Amount of Closing Highs in S&P Near
Record Levels in 2017
Nearing a Record Streak without a 10%
Correction in the 60/40 Portfolio.
Third Longest Bull Market Ever
BEWARE IS PIMCO OPINION
History of S&P Drawdowns….2017 is an
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
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.
Equity Flows Still Dominated by Large Cap
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.
Technology Dispersion from Other Sectors
Hitting Levels not Seen Since Late 1990’s
Stages of a Bull Market..Euphoria is
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.
Sector Valuations-Energy and Financials
(banks) Only Sectors not Trading at 15 Year
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%.”
Will 2018 See Sector Rotation?
BANK STOCKS SPIKE AFTER ELECTION THEN WENT
SIDEWAYS FOR ONE YEAR.
Will International Take the Lead Over U.S.
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
International Hitting Growth Mode from
Low Valuations vs. U.S
Japan and Emerging
A sustained expansion supports
company earnings growth, we
believe. All major regions are
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.
International Valuations Below 15 Year
Price-to-Book Ratio (P/B)
WHAT IT IS:
ratio measures a
company's market price in relation
to its book value. The ratio
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
3 Dangers to 2018
I. China Debt to GDP 300%.....42% of World
Growth Attributed to China.
THIS IS NOT A NEW STORY
BUT NO SIGNS OF IT
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.
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.
3 Dangers to 2018
Small Business Hiring at All-Time High…Unemployment was below 4% in 2000
and recession started in March 2001
3 Dangers to 2018
AMERICANS ARE ACTING LIKE AMERICANS AGAIN….SPENDING ALL THEIR MONEY.
Personal Savings Rate Plummets After Recovery Following Great Recession
3 Dangers to 2018
III. Volatility….2017 was a Record Low Volatility Year.
Unemployment Rate for Gen Y with Bachelor’s Degree 2.5%
Millennials Hitting Prime Earnings and
Household Formation Years
Millennials Ready to Start Buying
Homes…Tight Supply and
The United States:
Millennials are buying
homes later in life, but
they are starting to
tight housing supplies
affordability could slow
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