KEEP IT SIMPLE: INVESTING IN PRO-CYCLICAL …...4 For one-on-one use with institutional investors...

Matthew F. Beaudry, CPA, CIMA®, CMFC®, CRPC®, AAMS®

Senior Investment Director, Capital Markets

KEEP IT SIMPLE: INVESTING IN PRO-CYCLICAL MARKETS

ECONOMICS 101: THE MARKETS HAVEPROVIDED THE ROADMAP

DEFENSE OUTPERFORMED IN EARNINGS RECESSION

4For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Latest earnings recession: 2015 through Q2 2016

Sources: Bloomberg, Putnam.

-60%

-40%

-20%

0%

20%

40%

60%

80%Trailing 12-month earnings per share (year-over-year %)

5For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Fixed income outperformed equities

Sources: Bloomberg, Putnam.

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Bloomberg Barclays U.S. Aggregate Bond Index S&P 500

5.89%

1.94%

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INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Growth outperformed value

Sources: Bloomberg, Putnam.Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of the Frank Russell Company.

-20

-15

-10

-5

0

5

10

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Russell 3000 Value Russell 3000 Growth

-1.88%

3.87%

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INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Large cap outperformed small cap

Sources: Bloomberg, Putnam.

-25

-20

-15

-10

-5

0

5

10

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Russell 1000 Russell 2000

1.50%

-4.38%

8For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Domestic, S&P 500 outperformed international, EAFE

Sources: Bloomberg, Putnam.

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-15

-10

-5

0

5

10

15

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

S&P 500 MSCI EAFE

1.94%

-9.38%

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INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Defensive sectors outperformed cyclical sectors

Sources: Bloomberg, Putnam.

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Telecom

Consumer staples

Utilities

Real estate

Consumer discretionary

Health care

Technology

Industrials

Materials

Financials

Energy

S&P 500 sectors positive price return 1/1/15–6/30/16

10For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Earnings recession: Interest-rate risk outperformed non-traditional fixed income (dividends not reinvested)

Sources: Bloomberg, Putnam.

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-15

-10

-5

0

5

10

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Bloomberg Barclays U.S. Aggregate Bond IndexPutnam Diversified Income Trust 5.89%

-12.48%

OFFENSE HAS OUTPERFORMED IN A PRO-CYCLICAL, INFLATIONARY MARKET

12For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Economic growth began improving pre-election 2016

Source: Bloomberg.

50

51

52

53

54

55

56

Mar-14 Mar-15 Mar-16 Mar-17

JPMorgan Global Composite PMI

48

50

52

54

56

58

60

62

Mar-14 Mar-15 Mar-16 Mar-17

Markit U.S. Composite PMI

13For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Inflation expectations moved higher

Source: Bloomberg.

0.75

0.95

1.15

1.35

1.55

1.75

1.95

2.15

2.35

2.55

2.75U.S. Core PCE

14For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Yield curves steepened

Sources: Bloomberg, Putnam.

0.5

0.6

0.7

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0.9

1

1.1

1.2

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1.4

1.5U.S. 10-year yield – U.S. 2-year yield

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4Euro 10-year yield – Euro 2-year yield

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INVESTING IN PRO-CYCLICAL MARKETS

Earnings growth improved

Sources: Bloomberg, Putnam.

-60%

-40%

-20%

0%

20%

40%

60%

80%Trailing 12M earnings-per-share growth (year-over-year %)

PRO-GROWTH FISCAL POLICIES HISTORICALLY BULLISH FOR THE MARKETS

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INVESTING IN PRO-CYCLICAL MARKETS

Reagan policy vs. Trump policy

Sources: Putnam, Bloomberg, the World Bank.

Reagan Trump

Tax plan • Lowered the marginal tax rate by over 20%

• Reduced estate taxes and capital gains tax

• Accelerated Cost Recovery System

• Plans to cut the marginal tax rate

• Plans to repeal the estate tax and reduce capital gains tax

• Lower corporate taxes

Investment Massively expanded defensespending

Infrastructure and defense spending in the pipeline

Regulation Deregulated multiple sectors Plans deregulation in the health-care, finance, and energy sectors

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INVESTING IN PRO-CYCLICAL MARKETS

Reagan policy vs. Trump policy

Sources: Bloomberg, The World Bank.

Reagan Trump

Inflation (Core CPI)

11% when he took office in 1981

2.1% Core CPI

GDP Fell to -1.9% in 1982 2.2% growth for U.S. GDP in 2017

10-year Treasury 15% in 1981 2.44% at December 31, 2016

Unemployment 9.6% in 1983 4.7% at December 31, 2016

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INVESTING IN PRO-CYCLICAL MARKETS

Extraordinary results from Reaganomics

• U.S. real GDP growth averaged 3.5%

• Unemployment dropped nearly by half

• Inflation fell from approximately 12% to 4%

• Fed funds rates were nearly halved

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INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Equities outperformed fixed income

Sources: Bloomberg, Putnam.

-6

-4

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0

2

4

6

8

10

12

14

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Bloomberg Barclays U.S. Aggregate Bond Index S&P 500

-1.94%

12.35%

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INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Growth and value alternate leadership

Sources: Bloomberg, Putnam.

-2

0

2

4

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8

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Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Russell 3000 Growth Russell 3000 Value

12.49%13.65%

22For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Small cap outperformed large cap

Sources: Bloomberg, Putnam.

-5

0

5

10

15

20

25

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Russell 1000 Russell 2000

12.54%

19.81%

23For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Domestic outperformed international

Sources: Bloomberg, Putnam.

-4

-2

0

2

4

6

8

10

12

14

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

S&P 500 MSCI EAFE 12.35%

10.63%

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INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Cyclical outperformed defensive

Sources: Bloomberg, Putnam.

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Financials

Technology

Industrials

Materials

Consumer Discretionary

Health care

Energy

Consumer Staples

Utilities

Real Estate

Telecom

S&P 500 sectors positive price return 7/1/16–3/31/17

25For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market: Non-traditional fixed income strategies outperformed (Dividends not reinvested)

Sources: Putnam, Bloomberg.

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-4

-2

0

2

4

6

8

Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17

Bloomberg Barclays U.S. Aggregate Bond IndexPutnam Diversified Income Trust

-1.94%

6.16%

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INVESTING IN PRO-CYCLICAL MARKETS

Pro-cyclical market marches on: Key overweightsand underweights

• Equities > Fixed income

• Value > Growth

• Domestic > International

• Small cap > Large cap

• Credit risk > Interest-rate risk

INVEST IN THE MARKETS YOU SEE, NOT THE ONES YOU WANT.

28For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17

INVESTING IN PRO-CYCLICAL MARKETS

The views and opinions expressed are those of Matthew F. Beaudry, Senior Investment Director, Putnam Investments, are subject to change with market conditions, and are not meant as investment advice.

All information is historical and not indicative of future results. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index.

Putnam Retail Management putnam.com