Presentation Transcript

1. QuarterlyInvestment BriefingAugust 1, 2012 Clayton T. Bill, CFA Stephen J. Nilles, CFP
2. Capital Market Returns Current and Annualized thru 6-30-2012
3. Asset Market Performance Global stock markets and commodities declined during the second quarter, with the worst losses in markets outside the U.S. Fixed-income categories generally posted positive returns, led by defensive Treasury bonds. The risk meter was in the bottom 26% of most negative quarters during the past 30 years. Source: Fidelity
4. What Worked and What Didn’t in 2Q 2012 What Worked Equities Utilities +8%/Health Care +2% Defensive Stocks 0% Megacap -2% Fixed Income U.S. 10+ Year Maturity +7% U.S. Treasury 20+ Year +12% Alternatives/Real Assets Grains +9%/Livestock +3% Natural Gas +14% REITs North America +2% What Didn’t Work Equities Technology -8%/Energy -7% Dynamic Stocks -6% Global ex-U.S. -8% Fixed Income European Corp. Utilities -2% Alternatives/Real Assets Brent Crude Oil -19% Unleaded Gas -15% Silver -15% REITs Europe -2% Source: Russell
5. Global Flight from Risk Assets Even gold failed to provide a “safe haven” during the second quarter’s declines, faring little better than commodities dragged down by energy. Emerging-market and small-cap stocks had the lowest returns after leading in the first quarter, while equity indices for Japan, Europe, and large caps also posted sizable losses on global growth and fiscal policy uncertainty. Source: Fidelity
6. Strong Dollar Exacerbated Non-U.S. Equity Losses Falling foreign currency values generally exacerbated pervasive stock declines around the world for U.S. investors, particularly among some emerging-market countries such as Brazil and India. Eurozone stock losses were among the worst of any region. Source: Fidelity
7. Non-U.S. Stock Valuations Linger Below Long-Term Average Valuations remain compressed in both emerging and developed markets. Current trailing and forward earnings multiples remain well below the long-term average P/E, signaling that investors have already priced in at least some deceleration in corporate profit growth Source: Fidelity
8. U.S. Stocks Earnings per Share: Margins and Revenues Source: J.P. Morgan
9. Reasonable Valuations After Long Multiple Contraction At other points when the S&P 500 Index was around 1400 (a level reached during the second quarter of 2012), earnings per share were lower than today’s EPS of $100. As a result, trailing earnings multiples have compressed to the current price-to-earnings ratio of 13 – well below the long-term average trailing P/E near 17. Source: Fidelity
10. More Defensive Categories Led Fixed Income The global flight to safety pushed high-quality bond prices up and yields down, boosting the returns of both inflation-protected and nominal Treasuries. Although riskier, more credit-sensitive securities trailed, with leveraged loans the laggard, most categories achieved positive absolute returns despite spread widening. Source: Fidelity
11. Favorable Supply-Demand Backdrop for Muni Bonds The relatively high credit-quality and tax-advantaged status of municipal bonds have kept investor demand for munis strong, but municipalities have been issuing fewer bonds into the tax-exempt market. The potential for increased tax rates in the near future could further increase muni bond demand. AAA-rated municipal bond yields remain attractive relative to Treasuries. Source: Fidelity
12. Income Risk Pyramid High-yield bonds 8.1% Energy Partnerships 6.5% Emerging-markets bonds 5.9% Single-A-rated corporate bonds 3.1% GNMA mortgage securities 2.1% Two-year Treasury Note 0.3% Money Market funds 0.03%
13. Challenging Environment for Real Bond Returns Treasury yields have sunk below the current inflation rate, unlike the previous three decades that produced consistently strong positive real returns for high credit-quality bonds. With Federal Reserve policies aimed at keeping nominal rates near historical lows while simultaneously trying to reflate the economy, bond investors face a challenging real-return environment. Source: Fidelity
14. Interest Rates Might Remain Low for the Foreseeable Future Source: FactSet
15. Consumer Finances are Improving Source: J.P. Morgan
16. Current Tax Rates are Low; Future Rates are Uncertain Source: J.P. Morgan
17. Don’t Let Current Sentiment Distract from Long-Term Investment Perspective
18. Consumer Confidence and the Stock Market(Not What You Might Think) Source: J.P. Morgan
19. Portfolio Rebalancing May Smooth Performance Over Time Regular portfolio rebalancing back to the asset weights chosen for a long-term investment strategy has historically tended to produce lower long-term volatility and smoother monthly fluctuations. Regular rebalancing since 1990 would have kept a portfolio from reaching large equity overweight positions prior to the sharp stock market downturns in 2000 and 2008. Source: Fidelity
20. Diversification and the Average Investor Source: J.P. Morgan
21. ConclusionA proactive stance to cope with extended turbulence Anchor to the long-term investment perspective – instead of reacting to short-term market volatility Consider reducing home country bias in your portfolio …however… Expect continued volatility as the markets deal with political and macro-economic concerns …therefore… Be vigilant about managing risks in your portfolio by striving for diversification Set the stage for potential expected returns (and don’t lose your nerve) Source: Russell