where’s the market heading?...1 where’s the market heading? presented by: ed mcilveen, cfa...

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Where’s the Market Heading?

Presented by:Ed McIlveen, CFADirector of ResearchFrancis Investment Counsel LLC

A Word of Caution

I am a research analyst nerd

This material has lots of charts and references to economics - we’ll be straining the brain

Lots of Information and it’s late at night

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Our Agenda

Recap of Recent Past

Recent Market Performance

Expectations for the Next 12-18 Months

What is the point? So What?

No Shortage of News and Problems

CNBC, 6/11/18

WSJ, 6/10/18

CNN Money, 6/10/18

Forbes, 9/5/18

CNBC, 6/22/18

NPR, 5/11/18

Business Insider, 4/29/18

Record-Breaking Recovery

Since the stock market bottomed in March of 2009, the S&P 500 has cumulatively returned how much through August 31, 2018:

A) 126%

B) 189%

C) 290%

D) 382%

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D – 382%

Source: Bloomberg

Past Performance is no guarantee of future results.


100

150

200

250

300

350

400

450

500

2/1/

2009

6/1/

2009

10/1

/200

9

2/1/

2010

6/1/

2010

10/1

/201

0

2/1/

2011

6/1/

2011

10/1

/201

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2/1/

2012

6/1/

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10/1

/201

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2/1/

2013

6/1/

2013

10/1

/201

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2/1/

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/201

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2/1/

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2/1/

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6/1/

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10/1

/201

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2/1/

2017

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/201

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2/1/

2018

6/1/

2018

S&P 500 - Cumulative Return

Europe “on Fire”

Oil Collapse

China Troubles

Trade War

The path higher has had some drama

Source: StyleAdvisor


Our Agenda





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Market Performance Recap

Source: StyleAdvisor

28.0

%

17.6

%

14.4

%

8.6%

7.4%

2.0%

-0.4

%

-20%

-10%

0%

10%

20%

30%

40%

50%

Hard Asset(CS

Commodity)

U.S. SmallCap (Russell

2000)

U.S. LargeCap (S&P

500)

EmergingMkts (MSCI

EM)

IntlDeveloped

(MSCIEAFE)

Frontier Mkts(MSCI

Frontier)

U.S. Bond(Bloomberg

Barclays Agg)

1 Year Asset Class Returns (As of 6/30/18)

U.S. Companies Have Done Well

Big U.S. companies outperform “analyst expectations” – what does that mean?

1Q18,78.2%

50%

55%

60%

65%

70%

75%

80%

85%

1Q03

1Q04

1Q05

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

1Q15

1Q16

1Q17

1Q18

% o

f S&

P 5

00 C

ompa

nies

% of S&P 500 Beating Earnings Expectations*

*Compared to Bloomberg estimates

Source: Bloomberg

Company Results: Better Than Expected

Trade War – Look Out

Nobody wins in a trade war, but not everyone loses the same

3.9%

-0.4%-2.9% -2.3%

3.0%

-3.2% -6.2%

4.9%

-3.5%-9.3% -11.4%2Q18 Return (MSCI Country Index)

8% 11% 14% 16% 17% 19% 23% 25%36% 37% 48%

U.S

.

Indi

a

Japa

n

Eur

ozon

e

UK

Chi

na

Rus

sia

Can

ada

Mex

ico

Kor

ea

S. A

fric

a

Exports as % of GDP

Export Dependence vs. 2Q18 Country Returns

Developed Markets Emerging MarketsSource: IMF, Morningstar


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Our Agenda





The Global Economy

Global Expansion Remains Robust

Corporate earnings are trending higher

Source: IMF, JPM, MSCI, Bloomberg

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Trade War – Should We Worry?

Even when including the impact of tariffs, global manufacturing is expanding

Source: OECD, JPM, Bloomberg

53.0

50.5

48.0

49.0

50.0

51.0

52.0

53.0

54.0

55.0

Nov

-201

6

Dec

-201

6

Jan-

2017

Feb-

2017

Mar

-201

7

Apr

-201

7

May

-201

7

Jun-

2017

Jul-

2017

Aug

-201

7

Sep-

2017

Oct

-201

7

Nov

-201

7

Dec

-201

7

Jan-

2018

Feb-

2018

Mar

-201

8

Apr

-201

8

May

-201

8

Jun-

2018

Inde

x V

alue

(>5

0 is

exp

ansi

onar

y)

JPMorgan Global Manufacturing PMIGlobal Composite Subindex: New Exports

6/30/18

U.S. Equities

U.S. Economy

“Leading Economic Indicators” are Looking Good

Economic Contraction Expected

Economic Expansion Expected

Source: Bloomberg, Conference Board

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U.S. Economy

What are these Leading Economic Indicators?

10 Components What it Means to You Data Trend*

Average weekly hours, manufacturingPeople making stuff RIGHT NOW ▲

Average weekly initial claims for unemployment insurance

Are more or less people working RIGHT NOW? ▲▲

Manufacturers’ new orders, consumer goods and materials Will stuff be made in the near future? ▲ISM Index of New Orders

Measure of Demand for New Orders ▲▲Manufacturers' new orders, nondefense capital goods excluding aircraft orders

Measure of Demand for Stuff, no airplanes included ▲▲

Building permits, new private housing units New homes that WILL BE built ▼Stock prices, 500 common stocks Rising/Falling stock prices helpful for

next 6-months ▲▲Leading Credit Index

How hard is it to get access to money? ▲▲

Interest rate spread, 10-year Treasury bonds less federal funds

Difference in data can signal overall economic direction

▼

Source: Bloomberg, Conference Board, FRED*Trends provided by Francis Investment Counsel

What about Mid-Term Elections?

Source: Bloomberg

Date of Mid-Term ElectionS&P 500 Index Total Return 1-Year

Later11/2/1954 38.96%11/4/1958 14.66%11/6/1962 29.01%11/8/1966 16.70%11/3/1970 16.34%11/5/1974 24.11%11/7/1978 12.40%11/2/1982 25.41%11/4/1986 4.25%11/6/1990 29.32%11/8/1994 30.39%11/3/1998 22.10%11/5/2002 17.01%11/7/2006 8.74%11/2/2010 5.84%11/4/2014 6.71%

Median 16.86%Average 18.87%


U.S. Equities

Solid economic fundamentals

Low near-term recession risk

Mid-term election

Stock prices are higher relative to other parts of the world

We are Neutral/Overweight on U.S. Equities

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International Equities

Valuations Attractive

Both developed- and emerging-market equities are relatively cheaper vs. U.S. equities.

Source: MSCI, Bloomberg

Intl1.59

EM1.55

U.S.3.14

1.0

1.5

2.0

2.5

3.0

3.5

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Pric

e-to

-Boo

k R

atio

Global Valuations: Price-to-Book RatioIntl Developed (MSCI EAFE)Emerging (MSCI EM)U.S. (Russell 3000)

6/30/18

International Equities

Younger recoveries with more room for growthCheap currency valuesEquites trade at a discount to U.S.More exposed to a prolonged trade warEconomic fundamentals are more fragile than U.S.

We are Neutral on Developed Market EquitiesWe are Overweight on Emerging Market Equities

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Hard Assets

Catalysts for Commodities

Late-cycle dynamics tends to bode well for hard assets and commodity prices look very cheap relative to equities

Source: Bloomberg

3/31/18,0.99

0

1

2

3

4

5

6

7

8

9

10

1970

1972

1974

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1984

1986

1988

1990

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1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

S&P

GSC

I In

dex

/ S&

P 5

00 I

ndex

S&P Goldman Sachs Commodity Index/S&P 500

Avg. 3.94

Commodities "Cheap" v. Stocks

Commodities"Expensive" v. Stocks


Hard Assets

U.S. output gap is closed, setting up a favorable environment for inflation-sensitive assets

A strong global economy is supporting demand growth for most commodities

We are Neutral/Overweight on Hard Assets

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Bonds

Rates on the Rise

The Federal Reserve Bank is actively trying to push rates higher, weighing on bond values

2.00%1.75%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Fed Funds Target RangeUpper Limit Lower Limit

Latest hike on 6/14/18

Source: Board of Governors of the Federal Reserve System

Bonds

Low absolute yields, monetary tightening, burgeoning inflation, and heightened interest rate risk all portend a difficult environment for bonds

Higher absolute yields and depressed currency values make us slightly more optimistic on emerging market debt

We are Neutral/Underweight on U.S. Fixed IncomeWe are Neutral on Emerging Market Debt

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Our Agenda




What is the Point? So What?

Ratings Recap

Neutral/Overweight on U.S. Equities

Neutral on Developed Market Equities

Overweight on Emerging Market Equities

Neutral/Overweight on Hard Assets

Neutral/Underweight on U.S. Fixed Income

Neutral on Emerging Market Debt

So What?

Example provided for illustration purposes only

Long-Term Target

Example Portfolio

Domestic Bonds 40% 30% ▼

International Bonds - Emerging Market Debt 5% 5%

Domestic Equities 30% 33% ▲

International - Developed Equities 15% 15%

International - Emerging Market Equities 5% 10% ▲

Hard Assets – Inflation Sensitive 5% 7% ▲

The example does not constitute an investment recommendation. Before allocating any money to an asset allocation strategy, you should carefully consider your own circumstances. Past performance is no guarantee of future results.

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Francis Investment Counsel does not provide legal or tax advice. As investment returns are variable, we cannot guarantee any certain investment return or result. Historical performance information has been compiled from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is not a guarantee of future results.

Moneyadviceatwork.com/learnmore

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Disclaimer

The information presented in this report has beenobtained from sources we believe to be reliable, but wecannot guarantee its accuracy or completeness. Pastperformance is no guarantee of future results and anyreferences to the performance of markets, indexes,stocks, and economic data are provided to support theopinions of Francis Investment Counsel which canchange at any time.

where’s the market heading?...1 where’s the market heading? presented by: ed mcilveen, cfa...

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