Market Perspectives - Moir Financial
Market Perspectives S TAY I N VES T E D , B UT E X PE C T M O R E M OD E RATE RE TURN S
D EC E M B ER 21, 2017
By Garrett D’Alessandro, CFA, CAIA, AIF® Chief Executive Officer & Chief Investment Officer
It’s certainly been a remarkable year for global equity investors. The S&P 500 looks set to deliver gains of more than 20% in 2017, while emerging markets in Asia are delivering 40% gains. This is in contrast to Investment Grade bond investors earning approximately 2%. Although dysfunction in Washington and heightened geopolitical tensions are valid sources of concern, investors have remained focused on improving economic growth, rising corporate profits and the upcoming changes to the tax code. We project that equity returns could be in the 5-7% range in 2018 as rising corporate profits and steady consumer spending should help extend the bull market.
Figure 2 Global Demand Driving U.S. Earnings Growth 16% More Global Exposure
14% 12%
Q3 Earnings Growth Q3 Revenue Growth
10% 8%
Less Global Exposure
6% 4%
2017 saw a global economic and stock market expansion. For the first time in a decade, we believe the economies of all 45 countries followed by the OECD are growing, and 33 of them are poised to accelerate (see Figure 1). Moreover, we see few obvious clouds on the horizon for the world economy. Business surveys have improved in recent months, inflation has remained low, and the expansion is forecast to continue through next year. Most importantly for investors, the upturn in the world economy is fueling an impressive recovery in corporate profits. Figure 1 Global Synchronized Upturn (GDP Growth Forecasts) 9 8 7 6
For the first time in more than a decade, all G20 economies are expected to post an increase in GDP.
5 2017
4
2018
3
2% 0% Companies Generating More Than 50% of Sales Inside the U.S.
All S&P 500 Companies
Companies Generating More Than 50% of Sales Outside the U.S.
Source: FactSet. As of Q3 2017.
S&P 500 earnings are on track to increase 10% in 2017 thanks in large part to the ongoing strengthening in global demand (see Figure 1). Now add to this a significant reduction in the corporate tax rate to 21%, and we think U.S. corporate earnings could rise another 10-14% in 2018 (see Figure 3). There’s an old saying that bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. We don’t think we are in that final stage yet. Although valuations of major markets look full with recent price gains, they do not appear too expensive to prohibit further price gains. In fact, research shows that factors such as the state of the business cycle, business sentiment, and corporate earnings are actually more important in regard to near-term return expectations (see Figure 4). Still, it would be wise not to extrapolate 2017’s performance into 2018, nor to expect the same smooth ride of steady monthly market advances. Corporate profit growth forecasts have risen substantially, and much of that increase appears to have already been priced into the market. At 13 months and counting, we are in the longest period in S&P 500 history without a 3%+ correction, and with the expectations bar now
2 1 0
Source: Organisation for Economic Cooperation and Development. As of November 30, 2017. Non-deposit Investment Products:
▪
are not FDIC insured
▪
are not Bank guaranteed
▪
may lose value
Market Perspectives: December 2017 continued
Page 2
Figure 3
set quite high heading into next year, pullbacks are expected, and we feel this would be healthy. We’ve been enjoying a period of steadily rising stock prices for over eight years now, and if, as we expect, the bull market continues beyond August, it will be the longest ever. Ultimately, our optimism remains rooted in the positive fundamental outlook. Bear markets rarely occur outside of economic downturns, and current recession risk appears low both at home and abroad. Given all this, our advice for investors is to stay invested but also to lower expectations. For many years, our asset allocation has been steadfastly overweight U.S. large cap, high dividend, and EM Asia equities, and we remain overweight going into 2018. Global economic growth will likely continue to lift earnings; however, we do appear to be entering the later stages of the market cycle and investors should remain disciplined. The final stages of a market cycle can be rewarding, but this year’s impressive market gains are unlikely to be repeated and investors should expect more moderate returns in 2018.
Tax Cuts Could Affect Our EPS Outlook = 12% EPS Growth
12.0%
Dollar Impact
Real U.S. GDP Inflation
2.5%
6.0% +8%
2.0% 0.0% -2%
Stock Buybacks
2.5%
+14%
Oil International GDP
2.0%
2.0%
2.0%
2.0%
1.0% 0.4% -0.5%
1.0% 0.4% -0.5% -2%
-1.5%
-2.0% -4.0%
Corporate Tax Cuts
= 6% EPS Growth
8.0%
4.0%
Margin Change
6.0%
10.0%
-1.5%
Without expected tax cuts
With expected tax cuts
Source: City National Rochdale. As of December 21, 2017.
Figure 4 Annualized Real Total Return 15
10
5
0
-5 10-yr Holding Period 5-yr Holding Period -10
2-yr Holding Period 1-yr Holding Period
-15
Less than 10
10 to 20
20 to 30
30 to 40
More than 40
Initial Shiller P/E Ratio
Source: BCA Research. As of December 31, 2016. Based on S&P 500 data since 1881.
Important Disclosures The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance. This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly owned subsidiary of City National Bank.
Non-deposit Investment Products:
▪
are not FDIC insured
▪
are not Bank guaranteed
Beverly Hills | New York | 800-245-9888 | cnr.com
▪
may lose value
D EC E M B ER 21, 2017
By Garrett D’Alessandro, CFA, CAIA, AIF® Chief Executive Officer & Chief Investment Officer
It’s certainly been a remarkable year for global equity investors. The S&P 500 looks set to deliver gains of more than 20% in 2017, while emerging markets in Asia are delivering 40% gains. This is in contrast to Investment Grade bond investors earning approximately 2%. Although dysfunction in Washington and heightened geopolitical tensions are valid sources of concern, investors have remained focused on improving economic growth, rising corporate profits and the upcoming changes to the tax code. We project that equity returns could be in the 5-7% range in 2018 as rising corporate profits and steady consumer spending should help extend the bull market.
Figure 2 Global Demand Driving U.S. Earnings Growth 16% More Global Exposure
14% 12%
Q3 Earnings Growth Q3 Revenue Growth
10% 8%
Less Global Exposure
6% 4%
2017 saw a global economic and stock market expansion. For the first time in a decade, we believe the economies of all 45 countries followed by the OECD are growing, and 33 of them are poised to accelerate (see Figure 1). Moreover, we see few obvious clouds on the horizon for the world economy. Business surveys have improved in recent months, inflation has remained low, and the expansion is forecast to continue through next year. Most importantly for investors, the upturn in the world economy is fueling an impressive recovery in corporate profits. Figure 1 Global Synchronized Upturn (GDP Growth Forecasts) 9 8 7 6
For the first time in more than a decade, all G20 economies are expected to post an increase in GDP.
5 2017
4
2018
3
2% 0% Companies Generating More Than 50% of Sales Inside the U.S.
All S&P 500 Companies
Companies Generating More Than 50% of Sales Outside the U.S.
Source: FactSet. As of Q3 2017.
S&P 500 earnings are on track to increase 10% in 2017 thanks in large part to the ongoing strengthening in global demand (see Figure 1). Now add to this a significant reduction in the corporate tax rate to 21%, and we think U.S. corporate earnings could rise another 10-14% in 2018 (see Figure 3). There’s an old saying that bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. We don’t think we are in that final stage yet. Although valuations of major markets look full with recent price gains, they do not appear too expensive to prohibit further price gains. In fact, research shows that factors such as the state of the business cycle, business sentiment, and corporate earnings are actually more important in regard to near-term return expectations (see Figure 4). Still, it would be wise not to extrapolate 2017’s performance into 2018, nor to expect the same smooth ride of steady monthly market advances. Corporate profit growth forecasts have risen substantially, and much of that increase appears to have already been priced into the market. At 13 months and counting, we are in the longest period in S&P 500 history without a 3%+ correction, and with the expectations bar now
2 1 0
Source: Organisation for Economic Cooperation and Development. As of November 30, 2017. Non-deposit Investment Products:
▪
are not FDIC insured
▪
are not Bank guaranteed
▪
may lose value
Market Perspectives: December 2017 continued
Page 2
Figure 3
set quite high heading into next year, pullbacks are expected, and we feel this would be healthy. We’ve been enjoying a period of steadily rising stock prices for over eight years now, and if, as we expect, the bull market continues beyond August, it will be the longest ever. Ultimately, our optimism remains rooted in the positive fundamental outlook. Bear markets rarely occur outside of economic downturns, and current recession risk appears low both at home and abroad. Given all this, our advice for investors is to stay invested but also to lower expectations. For many years, our asset allocation has been steadfastly overweight U.S. large cap, high dividend, and EM Asia equities, and we remain overweight going into 2018. Global economic growth will likely continue to lift earnings; however, we do appear to be entering the later stages of the market cycle and investors should remain disciplined. The final stages of a market cycle can be rewarding, but this year’s impressive market gains are unlikely to be repeated and investors should expect more moderate returns in 2018.
Tax Cuts Could Affect Our EPS Outlook = 12% EPS Growth
12.0%
Dollar Impact
Real U.S. GDP Inflation
2.5%
6.0% +8%
2.0% 0.0% -2%
Stock Buybacks
2.5%
+14%
Oil International GDP
2.0%
2.0%
2.0%
2.0%
1.0% 0.4% -0.5%
1.0% 0.4% -0.5% -2%
-1.5%
-2.0% -4.0%
Corporate Tax Cuts
= 6% EPS Growth
8.0%
4.0%
Margin Change
6.0%
10.0%
-1.5%
Without expected tax cuts
With expected tax cuts
Source: City National Rochdale. As of December 21, 2017.
Figure 4 Annualized Real Total Return 15
10
5
0
-5 10-yr Holding Period 5-yr Holding Period -10
2-yr Holding Period 1-yr Holding Period
-15
Less than 10
10 to 20
20 to 30
30 to 40
More than 40
Initial Shiller P/E Ratio
Source: BCA Research. As of December 31, 2016. Based on S&P 500 data since 1881.
Important Disclosures The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change. All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance. This material is available to advisory and sub-advised clients of City National Rochdale, LLC, a Registered Investment Advisor and a wholly owned subsidiary of City National Bank.
Non-deposit Investment Products:
▪
are not FDIC insured
▪
are not Bank guaranteed
Beverly Hills | New York | 800-245-9888 | cnr.com
▪
may lose value
