93% HFRX Distressed Index 1116.20 1.45 0.13% 0.86%HFRX Equity Market Neutral 1012.19 5.97 0.59% 0.78% HFRX Merger Arbitrage Index 1853.19 2.77 0.15% 0.01%HFRX Equity Hedge Index 1297.73 18.25 1.43% 2.12% HFRX Convertible Arbitrage Index 790.74 4.52 0.57% -0.69%HFRX Event-Driven Index 1670.21 16.64 1.01% 0.27% HFRX Macro CTA Index 1172.34 17.27 1.50% 0.73%HFRX Absolute Return Index 1073.77 3.09 0.29% 0.99% IQ Fixed Income Beta Arb Index 1473.42 5.73 0.39% 0.20%

Alternative Investments



3.90

3.85

3.80

3.75

3.70

3.65

3.60

3.5510/21 11/21 12/21 1/21

Inde

x

S&P 500/MSCI EAFE - Trailing 180 Days


1.56

1.54

1.52

1.50

1.48

1.46

1.44

1.42

1.40

1.38

1.3610/21 11/21 12/21 1/21

Inde

x

MSCI EAFE/MSCI EM - Trailing 180 Days


0.42

0.42

0.41

0.41

0.40

0.40

0.39

0.39

0.38

0.38

0.37

Inde

xLarge Cap/Small Cap - Trailing 180 Days

8/21 9/21 10/21 11/21 12/21 1/21Source: Bloomberg

10/21 11/21 12/21 1/21

Inde

x

Growth/Value - Trailing 180 Days0.92

0.90

0.88

0.86

0.84

0.82

0.808/21 9/21

Source: Bloomberg

February 16, 2018

6.00

5.50

5.00

4.50

4.00

3.50

3.001/21

Inde

x

S&P 500/MSCI EM - Trailing 180 Days

8/21 9/21 10/21 11/21 12/21Source: Bloomberg

12

Portfolio Construction



0.310

0.308

0.306

0.304

0.302

0.300

0.298

0.2961/21

Inde

xHigh Yield/Inv. Grade Bonds - Trailing 180 Days

8/21 9/21 10/21 11/21 12/21Source: Bloomberg

0.250

0.245

0.240

0.235

0.230

0.225

0.22010/21 11/21 12/21 1/21

Inde

x

Info Tech/S&P 500 - Trailing 180 Days


1.92

1.91

1.90

1.89

1.88

1.87

1.86

1.85

1.84

1.83

1.82

Inde

x

Inv. Grade Bonds/Int. Govt. Bonds - Trailing 180 Days

8/21 9/21 10/21 11/21 12/21 1/21Source: Bloomberg

0.59

0.58

0.58

0.57

0.57

0.56

0.56

0.55

0.59

10/21 11/21 12/21 1/21

Inde

x

High Yield Bonds/Int. Govt. Bonds - Trailing 180 Days


13

February 16, 2018

Portfolio Construction (continued)



February 16, 2018

The Relative Strength Matrix provides an indication of how the various asset classes have performed relative to one another over the past 30 days. A number greater than 1.0 indicates that the asset class in the far left column has outperformed the corresponding asset class in the top row over the past 30 days. A number below 1.0 means the asset class on the left has underperformed the asset class at the top. The green shading indicates outperformance, and the red shading indicates underperformance.

Source: Bloomberg

RELATIVE STRENGTH MATRIX (BASED ON 30-DAY RSI)

Large Cap Core

Large Cap Growth

Large Cap Value

Mid Cap Core

Mid Cap Growth

Mid Cap Value

Small Cap Core

Small Cap Growth

Small Cap Value

Int'l.Developed

Emerging Markets REITs Comm. Int. Bond High Yield

Large Cap Core 1.00 0.96 1.06 1.03 0.98 1.08 1.05 1.00 1.12 1.09 0.98 1.32 1.00 1.11 1.26Large Cap Growth 1.04 1.00 1.10 1.07 1.02 1.12 1.09 1.04 1.16 1.13 1.02 1.37 1.04 1.15 1.30Large Cap Value 0.94 0.91 1.00 0.97 0.93 1.02 0.99 0.95 1.05 1.03 0.92 1.24 0.94 1.05 1.18Mid Cap Core 0.97 0.93 1.03 1.00 0.95 1.05 1.02 0.97 1.09 1.06 0.95 1.28 0.97 1.08 1.22Mid Cap Growth 1.02 0.98 1.08 1.05 1.00 1.10 1.07 1.02 1.14 1.11 1.00 1.34 1.02 1.13 1.28Mid Cap Value 0.93 0.89 0.98 0.96 0.91 1.00 0.98 0.93 1.04 1.01 0.91 1.22 0.93 1.03 1.16Small Cap Core 0.95 0.92 1.01 0.98 0.93 1.03 1.00 0.95 1.06 1.03 0.93 1.25 0.95 1.06 1.19Small Cap Growth 1.00 0.96 1.06 1.03 0.98 1.08 1.05 1.00 1.12 1.08 0.98 1.32 1.00 1.11 1.25Small Cap Value 0.89 0.86 0.95 0.92 0.88 0.96 0.94 0.90 1.00 0.97 0.88 1.18 0.89 0.99 1.12Int'l. Developed 0.92 0.89 0.98 0.95 0.90 0.99 0.97 0.92 1.03 1.00 0.90 1.21 0.92 1.02 1.15Emerging Markets 1.02 0.98 1.08 1.05 1.00 1.10 1.07 1.02 1.14 1.11 1.00 1.34 1.02 1.13 1.28REITs 0.76 0.73 0.80 0.78 0.74 0.82 0.80 0.76 0.85 0.82 0.74 1.00 0.76 0.84 0.95Commodities 1.00 0.96 1.06 1.03 0.98 1.08 1.05 1.00 1.12 1.09 0.98 1.32 1.00 1.11 1.26Int. Bond 0.90 0.87 0.95 0.93 0.88 0.97 0.95 0.90 1.01 0.98 0.88 1.19 0.90 1.00 1.13High Yield 0.80 0.77 0.85 0.82 0.78 0.86 0.84 0.80 0.89 0.87 0.78 1.05 0.80 0.89 1.00

11/30 12/7 12/14 12/21 12/28 1/4 1/11 1/18 2/1 2/8 2/15

Large Cap (R200) 1.89% -0.38% 0.83% 1.16% -0.02% 1.42% 1.65% 1.29%

1/25

1.45% -0.43% -8.67% 5.89%

Small Cap (R2000) 1.81% -1.53% -0.89% 2.66% 0.12% 0.44% 2.00% -0.63% 1.58% -1.36% -7.35% 5.01%

MSCI EAFE 0.31% -1.10% 0.94% 0.85% 0.47% 2.24% 1.15% 1.35% 2.10% -1.48% -6.11% 1.78%

MSCI Em.Mkts. -2.74% -1.81% 1.88% 1.17% 1.69% 3.38% 0.37% 2.55% 2.93% -1.17% -6.85% 3.40%

BarCap Agg. (AGG) 11.44% 3.87% 3.72% 47.24% -10.88 % 1.05% -9.17% -6.31 % 0.12% 0.12% -2.20% -2.12%

High Yield (JNK) -0.05% -0.54% -0.14% -0.35% 0.27% 0.90% -0.19% -0.30 % 0.22% -1.19% -1.70% 0.87%

BloombergCommodity

Index-1.54% -2.22% 0.04% 1.72% 2.84% 0.99% -0.30% 0.44% 1.99% -0.66% -3.18 % 1.41%

Hedge Funds (HFRX Global) 0.02% -0.38% 0.10% 0.90% 0.11% 1.06% 0.61% 0.21% 0.86% -0.23% -2.28% 0.75%

60/40* 4.66% 0.81% 1.69% 17.32% -3.63% 1.39% -2.33% -1.57 % 1.11% -0.56% -5.45% 2.01%

48/32/20(w/Alts.)** 3.73% 0.57% 1.37% 14.03% -2.89% 1.32% -1.74% -1.21% 1.06% -0.50% -4.82% 1.75%

Source: Bloomberg; *60/40 portfolio = 30% Large Cap/10% Small Cap/15% EAFE/5% Emerging Markets/35% BarCap Agg./5% High Yield.**48/32/20 portfolio = 24% Large Cap/8% Small Cap/12% EAFE/4% Emerging Markets/28% BarCap Agg./4% High Yield/20% HFRX Global Index.

WEEKLY ASSET CLASS PERFORMANCE (Prior 12 weeks ending Thursday)

Alternatives

Asset Allocation

Domestic Equity

Int'l. Equity

Fixed Income

Commodities

Equity

14



INDEX OVERVIEWThe S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. TheS&P/Case-Shiller Home Price Indices measure the residential housing market, tracking changes in the value of the residential real estate market in 20metropolitan regions across the United States. The Nasdaq Composite is a stock market index of the common stocks and similar securities listed on theNASDAQ stock market. The MSCI EAFE Index represents 21 developed markets outside of North America. The MSCI EAFE Growth Index is an unmanagedindex considered representative of growth stocks of Europe, Australasia and the Far East. The MSCI EAFE Value Index is an unmanaged index consideredrepresentative of value stocks of Europe, Australasia and the Far East. The MSCI Emerging Markets Index is a free float-adjusted market capitalizationindex that is designed to measure equity market performance in the global emerging markets. The MSCI Europe Index is an unmanaged indexconsidered representative of stocks of developed European countries. The MSCI Pacific Index is a free float-adjusted market capitalization weightedindex that is designed to measure the equity market performance of the developed markets in the Pacific region. The Barclays US Credit Index is anunmanaged index considered representative of publicly issued, SEC-registered US corporate and specified foreign debentures and secured notes. TheBarclays US Aggregate Bond Index is a market capitalization-weighted index of investment-grade, fixed-rate debt issues, including government,corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Barclays US Corporate High Yield Index covers theUSD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating ofMoody’s, Fitch and S&P is Ba1/BB+/BB+ or below. The index may include emerging market debt. The Barclays Capital Municipal Bond Index is anunmanaged index comprised of investment-grade, fixed-rate municipal securities representative of the tax-exempt bond market in general. The BarclaysUS Treasury Total Return Index is an unmanaged index of public obligations of the US Treasury with a remaining maturity of one year or more. TheCitigroup World Government Bond Index is a market capitalization weighted bond index consisting of the government bond markets of Australia, Austria,Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, Norway, Poland, Portugal, Singapore,Spain, Sweden, Switzerland, the United Kingdom and the United States. The DJ-UBS Commodity Index Total ReturnSM measures the collateralized returnsfrom a basket of 19 commodity futures contracts representing the energy, precious metals, industrial metals, grains, softs and livestock sectors. TheRussell 1000 Index is a market capitalization-weighted benchmark index made up of the 1000 largest U.S. companies in the Russell 3000 Index. TheRussell 1000 Growth Index is an unmanaged index considered representative of large-cap growth stocks. The Russell 1000 Value Index is an unmanagedindex considered representative of large-cap value stocks. The Russell 2000 Index is an unmanaged index considered representative of small-cap stocks.The Russell 2000 Growth Index is an unmanaged index considered representative of small-cap growth stocks. The Russell 2000 Growth Index is anunmanaged index considered representative of small-cap value stocks. The Russell 3000 Index is an unmanaged index considered representative of theUS stock market. The Russell Midcap Index is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on acombination of their market cap and current index membership. The Russell Midcap Growth Index is an unmanaged index considered representative ofmid-cap growth stocks. The Russell Midcap Value Index is an unmanaged index considered representative of mid-cap value stocks. The HFRX Indices area series of benchmarks of hedge fund industry performance which are engineered to achieve representative performance of a larger universe of hedgefund strategies. Hedge Fund Research, Inc. employs the HFRX Methodology (UCITS compliant), a proprietary and highly quantitative process by whichhedge funds are selected as constituents for the HFRX Indices. The ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on thedata from these surveys that monitors economic conditions of the nation. The ISM Manufacturing Index is an index based on surveys of more than 300manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new ordersand supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.The Consumer Price Index (CPI) measures the change in the cost of a fixed basket of products and services. The Gross Domestic Product (GDP) rate is ameasurement of the output of goods and services produced by labor and property located in the United States. Basis Point(s) is a unit that is equal to1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates,equity indexes and the yield of a fixed-income security. The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility thatis calculated by using real-time S&P 500 Index option bid/ask quotes. The Index uses nearby and second nearby options with at least 8 days left toexpiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index. The MSCI World ex-U.S. Index -captures large and mid-cap representation across 22 of 23 Developed Markets DM countries*--excluding the United States. With 1,002 constituents, theindex covers approximately 85% of the free float-adjusted market capitalization in each country. (* DM countries include: Australia, Austria, Belgium,Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,Sweden, Switzerland and the UK.) The MSCI Japan Index - is designed to measure the performance of the large and mid-cap segments of the Japanesemarket. With 320 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. The Barclays GlobalAggregate ex-U.S. Index - is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of eachbond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due totax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amountof foreign bonds traded in U.S. The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by theUniversity of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectationsregarding the overall economy. A separately managed account (SMA) is an individual managed investment account offered typically by a brokerage firmthrough one of their brokers or financial consultants and managed by independent investment management firms (often called money managers forshort) and have varying fee structures. An open-end index fund continuously issues and redeems shares based on investor demand. As an index fund, itsinvestment objective is to duplicate the performance of the index it uses as a benchmark. Investment Grade or Investment Grade Bond – The broadcredit designation given to corporate and municipal bonds which have a high probability of being paid and minor, if any, speculative features. Bondsrated Baa and higher by Moody’s Investor Services or BBB and higher by Standard & Poor's are deemed by those agencies to be "investment grade”. Non-Investment Grade - By definition, junk bonds are non-investment grade. A bond rated lower than Baa/BBB, also called a "high-yield" bond. Junk bondsare speculative compared with investment grade bonds. Risk-On Risk-Off - An investment setting in which price behavior responds to, and is driven by,changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods whenrisk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investorshave the tendency to gravitate toward lower-risk investments.


Endowment Wealth ManagementWeekly Market Review-Feb 16-2018 February 16, 2018

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained inthis weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regardingthe appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is noassurance that an investment will provide positive performance over any period of time. An investor may experience loss ofprincipal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals,time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investorsand investors should consult with an investment advisor to determine the appropriate investment strategy. Past performanceis not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Endowment WealthManagement makes no representation regarding the accuracy or completeness of information provided herein. All opinionsand views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasonssuch as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources.Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limitedgeographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject tointerest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in marketinterest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing inETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectlybearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the marketfluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods ofprolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposesonly and does not represent the performance of any specific investment product or portfolio. An investment cannot be madedirectly into an index.Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses. Neither Endowment Wealth Management nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. Copyright Endowment Wealth Management, Inc. All rights reserved ABOUT Endowment Wealth Management, Inc. We are a Multi-Client Family Office whose sole mission is to provide wealth sustainability for individuals, families, retirement plans and institutions through the utilization of the Endowment Investment Philosophy. We manage our client’s financial wealth to enhance the human capital of their future generations. We work closely with our clients to develop an integrated long-term wealth plan that maximizes the benefit gained by integrating all of our individuals or families wealth producing assets. We are different from many other firms, in the way we build our portfolios on behalf of our clients. For more information on Endowment Wealth Management, Inc., please call (920) 785-6010 and/or visit www.EndowmentWM.com.


Endowment Wealth ManagementWeekly Market Review-Feb 16-2018 February 16, 2018

PMC Weekly Review1/20/2012

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Endowment Wealth Management nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

Copyright Endowment Wealth Management, Inc. All rights reserved

ABOUT Endowment Wealth Management, Inc.

We are a Multi-Client Family Office whose sole mission is to provide wealth sustainability for individuals, families, retirement plans and institutions through the utilization of the Endowment Investment Philosophy. We manage our client’s financial wealth to enhance the human capital of their future generations. We work closely with our clients to develop an integrated long-term wealth plan that maximizes the benefit gained by integrating all of our individuals or families wealth producing assets. We are different from many other firms, in the way we build our portfolios on behalf of our clients.

For more information on Endowment Wealth Management, Inc., please call (920) 785-6010 and/or visit www.EndowmentWM.com.

FOR FINANCIAL ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC.

2

FOR FINANCIAL ADVISOR USE ONLY. NOT FOR DISTRIBUTION TO THE PUBLIC.

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weekly review february 16, 2018...feb 16, 2018 · 1) bond risk premia (also known as “term...

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