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Capital Markets Review
Q1 2019
Material prepared by Raymond James for use by its advisors. Raymond James & Associates, Inc., member New York Stock Exchange/SIPC
Reviewing the quarter ended December 31, 2018
Wealth Advisory Services of Raymond James 221 West 6th Street, Suite 1210Austin, Texas 78701T: (512) 477-3110F: (512) 472-1046www.WealthAdvisoryServicesAustin.com
F. Walter Penn, WMS - Senior Vice President, InvestmentsJenny Miller, WMS - Senior Vice President, InvestmentsWeston Keenan, AAMS® - Financial Advisor
Economic Review: 3-9Gross Domestic ProductEmploymentInflation Housing MarketConsumer Confidence
Capital Markets: 10-21Asset Class Returns S&P 500 Sector ReturnsS&P 500 Sector UpdateEquity StylesU.S. Treasury Yield CurveFixed Income YieldsGlobal Sovereign Debt YieldsS&P 500 Yield vs. Treasury YieldS&P 500 ValuationsForeign Exchange RatesCommodity Prices
Q1 Themes: 22-34U.S. Economic OutlookWashington Policy OutlookU.S. Equity OutlookInternational Equity OutlookFixed Income OutlookOil OutlookAsset Allocation Outlook
Disclosure: 35
Index Descriptions: 36-38
TABLE OF CONTENTS
-10
-7
-4
-1
2
5
8
98 00 02 04 06 08 10 12 14 16 18
Qua
rterly
Cha
nge
in R
eal G
DP
(%
, A
nnua
lized
)
Year
Quarterly Change in Real GDP
Quarterly Change in Real GDP (%, Annualized) Recession
3.40
3
Real gross domestic product (GDP) increased at an annual rate of 3.4 percent in the third quarter of 2018, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP
increased 4.2 percent.
The "third" GDP estimate is based on more complete source data than were available for the "second" estimate issued last November. In the second estimate, the increase in real GDP was 3.5 percent.
Economic ReviewGROSS DOMESTIC PRODUCT
Source: Bloomberg, as of 12/31/2018
The increase in real GDP in the third quarter reflected positive contributions from consumer spending, private inventory investment, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by negative contributions from exports and residential fixed
investment. Imports, which are a subtraction in the calculation of GDP, increased.
4
Economic ReviewCONTRIBUTIONS TO % CHANGE IN REAL GDP
Source: Bloomberg, as of 12/31/2018
-4
-2
0
2
4
6
8
2010 2011 2012 2013 2014 2015 2016 2017 2018
Per
cent
(%
)
Contributions to % Change in Real GDP
Private Investment Consumer Spending Government Spending (Fed, State, Local) Net Exports
3.90
0
2
4
6
8
10
12
98 00 02 04 06 08 10 12 14 16 18
Per
cent
(%
)
Year
Civilian Unemployment Rate
Recession Civilian Unemployment Rate (%)
-1,000
-750
-500
-250
0
250
500
750
98 00 02 04 06 08 10 12 14 16 18
Cha
nge
in P
ayro
lls (
000s
)
Year
Monthly Payroll Change
Monthly Change in Nonfarm Payrolls (000s) Recession
312
Total nonfarm payroll employment increased by 312,000 in December, and the unemployment rate rose to 3.9 percent. Job gains occurred in health care, food services and drinking places, construction, manufacturing, and
retail trade.
5
Economic ReviewEMPLOYMENT
Source: Bloomberg, as of 12/31/18 Source: Bloomberg, as of 12/31/18
4
6
11
24
32
38
43
55
82
0 10 20 30 40 50 60 70 80 90Job Gains: 1 Mo Net Chg (000s)
Indu
stry
Con
tribu
tion
(%)
Mining and Logging Financial Activities Government
Retail Trade Manufacturing Construction
Professional and Business Services Leisure and Hospitality Education and Health Services
In December, some of the largest job gains occurred in health care, leisure and hospitality, and professional and business services. Health care added 346,000 jobs in 2018, more than the gain of 284,000 jobs in 2017.
Employment in other major industries, including mining, financial activities, and government, showed little change over the month.
MAJOR INDUSTRY CONTRIBUTIONS TO JOB GROWTH
6
Economic Review
Source: Bureau of Labor Statistics, as of 12/31/2018, a preliminary estimate of the net number of jobs in the various industries in the latest month.
-2%
-1%
0%
1%
2%
3%
4%
5%
08 09 10 11 12 13 14 15 16 17 18
PCE
Infla
tion
(%)
Year
Inflation: Personal Consumption Expenditures
RecessionPersonal Consumption Expenditures Inflation (Annual)PCE Core (ex Food & Energy) Inflation (Annual)
1.91.8
The year-over-year PCE price index fell to 1.8 percent from 2.0 percent in November while the core PCE price index (excluding food and energy) increased to 1.9 percent from 1.8 percent.
“Inflation moderated in the second half of 2018, but should pick up somewhat in early 2019, reflecting higher labor costs (minimum wage increases in some states) and tariffs.” - Dr. Scott Brown, Chief Economist
7
Economic ReviewINFLATION
Source: Bloomberg, as of 11/302018
Personal Consumption Expenditure (PCE) is the preferred measure of inflation by the Bureau of Economic Analysis.
Builders continue to note supply constraints (a lack of skilled labor, and higher construction costs) leading to a continued dip in building permits. Demand remains strong, but customers have balked at higher home prices.
8
Economic ReviewHOUSING MARKET
Source: Bloomberg, as of 11/30/2018 Source: U.S. Census Bureau, as of 11/302018
128.1
0
20
40
60
80
100
120
140
160
98 00 02 04 06 08 10 12 14 16 18
Con
sum
er C
onfid
ence
Ind
ex
Year
Consumer Confidence
Recession Conference Board Consumer Confidence Index
"Consumer Confidence decreased in December, following a moderate decline in November. Expectations regarding job prospects and business conditions weakened, but still suggest that the economy will continue
expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in Expectations are reflective of an increasing concern that the pace of economic growth will begin
moderating in the first half of 2019.“ - Lynn Franco, Director of Economic Indicators at The Conference Board
9
Economic ReviewCONSUMER CONFIDENCE
Source: Bloomberg, as of 12/31/2018
$351.55
$199.76 $146.00
$311.18
$64.95
$103.61
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Grow
th o
f $10
0
YearU.S. Equity Non-U.S. EquityU.S. Fixed Income Global Real EstateCommodities Cash & Cash Alternatives
QTD YTD 1-Year 3-Year 5-Year 10-YearU.S. Equity -14.30% -5.24% -5.24% 8.97% 7.91% 13.18%
Non-U.S. Equity -11.46% -14.20% -14.20% 4.48% 0.68% 6.57%U.S. Fixed Income 1.64% 0.01% 0.01% 2.06% 2.52% 3.48%
Global Real Estate (REITs) -5.01% -6.37% -6.37% 3.46% 4.50% 10.96%Commodities -9.41% -11.25% -11.25% 0.30% -8.80% -3.78%
Cash & Cash Alternatives 0.57% 1.86% 1.86% 0.99% 0.60% 0.35%
10
Capital MarketsASSET CLASS RETURNS: GROWTH OF A DOLLAR
Source: Morningstar Direct, as of 12/31/2018; Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
Source: Morningstar Direct, as of 12/31/2018
11
Capital MarketsASSET CLASS RETURNS
Source: Morningstar Direct, as of 12/31/2018
Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
Blended Portfolio Allocation: 45% U.S. Equity / 15% Non-U.S. Equity / 40% Fixed Income
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Commodities-9.5%
Commodities-17.0%
Commodities-24.7%
Cash & Cash Alternatives
0.3%
Cash & Cash Alternatives
0.8%
Real Estate-5.0%
Real Estate-50.2%
Cash & Cash Alternatives
0.2%
Cash & Cash Alternatives
0.1%
Cash & Cash Alternatives
0.0%
Non-U.S. Equity-13.7%
Commodities-1.1%
Commodities-13.3%
Cash & Cash Alternatives
0.1%
Blended Portfolio
-0.2%
Blended Portfolio
13.8%
Real Estate-1.2%
Real Estate3.8%
Fixed Income3.5%
Fixed Income6.0%
U.S Equity-5.2%
Real Estate-6.4%
Commodities-11.2%
Non-U.S. Equity-14.2%
Blended Portfolio
2.1%
Non-U.S. Equity16.8%
Non-U.S. Equity15.3%
Cash & Cash Alternatives
4.7%
Non-U.S. Equity-45.5%
Fixed Income5.9%
Fixed Income6.5%
Commodities1.7%
Fixed Income-2.0%
Non-U.S. Equity-3.9%
Non-U.S. Equity-5.7%
Fixed Income2.7%
U.S. Equity5.1%
U.S. Equity-37.3%
Commodities18.9%
Non-U.S. Equity11.2%
Real Estate-8.7%
Fixed Income4.2%
Cash & Cash Alternatives
0.1%
Fixed Income7.0%
Commodities-35.7%
Blended Portfolio
20.2%
Blended Portfolio
11.9%
Cash & Cash Alternatives
0.1%
Blended Portfolio
11.0%
U.S. Equity16.4%
Blended Portfolio
7.8%
Blended Portfolio
-21.7%
U.S. Equity28.3%
Commodities16.8%
U.S. Equity1.0%
Real Estate1.6%
Real Estate13.9%
Fixed Income0.6%
U.S Equity12.7%
Non-U.S. Equity27.2%
Non-U.S. Equity16.7%
Fixed Income5.2%
Non-U.S. Equity41.5%
Real Estate19.3%
Fixed Income7.8%
Commodities16.2%
Cash & Cash Alternatives
1.8%
Real Estate40.2%
U.S. Equity16.9%
U.S. Equity12.6%
Real Estate29.0%
U.S. Equity33.6%
Blended Portfolio
7.1%Non-U.S.
Equity4.5%
U.S. Equity0.5%
Commodities11.8%
U.S Equity21.1%
Real Estate14.0%
Blended Portfolio
13.9%
Blended Portfolio
7.1%
Cash & Cash Alternatives
0.0%
Cash & Cash Alternatives
1.9%
Fixed Income0.0%
Blended Portfolio
-4.0%
-20.2%
-16.0%
-13.5%
-12.5%
-9.4%
-7.5%
-4.5%
0.9%
1.6%
-11.0%
-17.9%
-4.4%
-13.8%
-11.2%
-14.6%
-2.1%
-2.1%
0.0%
-25% -20% -15% -10% -5% 0% 5%
U.S. Small Cap Equity
Non-U.S. Developed Mkt Equity-Small Cap
U.S. Large Cap Equity
Non-U.S. Developed Mkt Equity-Large Cap
Commodities
Non-U.S. Emerging Market Equity
High Yield Corporate Bonds
Global Aggregate ex U.S. Bonds
Investment-Grade U.S. Aggregate Bonds
Total Return 12 Months Ending 12/31/2018 Q4 2018
2018 proved to be a trying year with most markets reporting losses for the fourth quarter and for the calendar year. This past year grounded complacent investors, and asset prices alike, as both retreated from one of the most extraordinary expansions in market history. Mounting concerns over trade tensions with China and slowing global
growth consumed the news headlines as we watched markets plummet and significant intraday movements became the norm.
12
Capital MarketsASSET CLASS RETURNS
Source: Morningstar Direct, as of 12/31/2018
Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
-23.8%
-17.3%
-17.3%
-16.4%
-13.5%
-13.2%
-13.1%
-12.3%
-8.7%
-5.2%
-3.8%
1.4%
-18.1%
-0.3%
-13.3%
0.8%
-4.4%
-12.5%
-13.0%
-14.7%
6.5%
-8.4%
-2.2%
4.1%
-30% -20% -10% 0% 10%
Energy
Information Technology
Industrials
Consumer Discretionary
S&P 500
Communication Services
Financials
Materials
Health Care
Consumer Staples
Real Estate
Utilities
Total Return
12 Months Ending 12/31/2018 Q4 2018
Utilities was the only sector to earn a positive return in the fourth quarter while health care was the top performer for the year.
“We feel health care is vulnerable to short-term underperformance given that significant market declines often end with leading sectors collapsing. Despite this near-term risk, the defensive characteristics, generally healthy
fundamental trends, and reasonable valuation support an overweight stance.” - J. Michael Gibbs, Managing Director of Equity Portfolio & Technical Strategy
13
Capital MarketsS&P 500 SECTOR RETURNS
Returns are based on the GICS Classification model. Returns are cumulative total return for stated period, including reinvestment of dividends. Past performance is not indicative of future results. Please see slide 35 for sector definitions. Source: Morningstar Direct, as of 12/31/2018
Value Blend Growth
Large -11.7% -13.8% -15.9%
Mid -15.0% -15.4% -16.0%
Small -18.7% -20.2% -21.7%
Q4 2018 Total Return
Value Blend Growth
Large -8.3% -4.8% -1.5%
Mid -12.3% -9.1% -4.8%
Small -12.9% -11.0% -9.3%
12-Month Total Return
“We favor value-oriented strategies over growth in the near term as these strategies include defensive, lower-volatility companies, rather than the more cyclical firms found in growth strategies. Given the late market
cycle, a more defensive approach is recommended in the near term.”- Tactical Asset Allocation Outlook, 3Q 2018 Investment Strategy Quarterly
14
Capital MarketsEQUITY STYLES
Style box returns based on the GICS Classification model. All values are cumulative total return for stated period including reinvestment of dividends. The indices used from left to right, top to bottom are: Russell 1000 Value Index, Russell 1000 Index, Russell 1000 Growth Index, Russell Mid-Cap Value Index, Russell Mid-Cap Blend Index, Russell Mid-Cap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index. Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
Source: Morningstar Direct, as of 12/31/2018Source: Morningstar Direct, as of 12/31/2018
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Yie
ld (%
)
Maturity
U.S. Treasury Yield Curve
Current (12/31/2018) 12/31/2017
1 m 3 m
6 m 1 y
2 y
3 y
5 y
7 y
10 y
20 y
30 y
“The Treasury curve remained in a tight, albeit slightly higher, trading range as yields were bumped up across the curve, driven in part by four Federal Reserve rate hikes. Short-term Treasury rates (less than one year)
followed suit, rising approximately 1.00%, while intermediate- and long-term Treasury rates lagged. As a result, the Treasury yield curve continued to flatten over the year.” - Doug Drabik, Senior Strategist, Fixed Income
15
Capital MarketsU.S. TREASURIES
Source: Federal Reserve, as of 12/31/2018
2.68 2.31
7.95
4.094.51
2.27
0
2
4
6
8
10
10 11 12 13 14 15 16 17 18
Yie
ld to
Wor
st (%
)
Year
U.S. Fixed Income Yields
10-Year U.S. Treasury BB Barclays 10-Year MunicipalBB Barclays U.S. Corporate High Yield BB Barclays Credit30-Yr Mortgage Fed Funds Rate
16
Capital MarketsFIXED INCOME YIELDS
Source: Bloomberg, as of 12/31/2018
Past performance is not indicative of future results. Please see slides 36-38 for index definitions.
(3)
-
3
6
9
12
15
18
Sw
itzer
land
Japa
n
Den
mar
k
Ger
man
y
Sw
eden
Fran
ce
Bel
gium
Irela
nd
Uni
ted
Kin
gdom
Spa
in
Por
tuga
l
Nor
way
Can
ada
Aus
tralia
Uni
ted
Sta
tes
Italy
Gre
ece
Yie
ld (%
)
10-Year Sovereign Debt Yields
“Global rate disparity has continued to widen (rather than narrow, as had been previously anticipated by many pundits). Active intervention by central banks around the globe, and the growth of their balance sheets appear to
have peaked at the beginning of 2018, yet most central banks remain in an accommodative state.” - Doug Drabik, Senior Strategist, Fixed Income Services
17
Capital MarketsGLOBAL SOVEREIGN DEBT YIELDS
Source: Bloomberg, as of 12/31/2018
This chart illustrates the highest and lowest monthly yields over the past 5 years as well as the current yield, represented by ♦.
1.802.68
0
2
4
6
8
10
12
14
16
83 88 93 98 03 08 13 18
Yie
ld (%
)
Year
Equity vs. Fixed Income Yields
Recession S&P 500 Dividend Yield 10-Year Treasury YTW
The 10-year Treasury yield dipped in December, causing the spread between stocks and bonds to tighten slightly. Still, bond yields remain relatively attractive which has been the norm, historically.
18
Capital MarketsS&P 500 YIELDS VS. TREASURY YIELD
Source: Bloomberg, as of 12/31/2018
Past performance is not indicative of future results. Please see slides 36-38 for index definitions.
17.1219.24
0
5
10
15
20
25
30
35
98 00 02 04 06 08 10 12 14 16 18
P/B
Rat
io
Year
S&P 500 Price-to-Earnings
Recession P/E Ratio 20-Yr Avg P/E
2.992.91
0
1
2
3
4
5
6
98 00 02 04 06 08 10 12 14 16 18
P/B
Rat
io
Year
S&P 500 Price-to-Book
Recession P/B Ratio 20-Yr Avg P/B
Attractive valuation further supports a positive bias with the S&P 500 price-to-earnings ratio (P/E) trading at 17x, relative to the long-term historical average of 19x.
“Our base case S&P 500 target of 2,957 by year end 2019 renders 25% upside price movement from the December 24 close of 2,351.” – Raymond James Equity Portfolio & Technical Strategy Group
19
Capital MarketsPRICE-EARNINGS RATIO AND PRICE-BOOK RATIOS
Source: Bloomberg, as of 12/31/2018 Past performance is not indicative of future results. Please see slides 36-38 for index definitions.
The price-to-earnings ratio, or P/E, is a common measure of the value of stocks. It shows the relationship between a stock’s price and the underlying company’s earnings (or profits) per share of stock. In essence, it calculates how many dollars you pay for each dollar of a company’s earnings. In very general terms, the higher the P/E ratio, the more likely the stock is to be overpriced.
The price-to-book ratio, or P/B, is a relative measure based on most recent price/accounting (book) value (quarterly, semiannual or annual data). Both price-to-earnings and price-to-book are accounting-based relative value measures.
128.52
80
90
100
110
120
130
140
94 96 98 00 02 04 06 08 10 12 14 16 18
U.S
. Dol
lar
Inde
x
Year
U.S. Dollar Index (Trade-Weighted)
Recession Trade-Weighted Exchange Rate Index (Top 26 U.S. Trade Partners)
12/31/2018 12/31/2017Source: Bloomberg, as of 12/31/2018U.S. Dollar ($) / Japanese Yen (¥) 109.6900 112.6900Euro (€) / U.S. Dollar ($) 1.1467 1.2005British Pound (£) / U.S. Dollar ($) 1.2754 1.3513
“The U.S. dollar has strengthened against most major foreign currencies over the last five to six years, eroding foreign returns as those funds flow back to the U.S. investors. In fact, the dollar has only declined in two of the
last eight years against major currencies, contrarily boosting returns for domestic investors. If the dollar appreciates in 2019, non-U.S. investments will have a more difficult time outperforming their domestic
counterparts.” – Nick Lacy, CFA, Chief Portfolio Strategist, Asset Management Services
20
Capital MarketsFOREIGN EXCHANGE RATES
Source: Bloomberg, as of 12/31/2018; Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
$1,279.00
$45.41
$0
$20
$40
$60
$80
$100
$120
$140
$160
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
94 96 98 00 02 04 06 08 10 12 14 16 18
Oil
Pric
e / B
arre
l
Gol
d P
rice
/ Oun
ce
Year
Commodity Prices
Gold (London Bullion Market) WTI Crude Oil
“On a calendar-year basis, oil prices averaged their highest level since 2014, though there is no disputing the rough end to the year. Commodity markets are volatile by nature, reflecting both fundamental drivers and
additional factors, such as the impact of the rising U.S. dollar, which placed significant pressure on already strained oil prices. Technical/momentum trading also contributed to this intense sell-off. It is important to keep
in mind that short-term prices are essentially unpredictable, so we do not encourage investors to focus on short-term volatility – whether it is taking off or on a nerve-wracking descent.” - Pavel Molchanov, Energy Analyst
21
Capital MarketsCOMMODITY PRICES
Source: Bloomberg, as of 12/31/2018. Commodities are generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. There may be sharp price fluctuations even during periods when process overcall are rising. Past performance is not indicative of future results. Please see slides 36-38 for asset class definitions.
22
U.S. ECONOMIC OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
Q1 Themes
CONSUMER SPENDING
23
Q1 ThemesU.S. ECONOMIC OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
DEFICITS AND DEBT
24
Q1 ThemesWASHINGTON POLICY OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
POLLING AHEAD
25
Q1 ThemesWASHINGTON POLICY OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
THE D.C. AGENDA
26
Q1 ThemesEMERGING MARKET OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
STRUCTURAL FORCES IN PLACE
Given its dominance in currency markets, the U.S. dollar drives both the exchange rate and relative value of foreign currencies. Due in part to the robust growth of the U.S. economy and tightening monetary policy, the dollar has appreciated, precipitating a fall in the relative value of other foreign currencies. Separately, Brexit and Italy’s budget negotiations with the EU have influenced the value of the Pound and euro, respectively.
27
Q1 ThemesINTERNATIONAL OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
WILL THE REST OF THE WORLD AWAKEN?
28
Q1 ThemesU.S. EQUITY OUTLOOK
EQUITY REVERSION?
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
29
Q1 ThemesU.S. EQUITY OUTLOOK
2019 YEAR-END OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
30
Q1 ThemesFIXED INCOME OUTLOOK
COMPARING CURVES
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
The bond market played out the year in 2018 much as expected. The Treasury curve remained in a tight, albeit slightly higher, trading range as yields were bumped up across the curve, driven in part by four Federal Reserve rate hikes.
Short-term Treasury rates (less than one year) followed suit, rising approximately 1.00%, while intermediate- and long-term Treasury rates lagged. As a result, the Treasury yield curve continued to flatten over the year.
At the state level, there were four high-profile initiatives on the ballot – in Colorado (drilling restrictions), Washington State (carbon tax), California (reduction of fuel taxes), and Arizona (upsized renewable portfolio standard) – but all four were defeated.
On the other hand, three new governors – in Illinois, Michigan, and New Mexico – are set to join the U.S. Climate Alliance, a coalition of currently 16 states that are enforcing the Paris Agreement’s decarbonization targets.
While any specific regulatory changes will have to go through utility commissions, it is a safe bet that the new administrations will push to accelerate retirements of coal plants. This is more bad news for the coal industry – but bullish for renewables.
31
Q1 ThemesENERGY OUTLOOK
GOING GREEN
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
32
Q1 ThemesENERGY OUTLOOK
OUTLOOK ON PRICES
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
CONSTRUCTIVE ON NON-U.S. DEVELOPED MARKET EQUITY
ECONOMIC GROWTH CATCH UPWhile we are in the later stages of the growth cycle in the U.S., the rest of the world still has ample room for growth and a much lower bar to surpass from a relative growth standpoint.
FUNDAMENTAL SUPPORTThe prices of U.S. equities are elevated both on an absolute basis and relative to the rest of the world. In fact, we haven’t seen global market dislocations such as these since 1998.
POLICY DIVERGENCECountries such as the UK and Canada began raising rates as well, but at a much slower pace. Japan, on the other hand, is unlikely to raise interest rates for the foreseeable future and the same is expected for most euro zone central banks.
While the U.S. may end up achieving final 2018 growth figures of around 2.9% (according to final GDP estimates), other large economies saw more muted
expansions, due in part to the fact that international companies did not have the luxury of reaping the benefits of the 2017 U.S. corporate tax cuts.
33
Q1 ThemesASSET ALLOCATION OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
34
Q1 ThemesASSET ALLOCATION OUTLOOK
For full theme articles, ask for a copy of the January 2019 Investment Strategy Quarterly.
U.S. FIXED INCOME: SHORTEN UPShorter-duration, higher-quality U.S. bonds are preferred relative to low-quality, non-investment grade bonds (high yield bonds) as investors are not being appropriately compensated for the potential downside risk taken by owning these securities.
NON-U.S. FIXED INCOMEWe continue to avoid non-U.S. sovereign debt in Europe as an eventual rising interest rate environment and political concerns such as Brexit and the Italian debt crisis remain headwinds for foreign bond returns over the next several years.
Emerging market local currency bonds may present opportunity in the new year as the yields of these bonds increased substantially as many countries raised interest rates to control currency levels. While these types of bonds tend to have low default rates, they do carry the risk of repayment of interest and principal in local currencies that may have declined dramatically.
DISCLOSURE
35
Data provided by Morningstar Direct, Bloomberg.This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account.There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein.
Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product that attempts to mimic the performance of an index will incur expenses that would reduce returns. Past performance is not indicative of future results. The performance noted in this presentation does not include fees and costs, which would reduce an investor's returns.
• Fixed Income: subject to credit risk and interest rate risk. An issuer’s ability to pay the promised income and return of principal upon maturity may impact the issuer’s credit rating. Generally, when interest rates rise, bond prices fall, and vice versa. Specific-sector investing can be subject to different and greater risks than more diversified investments.
• Personal Consumption Expenditure Index (PCE): a measure of inflation, this index measures the price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, non-durables and services.
• Gross Domestic Product (GDP): a broad measurement of a nation’s overall economic activity. It is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, including all private and public consumption, government outlays, investments and net exports that occur within a defined territory.
• Price-to-Earnings Ratio (P/E): a ratio for valuing a company that measures its current share price relative to its per-share earnings.• Price-to-Book Ratio (P/B): A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's
book value per share.• Small-cap and Mid-Cap Equity: generally involve greater risks, and may not be appropriate for every investor. International investing also involves special risks, including currency
fluctuations, different financial accounting standards, and possible political and economic volatility. • High-Yield Fixed Income: not suitable for all investors. Risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest
rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio.• Commodities: trading is generally considered speculative because of the significant potential for investment loss.• U.S. Government Fixed Income: guaranteed timely payment of principal and interest by the federal government. U.S. Treasury Bills: A short-term debt obligation backed by the U.S.
government with a maturity of less than one year.• Fixed Income Sectors: Returns based on the four sectors of Barclays Global Sector Classification Scheme: Securitized (consisting of U.S. MBS Index, the ERISA-Eligible CMBS
Index and the fixed-rate ABS Index), Government Related (consisting of U.S. Agencies and non-corporate debts with four sub sectors: Agencies, Local Authorities, Sovereign and Supranational), Corporate (dollar-denominated debt from U.S. and non-U.S. industrial, utility, and financial institutions issuers), and Treasuries (includes public obligations of the U.S. Treasury that have remaining maturities of one year or more).
Asset allocation and diversification does not guarantee a profit nor protect against loss. Dividends are not guaranteed and will fluctuate.
Past performance is not indicative of future results. Investing in international securities involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.
The values of real estate investments may be adversely affected by several factors, including supply and demand, rising interest rates, property taxes, and changes in the national, state and local economic climate. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector including limited diversification.All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc. and are subject to change. There is no assurance the trends mentioned will continue or forecasts will occur. Economic and market conditions are subject to change.
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INDEX DESCRIPTIONS
Asset class and reference benchmarks:
Bloomberg Commodity Total Return Index: Formerly the Dow Jones-UBS Commodity Index TR (DJUBSTR),is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 3 Month U.S. Treasury Bills.
Barclays 10-Year Municipal Bond Index: A rules-based, market-value weighted index engineered for the long-term tax-exempt bond market. This index is the 10 year (8-12) component of the Municipal Bond Index.
Barclays 10-Year U.S. Treasury Index: Measures the performance of U.S. Treasury securities that have a remaining maturity of 10 years.
Barclays U.S. Aggregate Bond Index: Represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.
Barclays Global Aggregate ex-U.S. Bond Index: Tracks an international basket of bonds that currently contains 65% government, 14% corporate, 13% agency and 8% mortgage-related bonds.
Barclays High Yield Bond Index: Covers the universe of fixed-rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures and 144-As are also included.
Barclays U.S. Credit Index: an index composed of corporate and non-corporate debt issues that are investment grade (rated Baa3/BBB- or higher).
Citi 3-Month Treasury-Bill Index: This is an unmanaged index of three-month Treasury bills.
INDEX DESCRIPTIONS (continued)
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FTSE EPRA/NAREIT Global Real Estate Index : designed to represent general trends in eligible listed real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income producing real estate.
MSCI All Country World Index Ex-U.S Index (ACWI ex U.S.): a market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. It includes both developed and emerging markets.
MSCI EAFE Index (Europe, Australasia, Far East): a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. The EAFE consists of the country indices of 21 developed nations.
MSCI EAFE Growth Index: represents approximately 50% of the free-float adjusted market capitalization of the MSCI EAFE index, and consists of those securities classified by MSCI as most representing the growth style.
MSCI EAFE Small-Cap Index: an unmanaged, market-weighted index of small companies in developed markets, excluding the U.S. and Canada.
MSCI EAFE Value: represents approximately 50% of the free-float adjusted market capitalization of the MSCI EAFE index, and consists of those securities classified by MSCI as most representing the value style.
MSCI Emerging Markets Index: designed to measure equity market performance in 25 emerging market indexes. The three largest industries are materials, energy and banks.
MSCI Local Currency Index: a special currency perspective that approximates the return of an index as if there were no currency valuation changes from one day to the next.
NASDAQ Global Real Estate Index: the index measures the performance of real estate stocks which listed on an Index Eligible Global Stock Exchange. The index is market-capitalization weighted.
Russell 1000 Index: measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the investible U.S. equity market.
Russell 1000 Value Index: measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell 1000 Growth Index: measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell Mid-Cap Index: measures the performance of the 800 smallest companies of the Russell 1000 Index, which represent approximately 30% of the total market capitalization of the Russell 1000 Index.
Russell Mid-cap Value Index: measures the performance of those Russell Mid-cap companies with lower price-to-book ratios and lower forecasted growth values.
Russell Mid-Cap Growth Index: measures the performance of those Russell Mid-cap companies with higher price-to-book ratios and higher forecasted growth values.
Russell 2000 Index: measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell 2000 Value Index: measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
Russell 2000 Growth Index: measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 3000 Index: measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
INDEX DESCRIPTIONS (continued)
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© 2019 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC© 2019 Raymond James Financial Services, Inc., member FINRA/SIPC
Standard & Poor’s 500 (S&P 500): measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market.
S&P 500 Communication Services: comprises those companies included in the S&P 500 that are classified as members of the GICS® communication services sector.
S&P 500 Consumer Discretionary: comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.
S&P 500 Consumer Staples: comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
S&P 500 Energy: comprises those companies included in the S&P 500 that are classified as members of the GICS® energy sector.
S&P 500 Financials: comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector
S&P 500 Health Care: comprises those companies included in the S&P 500 that are classified as members of the GICS® health care sector.
S&P 500 Industrials: comprises those companies included in the S&P 500 that are classified as members of the GICS® industrials sector.
S&P 500 Information Technology: comprises those companies included in the S&P 500 that are classified as members of the GICS® information technology sector.
S&P 500 Materials: comprises those companies included in the S&P 500 that are classified as members of the GICS® materials sector.
S&P 500 Telecom Services: comprises those companies included in the S&P 500 that are classified as members of the GICS® telecommunication services sector.
S&P 500 Utilities: comprises those companies included in the S&P 500 that are classified as members of the GICS® utilities sector.
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