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The financial Markets’ Year in Slides and Looking Ahead to 2018


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Looking back at the Financial Markets' Year in Slides and ahead to 2018

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The financial Markets’ Year in Slides and Looking Ahead to 2018

  1. 1. The Financial Markets’ Year in Slides and Looking Ahead to 2018
  2. 2. 2017 IN REVIEW 2
  3. 3. Amount of Closing Highs in S&P Near Record Levels in 2017 3
  4. 4. Nearing a Record Streak without a 10% Correction in the 60/40 Portfolio. 4
  5. 5. Third Longest Bull Market Ever BEWARE IS PIMCO OPINION 5
  6. 6. History of S&P Drawdowns….2017 is an Outlier The chart below highlights the calendar year return for the S&P 500 along with the intra-year decline for the index. In essence, it shows that markets have generally closed each calendar year in positive territory, but have also experienced, on average, a 14% decline in any given calendar year. The market rewards investors who are patient, but it does test their mettle on a regular basis. 2017 has been the exception to that rule, with the market only experiencing a 3% correction this year, so far 6
  7. 7. Warren Buffet Indicator at Record Levels Here is the bad news for equity investors: At current levels of market cap to GDP, estimated annualized total returns over the next 10 years look dismal at just 0.9 percent (before inflation), based on previous trends. Intuitively this makes sense: Looking back at the history of the time series, it is clear that an excellent entry point into the equity market for a long-term investor would have been a period like the mid-1980s, or in the latter stages of the financial crisis in 2009. Conversely, 1968, 2000, and 2007 would have been good times to get out. 7
  8. 8. Warren Buffet Indicator at Record Levels 8
  9. 9. Equity Flows Still Dominated by Large Cap Growth 9
  10. 10. 2017 Sector Divergence is Massive….Tech Outperforming Worst Sector by 56% Bespoke’s Sector Snapshot — 11/16/17 Below is one of the many charts included in this week’s Sector Snapshot, which simply highlights the year-to-date change for the major S&P 500 sectors. Note that Tech is now up more than twice as much as the 2nd best sector (Health Care) in 2017. And Tech is outperforming the worst sector (Telecom) by 56 percentage points. Talk about a spread. 10
  11. 11. Technology Dispersion from Other Sectors Hitting Levels not Seen Since Late 1990’s 11
  12. 12. 12
  13. 13. Insititutional Investors Go All In…Record Low Cash Source: 13
  14. 14. Retail Investors Go All In 14
  15. 15. Equity Markets: Schwab’s Retail Investors’ Cash Holdings are at Record Low Levels 15 Source: @jessefelder, @CapitalObserver;
  16. 16. 15 2018 THE YEAR AHEAD
  17. 17. Stages of a Bull Market..Euphoria is Setting In 17
  18. 18. Wall Street is Getting Increasingly Bullish The chart shows that the last time the BAML indicator (blue line) has been that far above its four-year rolling average (red line) was the financial crisis. 18
  19. 19. Sector Valuations-Energy and Financials (banks) Only Sectors not Trading at 15 Year Highs Source: 19
  20. 20. Tax Reform not Tech Sector Positive “After soaring 38% YTD, Tech faces tax reform headwind given 59% of sales is generated overseas and it paid the lowest median tax rate of any sector during the past five years at just 24%.” 20
  21. 21. S&P Sectors Effective Tax Rates 21
  23. 23. Will International Take the Lead Over U.S. in 2018? 22 Global Stock Market Correlation Lowest in 20 Years. DIVERSIFICATION OFFERS BEST VALUE IN 20 YEARS With stock markets valued fairly relative to how they perform we believe there is little reason not to be globally diversified. From a diversification perspective, there hasn’t been a better time in 20 years to be globally diversified. The trend in correlation among countries has fallen to the lowest levels since the mid-1990s, as you can see in the chart below. Many investors have never seen this low correlation before in their investing lifetimes. Global stock market correlation lowest in 20 years *DAILY ONE-YEAR ROLLING CORRELATION OF ONE MONTH PERCENT CHANGE IN MSCI INDEXES FOR COUNTRIES IN G20 AND SPAIN. SOURCE: CHARLES SCHWAB, FACTSET DATA AS OF 11/20/2017. We believe it’s not too late to buy. Valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.
  24. 24. International Hitting Growth Mode from Low Valuations vs. U.S Japan and Emerging Markets Earnings Expectations Double. A sustained expansion supports company earnings growth, we believe. All major regions are posting earnings-per-share growth higher than 10% for the first time since 2005, excluding the post-crisis bounce, our research shows. Analyst forecasts are holding steady in the U.S. and Europe, Japan is up and emerging market (EM) earnings expectations have almost doubled this year. See the chart at right. 24
  25. 25. International Valuations Below 15 Year Average 24 Price-to-Book Ratio (P/B) WHAT IT IS: The price-to-book ratio measures a company's market price in relation to its book value. The ratio denotes how much equity investors are paying for each dollar in net assets. Book value, usually located on a company's balance sheet as "stockholder equity," represents the total amount that would be left over if the company liquidated all of its assets and repaid all of its liabilities. dictionary/price-book-ratio-pb
  26. 26. 3 Dangers to 2018 25 I. China Debt to GDP 300%.....42% of World Growth Attributed to China. THIS IS NOT A NEW STORY BUT NO SIGNS OF IT SLOWING DOWN. China, as you know, has a debt to GDP ratio approaching 300%, and household debt is increasing. As for China’s currency, in each of these cycles, we’ve seen its strength tested. At one point you have to wonder if there will be a time when it no longer has the stuff to pass that test. Or to put it another way, if there will be a time when the government will accept a lower grade.
  27. 27. 3 Dangers to 2018 II. Risk Number 2-Accelerated Wage Growth Forces FED to Raise Rates Aggressively. It is our view that the most pronounced risk to the status quo resides in the United States, where an already tight labor market will grow tighter, driving the unemployment rate well below 4%. This, followed by a cyclical uptick in wages and inflation, should justify the Federal Reserve’s raising rates to at least 2% by the end of 2018. Expectations of additional rate hikes would likely follow, ending an era of extraordinary monetary support in the united States and possibly leading markets to price in more aggressive normalization plans elsewhere. None of this is status quo. 27
  28. 28. 3 Dangers to 2018 Small Business Hiring at All-Time High…Unemployment was below 4% in 2000 and recession started in March 2001 28
  29. 29. 3 Dangers to 2018 AMERICANS ARE ACTING LIKE AMERICANS AGAIN….SPENDING ALL THEIR MONEY. Personal Savings Rate Plummets After Recovery Following Great Recession 29
  30. 30. 3 Dangers to 2018 III. Volatility….2017 was a Record Low Volatility Year. 30
  31. 31. Positive 2018-Demographics Unemployment Rate for Gen Y with Bachelor’s Degree 2.5% Millennials Hitting Prime Earnings and Household Formation Years 31
  32. 32. Millennials Ready to Start Buying Homes…Tight Supply and Declining Affordability 31 The United States: Millennials are buying homes later in life, but they are starting to embrace home- ownership. However, tight housing supplies and declining affordability could slow this trend.
  33. 33. Disclaimer 33 Fortis Advisors, LLC is a registered investment adviser with the Securities and Exchange Commission. You can read more about the Fortis team at To the extent that content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security as information is provided for educational purposes only. Articles should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any securities or asset classes mentioned. Articles have been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Securities discussed may not be suitable for all investors. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. Material compiled by Fortis is based on publically available data at the time of compilation. Fortis makes no warranties or representation of any kind relating to the accuracy, completeness or timeliness of the data and shall not have liability for any damages of any kind relating to the use such data. Material for market review represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Indices that may be included herein are unmanaged indices and one cannot directly invest in an index. Index returns do not reflect the impact of any management fees, transaction costs or expenses. The index information included herein is for illustrative purposes only. The trademarks and service marks contained herein are the property of their respective owners.