KEEP IT SIMPLE: INVESTING IN PRO-CYCLICAL MARKETSINVESTING IN PRO-CYCLICAL MARKETS Reagan policy vs. Trump policy Sources: Bloomberg, The World Bank. Reagan Trump Inflation (Core CPI)

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 %)



Earnings recession: Fixed income outperformed equities


-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%



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


Russell 3000 Value Russell 3000 Growth

-1.88%

3.87%



Earnings recession: Large cap outperformed small cap


-25

-20

-15

-10

-5

0

5

10


Russell 1000 Russell 2000

1.50%

-4.38%



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


-20

-15

-10

-5

0

5

10

15


S&P 500 MSCI EAFE

1.94%

-9.38%



Earnings recession: Defensive sectors outperformed cyclical sectors


-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



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


-20

-15

-10

-5

0

5

10


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

-12.48%

OFFENSE HAS OUTPERFORMED IN A PRO-CYCLICAL, INFLATIONARY MARKET



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



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



Yield curves steepened


0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

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



Earnings growth improved


-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



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



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



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



Pro-cyclical market: Equities outperformed fixed income


-6

-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

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

-1.94%

12.35%



Pro-cyclical market: Growth and value alternate leadership


-2

0

2

4

6

8

10

12

14

16


Russell 3000 Growth Russell 3000 Value

12.49%13.65%



Pro-cyclical market: Small cap outperformed large cap


-5

0

5

10

15

20

25


Russell 1000 Russell 2000

12.54%

19.81%



Pro-cyclical market: Domestic outperformed international


-4

-2

0

2

4

6

8

10

12

14


S&P 500 MSCI EAFE 12.35%

10.63%



Pro-cyclical market: Cyclical outperformed defensive


-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



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

Sources: Putnam, Bloomberg.

-6

-4

-2

0

2

4

6

8


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

-1.94%

6.16%



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.



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

Documents

KEEP IT SIMPLE: INVESTING IN PRO-CYCLICAL MARKETSINVESTING IN PRO-CYCLICAL MARKETS Reagan policy vs. Trump policy Sources: Bloomberg, The World Bank. Reagan Trump Inflation (Core CPI)