US Investment Policy Committee
U.S. Investment Policy Committee Notes February 08, 2017 Economic and Stock Market Outlooks Overall Outlook
Recommended Moderate Allocation
The U.S. equity markets have trended slightly lower since the stronger-than-expected January jobs report, as investors awaited additional market-moving economic data in an otherwise quiet week of news. The Michigan Sentiment Index, to be reported later this week, is expected to remain resolutely above 98, equal to one standard deviation above the average monthly reading since January 1978. In addition, its year-over-year change of +6.0% on December data was well above the average double-digit decline that preceded or accompanied recessions since 1980. Other indicators that also point to recessionary conditions when showing negative comparisons include housing starts, Leading Indicators and the (10-year-1 year) yield curve are all comfortably in positive territory.
20% Fo re ig n Eq u itie s
4 5 % U.S. Eq u itie s
2 5 % Bo n d s
Economic Update Action Economics (AE) thinks the recent decline in implied Fed funds rates suggests a reduced risk for a March rate hike. After mixed Fedspeak from voters Evans (dovish), Kashkari (dovish), and Harker (hawkish), the markets will await the final word from Fed Chair Yellen at her Congressional testimony (aka Humphrey-Hawkins) on February 14, 15. Clearly, if the FOMC wanted to hike rates at the March 14, 15 meeting, they would feel compelled to start preparing the markets. AE doubts she'll give any clues, however, as the U.S. political backdrop and global conditions are way too uncertain. The March meeting will include fresh estimates on growth, unemployment, inflation and dots, as well as a press conference. AE still sees three quarter-point hikes beginning in June. Fundamental Update As of Feb 7, about two-thirds of the companies in the S&P 500 have reported Q4 2016 earnings. The U.S. large-cap benchmark is now projected to post a 6.7% year-over-year gain in operating results versus the beginning-of-quarter 4.2% climb. The sectors in the "500" showing the greatest outpacing of their initial estimates include real estate (+ 21.0 percentage points), financials (at +5.4 points), Info tech (+3.7), industrials and materials (+2.8). The sectors showing the greatest erosion in growth expectations are energy (-7.3 percentage points), telecom services (-3.0 points) and consumer discretionary (-0.1). Even though the Q4 S&P 500 EPS expected result has improved, the full-year growth remains at 11.8%. In addition, five of 11 sectors have seen full-year 2017 EPS estimate reductions vs initial estimates, led by real estate (-5.0 percentage points), materials (-3.3 points), and telecom services (-2.3 points).
1 0 % Ca s h
S&P 500 EPS changes as of 02/08/17 EPS Growth % S&P 500 Sector
Cons Disc 0.3 0.7 9.1 7.0 Cons Staples 6.4 6.1 3.8 6.9 Energy (15.2) (1044.5) (78.4) 344.0 Financials 32.9 36.3 15.2 12.2 Health Care 6.0 4.0 7.1 7.5 Industrials (2.2) (4.0) 1.3 3.9 Info Tech 10.4 15.2 3.5 12.0 Materials 8.7 14.6 (1.8) 13.2 Real Estate 0.0 0.0 0.0 3.0 Telecom Svcs (2.4) (2.3) (0.1) 1.2 Utilities 9.0 (1.1) 3.8 0.1 S&P 500 6.7 11.9 (0.2) 11.8 Source: S&P Capital IQ
Targets
Technical Update The S&P 500 is poised just below its all-time high after bouncing from the zone of support at 2258-2273. The larger bullish bias remains in force while above this zone. Once again, the NDX is pushing to the upside, while the RUT remains stuck in the same range its traversed since mid-December. The SPX is caught in the middle and until the RUT gets moving to the upside, the overall upside potential in the SPX will likely be tempered. The Nasdaq-100 is pressing to the upside and remains the upside leader. The bias is bullish with support established at 5012-5060 and additional support at 4922-4957. The Russell 2000 remains in an overall bullish position with a growing area of volume at 1356-1376. Given the prolonged nature of this consolidation, an upside resolution is favored.
Q4 2016 Q1 2017e 2016e 2017e
12-Month S&P 500:2335 S&P 500 EPS 2016E:$117.87, 17E:$130.81 S&P 500 Revenues 2016E:+2.7%, 17E:+6.0% Real GDP Growth Avg. 2017E:+2.4%, 18E:+2.6% Core PCE Avg. 2017E:1.8%, 18E:2.0% Fed Funds Rate Avg. 2017E:0.85%, 18E:1.58% 10-Year T-Note Avg. 2017E:2.55%, 18E:2.64% Exchange Rate 2017E:94.4, 18E:95.1 WTI/bbl. Avg. 2017E:$53.01, 18E:$55.33
S&P 500 GICS Sector Performance and Recommended Sector Weightings S&P 500 Sector Cons Disc Cons Staples Energy Financials Health Care Industrials Info Tech Materials Real Estate Telecom Svcs Utilities S&P Composite 1500 S&P 500 S&P MidCap 400 S&P SmallCap 600
2/07/2017
Feb
YTD
2016
P/E on '17e EPS
'17e P/E to Proj. 5-Yr. EPS Grth.
(0.8) 1.1 (1.6) 1.0 1.5 0.6 2.0 (0.8) (0.2) (2.3) (0.6)
3.4 2.6 (5.1) 1.1 3.7 2.0 6.5 3.7 (0.3) (5.7) 0.6
4.3 2.6 23.7 20.1 (4.4) 16.1 12.0 14.1 0.0 17.8 12.2
18.9 19.9 31.0 14.0 15.0 18.2 17.4 18.1 38.0 13.6 17.3
1.0 2.2 1.4 1.6 1.4 1.8 1.4 1.6 5.0 3.3 3.4
% Change
0.6 0.6 0.4 (0.4)
2.3 2.4 2.0 (0.9)
10.6 9.5 18.7 24.7
17.8 17.6 20.3 20.7
1.5 1.5 2.1 1.7
Sector % Weightings 12.1 9.4 7.1 14.6 13.7 10.2 21.6 2.9 2.8 2.4 3.1
S&P Sector Emphasis Overweight Underweight Underweight Marketweight Marketweight Overweight Marketweight Overweight Underweight Marketweight Underweight
Over/Under Weight 0.3 -0.3 -0.3 0.0 0.0 0.3 0.0 0.2 -0.1 0.0 -0.1
Sector recommendations are market-cap weighted, influenced by economic,fundamental and technical considerations
Technical commentary contributed by i10 Research. Please read the Required Disclosures from page 2 onwards of this report.
1
Glossary
Required Disclosures
★★★★★ 5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. ★★★★☆ 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. ★★★☆☆ 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. ★★☆☆☆ 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price not anticipated to show a gain. ★☆☆☆☆ 1-STAR (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. CFRA Ranking Definitions: Overweight rankings are assigned to approximately the top quartile of the asset class. Marketweight rankings are assigned to approximately the second and third quartiles of the asset class. Underweight rankings are assigned to approximately the bottom quartile of the asset class. S&P Global Quality Ranking Growth and stability of earnings and dividends are deemed key elements in establishing earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of ranking. A+ Highest A High A- Above Average B+ Average
B Below Average B- Lower C Lowest D In Reorganization
S&P GLOBAL™ and S&P CAPITAL IQ™ are used under license. The owner of these trademarks is S&P Global Inc. or its affiliate, which are not affiliated with CFRA Research or the author of this content. This content has been prepared by Accounting Research & Analytics, LLC and/or one of its affiliates. It is published and distributed by Accounting Research & Analytics, LLC d/b/a CFRA with the following exceptions: In the European Union/European Economic Area, the content is published and distributed by CFRA UK Limited (company number 08456139 registered in England & Wales with its registered office address at 131 Edgware Road, London, W2 2AP, United Kingdom), which is an Appointed Representative of Hutchinson Lilley Investments LLP, which is regulated by the UK Financial Conduct Authority (No. 582181); in Malaysia, the content is published and distributed by Standard & Poor’s Malaysia Sdn Bhd, which is regulated by the Securities Commission Malaysia (License No. CMSL/A0181/2007). The content of this material and the opinions expressed herein are those of CFRA based upon publicly-available information that CFRA believes to be reliable and the opinions are subject to change without notice. This analysis has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While CFRA exercised due care in compiling this analysis, CFRA AND ALL RELATED ENTITIES SPECIFICALLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, to the full extent permitted by law, regarding the accuracy, completeness, or usefulness of this information and assumes no liability with respect to the consequences of relying on this information for investment or other purposes. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of CFRA. The Content shall not be used for any unlawful or unauthorized purposes. CFRA and any third-party providers, as well as their directors, officers, shareholders, employees or agents do not guarantee the accuracy, completeness, timeliness or availability of the Content. Past performance is not necessarily indicative of future results. This document may contain forward-looking statements or forecasts; such forecasts are not a reliable indicator of future performance. This report is not intended to, and does not, constitute an offer or solicitation to buy and sell securities or engage in any investment activity. This report is for informational purposes only. Recommendations in this report are not made with respect to any particular investor or type of investor. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors and this material is not intended for any specific investor and does not take into account an investor's particular investment objectives, financial situations or needs. Investors should seek independent financial advice regarding the suitability and/or appropriateness of making an investment or implementing the investment strategies discussed in this document and should
2
understand that statements regarding future prospects may not be realized. Investors should note that income from such investments, if any, may fluctuate and that the value of such investments may rise or fall. Accordingly, investors may receive back less than they originally invested. Investors should seek advice concerning any impact this investment may have on their personal tax position from their own tax advisor. Please note the publication date of this document. It may contain specific information that is no longer current and should not be used to make an investment decision. Unless otherwise indicated, there is no intention to update this document. CFRA’s financial data provider is S&P Global Market Intelligence. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM S&P
GLOBAL MARKET INTELLIGENCE. FOR RECIPIENT’S INTERNAL USE ONLY. The Global Industry Classification Standard (GICS®), was developed by and/or is the exclusive property of MSCI, Inc. and Capital IQ, Inc. (“Capital IQ”). GICS is a service mark of MSCI and Capital IQ and has been licensed for use by CFRA. Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA. All rights reserved. CFRA, the CFRA inverted pyramid logo, and STARS are registered trademarks of CFRA.
3
Recommended Moderate Allocation
The U.S. equity markets have trended slightly lower since the stronger-than-expected January jobs report, as investors awaited additional market-moving economic data in an otherwise quiet week of news. The Michigan Sentiment Index, to be reported later this week, is expected to remain resolutely above 98, equal to one standard deviation above the average monthly reading since January 1978. In addition, its year-over-year change of +6.0% on December data was well above the average double-digit decline that preceded or accompanied recessions since 1980. Other indicators that also point to recessionary conditions when showing negative comparisons include housing starts, Leading Indicators and the (10-year-1 year) yield curve are all comfortably in positive territory.
20% Fo re ig n Eq u itie s
4 5 % U.S. Eq u itie s
2 5 % Bo n d s
Economic Update Action Economics (AE) thinks the recent decline in implied Fed funds rates suggests a reduced risk for a March rate hike. After mixed Fedspeak from voters Evans (dovish), Kashkari (dovish), and Harker (hawkish), the markets will await the final word from Fed Chair Yellen at her Congressional testimony (aka Humphrey-Hawkins) on February 14, 15. Clearly, if the FOMC wanted to hike rates at the March 14, 15 meeting, they would feel compelled to start preparing the markets. AE doubts she'll give any clues, however, as the U.S. political backdrop and global conditions are way too uncertain. The March meeting will include fresh estimates on growth, unemployment, inflation and dots, as well as a press conference. AE still sees three quarter-point hikes beginning in June. Fundamental Update As of Feb 7, about two-thirds of the companies in the S&P 500 have reported Q4 2016 earnings. The U.S. large-cap benchmark is now projected to post a 6.7% year-over-year gain in operating results versus the beginning-of-quarter 4.2% climb. The sectors in the "500" showing the greatest outpacing of their initial estimates include real estate (+ 21.0 percentage points), financials (at +5.4 points), Info tech (+3.7), industrials and materials (+2.8). The sectors showing the greatest erosion in growth expectations are energy (-7.3 percentage points), telecom services (-3.0 points) and consumer discretionary (-0.1). Even though the Q4 S&P 500 EPS expected result has improved, the full-year growth remains at 11.8%. In addition, five of 11 sectors have seen full-year 2017 EPS estimate reductions vs initial estimates, led by real estate (-5.0 percentage points), materials (-3.3 points), and telecom services (-2.3 points).
1 0 % Ca s h
S&P 500 EPS changes as of 02/08/17 EPS Growth % S&P 500 Sector
Cons Disc 0.3 0.7 9.1 7.0 Cons Staples 6.4 6.1 3.8 6.9 Energy (15.2) (1044.5) (78.4) 344.0 Financials 32.9 36.3 15.2 12.2 Health Care 6.0 4.0 7.1 7.5 Industrials (2.2) (4.0) 1.3 3.9 Info Tech 10.4 15.2 3.5 12.0 Materials 8.7 14.6 (1.8) 13.2 Real Estate 0.0 0.0 0.0 3.0 Telecom Svcs (2.4) (2.3) (0.1) 1.2 Utilities 9.0 (1.1) 3.8 0.1 S&P 500 6.7 11.9 (0.2) 11.8 Source: S&P Capital IQ
Targets
Technical Update The S&P 500 is poised just below its all-time high after bouncing from the zone of support at 2258-2273. The larger bullish bias remains in force while above this zone. Once again, the NDX is pushing to the upside, while the RUT remains stuck in the same range its traversed since mid-December. The SPX is caught in the middle and until the RUT gets moving to the upside, the overall upside potential in the SPX will likely be tempered. The Nasdaq-100 is pressing to the upside and remains the upside leader. The bias is bullish with support established at 5012-5060 and additional support at 4922-4957. The Russell 2000 remains in an overall bullish position with a growing area of volume at 1356-1376. Given the prolonged nature of this consolidation, an upside resolution is favored.
Q4 2016 Q1 2017e 2016e 2017e
12-Month S&P 500:2335 S&P 500 EPS 2016E:$117.87, 17E:$130.81 S&P 500 Revenues 2016E:+2.7%, 17E:+6.0% Real GDP Growth Avg. 2017E:+2.4%, 18E:+2.6% Core PCE Avg. 2017E:1.8%, 18E:2.0% Fed Funds Rate Avg. 2017E:0.85%, 18E:1.58% 10-Year T-Note Avg. 2017E:2.55%, 18E:2.64% Exchange Rate 2017E:94.4, 18E:95.1 WTI/bbl. Avg. 2017E:$53.01, 18E:$55.33
S&P 500 GICS Sector Performance and Recommended Sector Weightings S&P 500 Sector Cons Disc Cons Staples Energy Financials Health Care Industrials Info Tech Materials Real Estate Telecom Svcs Utilities S&P Composite 1500 S&P 500 S&P MidCap 400 S&P SmallCap 600
2/07/2017
Feb
YTD
2016
P/E on '17e EPS
'17e P/E to Proj. 5-Yr. EPS Grth.
(0.8) 1.1 (1.6) 1.0 1.5 0.6 2.0 (0.8) (0.2) (2.3) (0.6)
3.4 2.6 (5.1) 1.1 3.7 2.0 6.5 3.7 (0.3) (5.7) 0.6
4.3 2.6 23.7 20.1 (4.4) 16.1 12.0 14.1 0.0 17.8 12.2
18.9 19.9 31.0 14.0 15.0 18.2 17.4 18.1 38.0 13.6 17.3
1.0 2.2 1.4 1.6 1.4 1.8 1.4 1.6 5.0 3.3 3.4
% Change
0.6 0.6 0.4 (0.4)
2.3 2.4 2.0 (0.9)
10.6 9.5 18.7 24.7
17.8 17.6 20.3 20.7
1.5 1.5 2.1 1.7
Sector % Weightings 12.1 9.4 7.1 14.6 13.7 10.2 21.6 2.9 2.8 2.4 3.1
S&P Sector Emphasis Overweight Underweight Underweight Marketweight Marketweight Overweight Marketweight Overweight Underweight Marketweight Underweight
Over/Under Weight 0.3 -0.3 -0.3 0.0 0.0 0.3 0.0 0.2 -0.1 0.0 -0.1
Sector recommendations are market-cap weighted, influenced by economic,fundamental and technical considerations
Technical commentary contributed by i10 Research. Please read the Required Disclosures from page 2 onwards of this report.
1
Glossary
Required Disclosures
★★★★★ 5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. ★★★★☆ 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. ★★★☆☆ 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. ★★☆☆☆ 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price not anticipated to show a gain. ★☆☆☆☆ 1-STAR (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. CFRA Ranking Definitions: Overweight rankings are assigned to approximately the top quartile of the asset class. Marketweight rankings are assigned to approximately the second and third quartiles of the asset class. Underweight rankings are assigned to approximately the bottom quartile of the asset class. S&P Global Quality Ranking Growth and stability of earnings and dividends are deemed key elements in establishing earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of ranking. A+ Highest A High A- Above Average B+ Average
B Below Average B- Lower C Lowest D In Reorganization
S&P GLOBAL™ and S&P CAPITAL IQ™ are used under license. The owner of these trademarks is S&P Global Inc. or its affiliate, which are not affiliated with CFRA Research or the author of this content. This content has been prepared by Accounting Research & Analytics, LLC and/or one of its affiliates. It is published and distributed by Accounting Research & Analytics, LLC d/b/a CFRA with the following exceptions: In the European Union/European Economic Area, the content is published and distributed by CFRA UK Limited (company number 08456139 registered in England & Wales with its registered office address at 131 Edgware Road, London, W2 2AP, United Kingdom), which is an Appointed Representative of Hutchinson Lilley Investments LLP, which is regulated by the UK Financial Conduct Authority (No. 582181); in Malaysia, the content is published and distributed by Standard & Poor’s Malaysia Sdn Bhd, which is regulated by the Securities Commission Malaysia (License No. CMSL/A0181/2007). The content of this material and the opinions expressed herein are those of CFRA based upon publicly-available information that CFRA believes to be reliable and the opinions are subject to change without notice. This analysis has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. While CFRA exercised due care in compiling this analysis, CFRA AND ALL RELATED ENTITIES SPECIFICALLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, to the full extent permitted by law, regarding the accuracy, completeness, or usefulness of this information and assumes no liability with respect to the consequences of relying on this information for investment or other purposes. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of CFRA. The Content shall not be used for any unlawful or unauthorized purposes. CFRA and any third-party providers, as well as their directors, officers, shareholders, employees or agents do not guarantee the accuracy, completeness, timeliness or availability of the Content. Past performance is not necessarily indicative of future results. This document may contain forward-looking statements or forecasts; such forecasts are not a reliable indicator of future performance. This report is not intended to, and does not, constitute an offer or solicitation to buy and sell securities or engage in any investment activity. This report is for informational purposes only. Recommendations in this report are not made with respect to any particular investor or type of investor. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors and this material is not intended for any specific investor and does not take into account an investor's particular investment objectives, financial situations or needs. Investors should seek independent financial advice regarding the suitability and/or appropriateness of making an investment or implementing the investment strategies discussed in this document and should
2
understand that statements regarding future prospects may not be realized. Investors should note that income from such investments, if any, may fluctuate and that the value of such investments may rise or fall. Accordingly, investors may receive back less than they originally invested. Investors should seek advice concerning any impact this investment may have on their personal tax position from their own tax advisor. Please note the publication date of this document. It may contain specific information that is no longer current and should not be used to make an investment decision. Unless otherwise indicated, there is no intention to update this document. CFRA’s financial data provider is S&P Global Market Intelligence. CONTAINS COPYRIGHTED AND TRADE SECRET MATERIAL DISTRIBUTED UNDER LICENSE FROM S&P
GLOBAL MARKET INTELLIGENCE. FOR RECIPIENT’S INTERNAL USE ONLY. The Global Industry Classification Standard (GICS®), was developed by and/or is the exclusive property of MSCI, Inc. and Capital IQ, Inc. (“Capital IQ”). GICS is a service mark of MSCI and Capital IQ and has been licensed for use by CFRA. Redistribution or reproduction is prohibited without written permission. Copyright © 2016 CFRA. All rights reserved. CFRA, the CFRA inverted pyramid logo, and STARS are registered trademarks of CFRA.
3
