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Our sole mission is to provide wealth sustainability for individuals, families, endowments, foundations, and retirement plans through the
implementation of our 3-D Endowment Investment Philosophy.
www.EndowmentWM.com
Quarterly Economic & Market Update2nd Quarter 2016
Prateek Mehrotra, MBA, CFA®, CAIA®
Chief Investment Officer
1
2
Important Information
Performance quoted is past performance and cannot guarantee comparable future results; currentperformance may be higher or lower.
Results shown assume the reinvestment of dividends.
An investment cannot be made directly in an index.
Investments with higher return potential carry greater risk for loss.
Investing in small companies involves greater risks not associated with investing in more establishedcompanies, such as business risk, significant stock price fluctuations and illiquidity.
Foreign securities have additional risks, including exchange rate changes, political and economicupheaval, the relative lack of information about these companies, relatively low market liquidity andthe potential lack of strict financial and accounting controls and standards.
Investing in emerging markets involves greater risk than investing in more established markets such asrisks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates,adverse political developments and lack of timely information.
Fluctuations in the price of gold and precious metals often dramatically affect the profitability of thecompanies in the gold and precious metals sector. Changes in political or economic climate for thetwo largest gold producers, South Africa and the former Soviet Union, may have a direct effect on theprice of gold worldwide.
www.EndowmentWM.com
3
Stock Market record new highs driven by earnings turnaround following the anniversary of $USD surge and energy prices bottoming stocks are fully-, but not over-valued margins are likely sustainable Fed is accommodative inflation is tame lack of irrational exuberance
Point of ViewJuly 2016
www.EndowmentWM.com
ValuationS&P 500 vs. 17X actual and estimated earnings
4
S&P 500
17X S&P 500 actual and estimated earnings
1988Q4
1989Q4
1990Q4
1991Q4
1992Q4
1993Q4
1994Q4
1995Q4
1996Q4
1997Q4
1998Q4
1999Q4
2000Q4
2001Q4
2002Q4
2003Q4
2004Q4
2005Q4
2006Q4
2007Q4
2008Q4
2009Q4
2010Q4
2011Q4
2012Q4
2013Q4
2014Q4
2015Q4
2016Q4
2017Q4
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
S&P
500
Inde
x
This is not a forecast or prediction.It’s simply a calculation of 17X actual and estimated S&P 500 earnings.
1 2015 (actual), 2016 (estimated) and 2017 (estimated) bottom-up S&P 500 operating earnings per share as of June 29, 2016: for 2015, $117.46; for 2016(e), $118.62; for 2017(e), $135.63. Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S survey of consensus estimates. Standard and Poor’s for index price data through June 30, 2016; and actual earnings data through 2014.
5
Earnings recessionS&P 500 earnings and forecasts – with and without energy + materials
Source: Standard & Poor’s. Earnings estimates are based on the Capital IQ consensus forecast. Actual data through Q1 2016. Data as of June 30, 2016.
According to Standard & Poor’s forecasts, earnings are on a +12% growth trajectory through the end of 2017.
+12% might be too optimistic but just half of that would be fine.
S&P 500 earnings
Forecast
S&P 500 earnings ex-energy and …
Actual
+12% y/y trendline
$20.00
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
$34.00
$36.00
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
S&P
500
quar
terly
ope
ratin
g ea
rnin
gs ($
)
www.EndowmentWM.com
6 Source: Federal Reserve major currencies index. Data through June 2016. Federal Reserve, Remarks by Chairman Alan Greenspan before the Economic Club of New York, March 2, 2004.
Economic dataU.S. Dollar index
$USD stabilization for over a year.
“… no model projecting directional movements in exchange rates is significantly superior to tossing a coin.”-- Alan Greenspan1
March 2015
60
70
80
90
100
110
120
130
140
150
1973-01
1975-01
1977-01
1979-01
1981-01
1983-01
1985-01
1987-01
1989-01
1991-01
1993-01
1995-01
1997-01
1999-01
2001-01
2003-01
2005-01
2007-01
2009-01
2011-01
2013-01
2015-01
$USD
Inde
x (M
arch
197
3 =
100)
+35%
+39%
+54%
7
Earnings recessionS&P 500 earnings & the $USD
Sources: Federal Reserve and Standard & Poor’s. Earnings estimates are based on the Capital IQ consensus forecast. Actual earnings data through Q1 2016; actual $USD data through Q2 2016.
2014-15 surge in the $USD was a key cause of the earnings recession.
With $USD stabilization and rising oil prices earnings are forecast to surge in 2016 and 2017.
y/y % change $USD(right axis)
S&P 500 operating earnings(left axis)
-15
-10
-5
0
5
10
15
20
25
$80.00
$90.00
$100.00
$110.00
$120.00
$130.00
$140.00
Dec-10
Mar-11
Jun-2011
Sep-11
Dec-11
Mar-2012
Jun-12
Sep-2012
Dec-12
Mar-2013
Jun-13
Sep-2013
Dec-13
Mar-2014
Jun-14
Sep-2014
Dec-14
Mar-2015
Jun-15
Sep-2015
Dec-15
Mar-2016
Jun-16
Sep-2016
Dec-16
Mar-2017
Jun-17
Sep-2017
Dec-17
y/y
% c
hang
e $U
SD (%
)
S&P
500
oper
atin
g ea
rnin
gs p
er sh
are
actual earnings estimated earnings
8
Market dataS&P 500
Source: Standard & Poor’s. data through July 11, 2016.
flat 18 months
9/17/15 Fed defers
on rate hike
October 2014QE3 ends,
Fed rate hike jitters,global slowdown worries
-9.8%
12/11/15Third Avenue
suspends redemptions
-4.3%
7/8/16Strong June jobs report
1/29/14Fed begins QE taper -6.1%
April 2014Ukraine-4.4%
7/30/14Fed reaffirms
taper will conclude QE
by October 2014-4.3%
12/17/14Fed to be"patient"
raising rates
-5.1%
6/29/15Greek vote
8/24/15flash crash;
China devaluation, global slowdown
worries-11.2%
10/22/15ECB, China signal more
stimulus
12/16/15 Fed rate
hike
2/12/16China, global
slowdown worries, oil-12.0%
3/4/16Strong Feb jobs report,
oil rally
4/1/16 Strong Mar jobs report
6/24/16Brexit
-5.3%
1700
1750
1800
1850
1900
1950
2000
2050
2100
2150
2200
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
S&P
500
Stock market equilibriumS&P 500 total return
Source: Standard & Poor’s Corporation. Data through July 8, 2016. 1Total return includes dividends reinvested.
2015 and 2016-to-date have marked a leveling out in the stock market and two long-anticipated corrections following the extraordinary uninterrupted four-year recovery run.
The market’s relentless, low-volatility surge higher was driven by a post-recession reversion back to normal valuation.
See next slide.
Let’s put it into perspective.
August 2011-14% correction
1500
2000
2500
3000
3500
4000
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
S&P
500
tota
l ret
urn
inde
x 2/16-13%
8/15-12%
8/11-16%
+77%+19% per year
9
10Sources: Standard & Poor’s Corporation. P/E ratio calculated on operating earnings. Stock price data through June 30, 2016. Latest data point: 2099 ÷ trailing earnings of $116.61 through 3/31/16 = 18.0X.
Stock market equilibriumValuation – S&P 500 P/E ratio
Post-recession, the stock market’s P/E ratio took three years to revert back to normal.
That sustained upward re-valuation pressure helps to explain the market’s relentless, low-volatility three-year surge higher.
With that re-valuation tailwind now past, the stock market has been more susceptible to volatility.
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
2015Q4
2015Q1
2014Q2
2013Q3
2012Q4
2012Q1
2011Q2
2010Q3
2009Q4
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
1999Q2
1998Q3
1997Q4
1997Q1
1996Q2
1995Q3
1994Q4
1994Q1
1993Q2
1992Q3
1991Q4
1991Q1
1990Q2
S&P
500
P/E
Ratio
P/E ↑ from 12X
to 18X
11Sources: Standard & Poor’s Corporation and Thomson Reuters I/B/E/S earnings estimates, BEA. Stock price data through June 30, 2016; inflation data through Q1 2016. Top panel, latest data point: 2099 ÷ trailing earnings of $116.61 through 3/31/16 = 18.0.
ValuationS&P 500 P/E ratio vs. inflation
The S&P 500’s latest P/E ratio (6/30/16) on trailing 12-months operating earnings is 18.0X.
It is 15.5X on consensus bottom-up 2017 operating earnings.
Inflation(left axis)
S&P 500 P/E ratio(right axis)
17.9X
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
-1.0
4.0
9.0
14.0
19.0
24.0
12/31/196006/30/196212/31/196306/30/196512/31/196606/30/196812/31/196906/30/197112/31/197206/30/197412/31/197506/30/197712/31/197806/30/198012/31/198106/30/198312/31/198406/30/198612/31/198706/30/198912/31/199006/30/199212/31/199306/30/199512/31/199606/30/199812/31/199906/30/200112/31/200206/30/200412/30/200506/30/200712/31/200806/30/201012/31/20116/30/201312/31/20146/30/2016
S&P
500
P/E
Ratio
Pers
onal
Con
sum
ptio
n Ex
pend
iture
s Def
lato
r(y
/y %
cha
nge)
12
Stock market arithmeticTotal return = 7.0% earnings-driven price + 2.3% dividends reinvested
The 2011-2014 run higher put these two indices slightly above their long-term trajectories. Today they are in line.
+9.3% per year S&P 500 total return over the last 25 years is right in line with the stock market’s long-term returns going back to 1926, or back even further to 1871.3
Source: Standard and Poor’s. Data through July 8, 2016.1 Compound annual growth rate. 2 S&P 500 total return index. 3 per Professor Jeremy Siegel’s seminal Stocks for the Long Run, first published in 1994.
S&P 500 w/ dividends
reinvested2
S&P 500
+9.3%1 growth path
+7.0%1 growth path
0
100
200
300
400
500
600
700
800
900
Jul-91
Jul-92
Jul-93
Jul-94
Jul-95
Jul-96
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
S&P
500
Inde
x(6
/30/
91 =
100
)
This was a bubble.
13
Economy
Q1 GDP – weakness from “I” investment strong growth in: personal income, DPI, real DPI, real DPI
per capita, retail sales strong household balance sheets, savings rate and record
low household financial obligations ratio rising LEI, rebounding PMIs, strong hiring, record high job
openings, declining unemployment rate, record low weekly unemployment claims, strong car sales, rising housing starts
no inflation threat
Point of ViewJuly 2016
www.EndowmentWM.com
14 Source: Bureau of Economic Analysis, data through March 2016.
Economic data Contributions to GDP growth: C + I + G + Net Exports
% c
hang
e at
ann
ual r
ate
Don’t be surprised if we get a +3.0% quarter this year.
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0 2
003-
I 2
003-
IV 2
004-
III 2
005-
II 2
006-
I 2
006-
IV 2
007-
III 2
008-
II 2
009-
I 2
009-
IV 2
010-
III 2
011-
II 2
012-
I 2
012-
IV 2
013-
III20
14-II
2015
-I20
15-IV
Personal consumptionexpenditures
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
200
3-I
200
3-IV
200
4-III
200
5-II
200
6-I
200
6-IV
200
7-III
200
8-II
200
9-I
200
9-IV
201
0-III
201
1-II
201
2-I
201
2-IV
201
3-III
2014
-II
2015
-I
2015
-IV
Gross private domestic investment
average = 0.7%
3-quarter inventory correction
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
200
3-I
200
3-IV
200
4-III
200
5-II
200
6-I
200
6-IV
200
7-III
200
8-II
200
9-I
200
9-IV
201
0-III
201
1-II
201
2-I
201
2-IV
201
3-III
2014
-II20
15-I
2015
-IV
Government consumption and gross investment
recovering
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
200
3-I
200
3-IV
200
4-III
200
5-II
200
6-I
200
6-IV
200
7-III
200
8-II
200
9-I
200
9-IV
201
0-III
201
1-II
201
2-I
201
2-IV
201
3-III
2014
-II
2015
-I
2015
-IV
Net exports of goods and services
Q1 ∆GDPConsumption +1.0%Investment -0.3%Government +0.1%Net Exports +0.2%Total +1.1%
15 Source: Bureau of Economic Analysis, monthly data through May 2016. 1Compound annual growth rate.
Economic data – consumer spendingConsumer income, spending and saving
Nominal DPI drives spending, spending drives GDP and corporate earnings.
The savings rate (5.3%) has recently run higher and has remained substantially higher than it was pre-crisis.
Disposable Personal Income
(left scale)
Personal Outlays(70% of GDP)
(left scale)
Personal Saving (right scale)
Shaded bands represent recession.
0
500
1,000
1,500
2,000
2,500
3,000
1,000
3,000
5,000
7,000
9,000
11,000
13,000
15,000
1995-Jan 1995-Jul 1996-Jan 1996-Jul 1997-Jan 1997-Jul 1998-Jan 1998-Jul 1999-Jan 1999-Jul 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul 2011-Jan 2011-Jul 2012-Jan 2012-Jul 2013-Jan 2013-Jul 2014-Jan 2014-Jul 2015-Jan 2015-Jul 2016-Jan
$ bi
llion
s SAA
R
DPI 7/02-7/07
+5.3%1
DPI 5/15-5/16
+4.1%
Personal outlays
5/15-5/16+3.7%
16 Source: Bureau of Economic Analysis, monthly data through May 2016. 1Compound annual growth rate.
Economic data – consumer spendingReal consumer income and spending
Growing faster than pre-recession.
Income stagnation is a fiction
Real Disposable Personal Income
Shaded bands represent recession.
Real Personal Outlays
6,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
15,000
1995-Jan 1995-Jul 1996-Jan 1996-Jul 1997-Jan 1997-Jul 1998-Jan 1998-Jul 1999-Jan 1999-Jul 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul 2011-Jan 2011-Jul 2012-Jan 2012-Jul 2013-Jan 2013-Jul 2014-Jan 2014-Jul 2015-Jan 2015-Jul 2016-Jan
billi
ons (
$) S
AAR
Real DPI 7/02-7/07
+2.8% CAGR1
Real DPI 5/15-5/16
+3.2%
17Source: Bureau of Economic Analysis, quarterly data through March 2016. 1Compound annual growth rate. 2Surge in compensation paid prior to 2013 tax hike.
Economic data – consumer spending Real per capita purchasing power
Real per capita after-tax income is growing faster than pre-recession.
Income stagnation is a fiction.
Shaded bands represent
recessions.
24,000
26,000
28,000
30,000
32,000
34,000
36,000
38,000
40,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Real
Disp
osab
le P
erso
nal I
ncom
e pe
r Cap
ita(c
hain
ed 2
009
dolla
rs)
Real DPI per Capita (2)
+2.5% y/y
+1.8% CAGR1
2002-2007
18
Eco
nom
ic d
ata
Reta
il sa
les
Source: The Wall Street Journal, June 15, 2016.
Dismal comp store sales for Neiman, Macy’s, Nordstrom, Kohl’s, Gap … but, overall retail sales are booming.
Major retail channel shift continues.
www.EndowmentWM.com
19
Economic data Retail sales
Source: U.S. Census Bureau. Data through May 2016.
Services (44% of total GDP)
Government Consumption(18% of total GDP)
Investment(17% of total GDP)
Booming trend in retail sales growth.
Despite soft comp-store sales at Macy’s, Nordstrom, Kohl’s, Gap and more.
10/06-10/07+3.1%
Shaded band represents recession.
Retail sales ex-gasoline
5/15-5/16+3.7%Total retail sales
280,000
300,000
320,000
340,000
360,000
380,000
400,000
420,000
440,000
Jan-2005M
ay-2005Sep-2005Jan-2006M
ay-2006Sep-2006Jan-2007M
ay-2007Sep-2007Jan-2008M
ay-2008Sep-2008Jan-2009M
ay-2009Sep-2009Jan-2010M
ay-2010Sep-2010Jan-2011M
ay-2011Sep-2011Jan-2012M
ay-2012Sep-2012Jan-2013M
ay-2013Sep-2013Jan-2014M
ay-2014Sep-2014Jan-2015M
ay-2015Sep-2015Jan-16M
ay-16
Reta
il sa
les
($m
illio
ns)
20
Economic data Retail sales by category
Source: U.S. Census Bureau. Data through May 2016.
Services (44% of total GDP)
Government Consumption(18% of total GDP)
Investment(17% of total GDP)
motor vehicles and parts dealers
general merchandise incl. dept. storesfood and beverage storesfood services and drinking places +6.4% y/y
non-store retailers (internet retailers) +11.4% y/y
building materials and garden equip dealers +8.2% y/y
health and personal care stores +8.2% y/y
clothing and accessories storesdepartment stores -5.6% y/ymiscellaneous storeselectronics and appliance stores
sporting goods, hobbies, books and music stores
furniture and home furnishings stores
Dying retail format: Macy’s, Gap, Nordstrom, et al
gasoline stations
Shaded band represents recession.
-5,000
5,000
15,000
25,000
35,000
45,000
55,000
65,000
75,000
85,000
95,000
Jan-2005
May-2005
Sep-2005
Jan-2006
May-2006
Sep-2006
Jan-2007
May-2007
Sep-2007
Jan-2008
May-2008
Sep-2008
Jan-2009
May-2009
Sep-2009
Jan-2010
May-2010
Sep-2010
Jan-2011
May-2011
Sep-2011
Jan-2012
May-2012
Sep-2012
Jan-2013
May-2013
Sep-2013
Jan-2014
May-2014
Sep-2014
Jan-2015
May-2015
Sep-2015
Jan-16
May-16
Reta
il sa
les
($ m
illio
ns)
Sources: Bureau of Economic Analysis, actual data through March 2016; The Wall Street Journal survey taken June 2016.
Consensus GDP forecastSteady expansion expected
The 70 economists surveyed in early June see an average +2.4% rate of quarterly GDP growth ahead, in line with the +2.5% actual two-year GDP growth.
Despite Q1 weakness it’s a Goldilocks forecast … healthy economic growth with benign inflation.
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
1997-I
1997-IV
1998-III
1999-II
2000-I
2000-IV
2001-III
2002-II
2003-I
2003-IV
2004-III
2005-II
2006-I
2006-IV
2007-III
2008-II
2009-I
2009-IV
2010-III
2011-II
2012-I
2012-IV
2013-III
2014-II
2015-I
2015-IV
2016-III(E)
Real
GDP
Q/Q
% c
hang
e(an
nual
ized)
Actual and Forecast
Q1 2011Japan
tsunami
3-quarter average +2.4%
Q1 2014 East Coast
winterQ4 2012 Hurricane
Sandy
Q1 2015 East Coast
winter, West Coast dock
strike
21
The Conference Board Leading Economic Index® (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers’ new orders – consumer goods and materials; 4) ISM index of new orders; 5) manufacturers’ new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index™; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations.
Source: ©The Conference Board. Data through May, released June 23, 2016.
Economic dataU.S. index of leading economic indicators
22
The LEI ticked down in May but continues to trend higher, suggesting continued growth ahead.
This chart shows how the LEI has definitively rolled over well in advance of the last two recessions.
Shaded areas represent recession.
Economic data rest-of-worldWorld GDP growth forecasts – improving growth expected
Source: OECD, Economic Outlook, June 2016.
2013-2015Actual
2016-2017Forecast
-4
-2
0
2
4
6
8
Euro Area U.S. Japan China Brazil India
GDP
Gro
wth
(% C
hang
e Y/
Y)
23
24
Fed policy first rate hikes have signaled stock market strength the Fed manages the yield curve the Fed has created every recession since the 1950s twin mandate points to continued dovish policy for
now
Point of ViewJuly 2016
www.EndowmentWM.com
Federal Reserve policy… it’s the last rate hike that matters
Initial fed funds rate hikes have caused the stock market to stutter.
But, following the initial stutter stocks have continued higher even as the Fed has repeatedly hiked rates … until fed funds have approximated bond yields.
Sources: NBER, Federal Reserve and Standard & Poor’s. Data through July 11, 2016.
S&P 500
Shaded bands represent recession.
Fed Funds
0
2
4
6
8
10
12
14
0
250
500
750
1000
1250
1500
1750
2000
Jul-83
Sep-84
Nov-85
Jan-87
Mar-88
May-89
Jul-90
Sep-91
Nov-92
Jan-94
Mar-95
May-96
Jul-97
Sep-98
Nov-99
Jan-01
Mar-02
May-03
Jul-04
Sep-05
Nov-06
Jan-08
Mar-09
May-10
Jul-11
Sep-12
Nov-13
Jan-15
Mar-16
Fed
Fund
s (%
)
S&P
500
Inde
x
25
Federal Reserve policyFed’s key policy lever is the yield curve
Steep yield curves –high bond yields compared to Fed Funds rates – are consistent with strong GDP growth.
Flat or negative yield curves have preceded recessions.
Today the yield curve is positive but less than half as steep as immediately post-recession.
The Fed has been saying that rate hikes are likely to be very gradual from here.
Sources: NBER, Federal Reserve. Data through July 11, 2016. 1The differential between the interest rate on Fed Funds (short term) and the 10-year Treasury bond (long term).
Shaded bands represent recession.
Yield Curve1
-1.5
-0.5
0.5
1.5
2.5
3.5
Jul-83Jul-84Jul-85Jul-86Jul-87Jul-88Jul-89Jul-90Jul-91Jul-92Jul-93Jul-94Jul-95Jul-96Jul-97Jul-98Jul-99Jul-00Jul-01Jul-02Jul-03Jul-04Jul-05Jul-06Jul-07Jul-08Jul-09Jul-10Jul-11Jul-12Jul-13Jul-14Jul-15Jul-16
10-y
ear T
reas
ury
Yiel
d -F
ed F
unds
(%)
26
Federal Reserve policyDual mandate, dovish Fed
See footnotes in the notes to the slide.
Fed’s dual mandate: full employment 2% inflation
With inflation still well below 2% the Fed might stay very dovish for awhile yet. It may take until well into 2017 to regain full employment.
Shaded band represents recession.
PCED
+0.9%
June 2016 forecast (solid)
2011 forecast(dotted)
Core PCED
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-04Jun-04N
ov-04Apr-05Sep-05Feb-06Jul-06Dec-06M
ay-07O
ct-07M
ar-08Aug-08Jan-09Jun-09N
ov-09Apr-10Sep-10Feb-11Jul-11Dec-11M
ay-12O
ct-12M
ar-13Aug-13Jan-14Jun-14N
ov-14Apr-15Sep-15Feb-16Jul-16Dec-16M
ay-17O
ct-17M
ar-18Aug-18
Pric
e In
dex
for P
erso
nal
Cons
umpt
ion
Expe
nditu
res
12-m
onth
per
cent
chan
ge (%
)
Fed’s central tendency forecasts
U-3
4.9%
U-6
9.6%
2
4
6
8
10
12
14
16
18
Une
mpl
oym
ent r
ate
(%)
27
28
Inflation PCED headline +1.1%, more in the core but
still far from the Fed’s +2% target employment costs steady and still tame productivity and declining unit labor costs how you experience inflation depends on
what you consume
Point of ViewJuly 2016
www.EndowmentWM.com
InflationPCE – headline and core
Headline inflation (PCE) has plunged and partially recovered with the plunge in gasoline, diesel and fuel oil prices.
Inflation ex-food and energy (core PCE) is higher than core but still below the Fed’s 2% target.
Source: NBER, Federal Reserve Bank of St. Louis. Data through May 2016.
2% target
+1.5% core
+0.9% headline
Shaded bands represent recessions.
Core PCE
PCE
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-95O
ct-95Jul-96Apr-97Jan-98O
ct-98Jul-99Apr-00Jan-01O
ct-01Jul-02Apr-03Jan-04O
ct-04Jul-05Apr-06Jan-07O
ct-07Jul-08Apr-09Jan-10O
ct-10Jul-11Apr-12Jan-13O
ct-13Jul-14Apr-15Jan-16
Pric
e In
dex
12-m
onth
per
cent
chan
ge (%
)
29
How you experience inflation depends on what you consume.
InflationInflation by expenditure category
Food
Airfare
Medical care
Education
Information technology
CPI
1%
Housing2%
3%
4%
-4%
60
70
80
90
100
110
120
130
140
150
160
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16
Inde
x(Ja
n. 2
005
= 10
0)
TransportationApparelRecreationNew and used vehicles
Source: BLS. Data through April 2016. Dotted lines indicate compound annual growth rate trajectories at rates indicated. 30
31
Bond Yields forecasts have grossly missed forecast for steady rise to 3.35% real yield suggests nominal yield could be higher pressure on yields from declining federal deficit pressure on yields from ECB’s QE capping euro
bond yields value in munis
Point of ViewJuly 2016
www.EndowmentWM.com
Source: Federal Reserve. Data through July 8, 2016.1 Average of economists’ forecasts from The Wall Street Journal ‘s monthly surveys taken November 2011, January 2014, September 2014, January 2015 and December 2015.
Bond yields Much lower than expected bond yields
Forecasts have been consistently and horribly wrong.
Where yields go from here depends on the inflation data and supply and demand for bonds.
Inflation is very low and apt to remain so. The rate of net new supply of U.S Treasury bonds will be close to flat. The ECB is in the driver’s seat with its QE.
QE 1 QE 2
3/2/11: Bill Gross: with the end of QE2, bond yields are likely to go "higher, maybe even
much higher."
1.43%
QE 3
1.37%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
Jan-08Apr-08Jul-08O
ct-08Jan-09Apr-09Jul-09O
ct-09Jan-10Apr-10Jul-10O
ct-10Jan-11Apr-11Jul-11O
ct-11Jan-12Apr-12Jul-12O
ct-12Jan-13Apr-13Jul-13O
ct-13Jan-14Apr-14Jul-14O
ct-14Jan-15Apr-15Jul-15O
ct-15Jan-16Apr-16Jul-16O
ct-16Jan-17Apr-17Jul-17O
ct-17
10-y
ear U
.S. T
reas
ury
Bond
Yie
ld (%
)
32
33 Source: Federal Reserve. Data through July 5, 2016.
Bond yields – why so low? U.S. Treasury bond yields – nominal and TIPS
Quantitative easing (QE) has driven bond yields steadily lower.
Although the Federal Reserve is no longer purchasing bonds (QE), the ECB is, having a like effect on U.S. bond yields.
See next chart.
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2003-012003-052003-092004-012004-052004-092005-012005-052005-092006-012006-052006-092007-012007-052007-092008-012008-052008-092009-012009-052009-092010-012010-052010-092011-012011-052011-092012-012012-052012-092013-012013-052013-092014-012014-052014-092015-012015-052015-092016-012016-05
Yiel
d (%
)
U.S. Treasury Bond Yields10-year Maturity
Recession QE Nominal Yield TIPS Yield
34 Source: The Wall Street Journal. Data through July 6, 2016.
Bond yields – why so low? U.S. Treasury bond yield vs. German bund yield
Yields moving in lock-step.
The ECB is in control of U.S. Treasury yields.
The ECB plans to continue their QE program until further notice.
-0.2
0.3
0.8
1.3
1.8
2.3
2.8
7-Apr
21-Apr
5-May
19-May
2-Jun
16-Jun
30-Jun
14-Jul
28-Jul
11-Aug
25-Aug
8-Sep
22-Sep
6-Oct
20-Oct
3-Nov
17-Nov
1-Dec
15-Dec
29-Dec
12-Jan
26-Jan
9-Feb
23-Feb
8-Mar
22-Mar
5-Apr
19-Apr
3-May
17-May
31-May
14-Jun
28-Jun
Yiel
d (%
)
German bund yield U.S. Treasury bond yield
35
Market dataMunicipal bonds
Source: Federal Reserve, bond buyer GO 20-bond municipal bond index. Data through June 2016.
Municipals’ spread-to-Treasuries is attractive.
Municipal Bond Index
Muni spread over/under 10-year
Treasury
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1965-011966-041967-071968-101970-011971-041972-071973-101975-011976-041977-071978-101980-011981-041982-071983-101985-011986-041987-071988-101990-011991-041992-071993-101995-011996-041997-071998-102000-012001-042002-072003-102005-012006-042007-072008-102010-012011-042012-072013-102015-12016-4
Perc
ent (
%)
Shaded bands represent recession.
36
Crude oil price rebound with cut in global supply 22 consecutive oversupply months still 0.7 mmbpd supply/demand imbalance U.S. rig count collapse, production down
only slightly (so far)
Point of ViewJuly 2016
www.EndowmentWM.com
37
OilWorld crude oil supply vs. consumption
Source: U.S. Energy Information Agency, Short-Term Energy Outlook, June 2016, data through May 2016. Includes condensate and natural gas liquids.
In 2014, 2015 and so far in 2016, global supply surged, outstripping demand growth, driving prices down.
Supply has now outstripped demand for 22 consecutive months.
0.7 mmbpd oversupply.
Supply(solid, left axis)
Consumption(dotted, left axis)
WTI(right axis)
0
20
40
60
80
100
120
140
160
180
200
85
87
89
91
93
95
97
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
WTI
pric
e pe
r bar
rel (
$)
Mill
ion
barr
els p
er d
ay
38
OilU.S. drilling plunge
Source: U.S. Energy Information Agency, Baker Hughes. Rig count through July 8, 2016. Crude oil production through July 1, 2016.
8.43 mmbpd production. Peaked at 9.61 mmbpd in June 2015.
351 rig count. Peaked at 1,609 in October 2014.U.S. crude oil
production(left axis)
U.S. oil rig count(right axis)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
4.50
4.75
5.00
5.25
5.50
5.75
6.00
6.25
6.50
6.75
7.00
7.25
7.50
7.75
8.00
8.25
8.50
8.75
9.00
9.25
9.50
Jul-87Jul-88Jul-89Jul-90Jul-91Jul-92Jul-93Jul-94Jul-95Jul-96Jul-97Jul-98Jul-99Jul-00Jul-01Jul-02Jul-03Jul-04Jul-05Jul-06Jul-07Jul-08Jul-09Jul-10Jul-11Jul-12Jul-13Jul-14Jul-15
U.S.
oil
rig c
ount
U.S.
oil
prod
uctio
n (m
mbp
d)
39
Federal budget CBO’s March 2016 forecast looks good for a few years … … but the entitlements problem hasn’t
gone away rising debt/GDP ratio low U.S. tax burden allows flexibility to
solve long-term entitlements problem
DebtU.S. government debt
www.EndowmentWM.com
40
Medicare and Medicaid
Other Federal Noninterest Spending
Federal deficit and debtFederal revenues and outlays – a rising spending problem
Source: Congressional Budget Office, Updated Budget Projections: 2016 to 2026, dated March 2016.1 American Taxpayer Relief Act.
Widening, gap between outlays
and revenues through 2026.
Revenues
Forecast
Average Revenues1966 to 2015
(17.4%)
Outlays
Average Outlays1966 to 2015
(20.2%)
Actual13.0
15.0
17.0
19.0
21.0
23.0
25.0
1966196819701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014201620182020202220242026
Perc
ent o
f GDP
(%)
The ATRA1 tax hikes of 2013 help push tax revenue up to 18% of GDP.
Federal deficit and debtFederal deficits % of GDP
CBO is projecting low growth in federal borrowing requirements through 2018.
Source: Congressional Budget Office, Updated Budget Projections: 2016 to 2026, dated March 2016.
Average 1966-2015
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
1966196719681969197019711972197319741975197619771978197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023202420252026
Perc
ent o
f GDP
(%)
---- projected ----
Federal Deficits % of GDP
41
42Source: IMF, World Economic Outlook Database, October 2014 and April 2016. Data for years (from left to right) 2011-2021. Actual (black) and forecast (red).
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
Federal deficit and debtGovernment debt-to-GDP ratios (2011-2021)
0
20
40
60
80
100
120
140
160
180
Greece Japan Portugal Italy Ireland France UnitedKingdom
UnitedStates
Spain Germany Canada Australia
Debt
/ GD
P (%
)
2011-2021
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
Federal deficit and debtProjected federal spending1 through 2050
Defense (+0.4%)
All other discretionary (+0.0%)
Entitlements are on autopilot and interest expense keeps growing as a share of total spending as the debt accumulates.
Source: Congressional Budget Office (CBO), The 2015 Long-Term Budget Outlook, June 2015. 1CBO’s 10-year and extended baselines are meant to serve as benchmarks for measuring the budgetary effects of proposed changes in federal revenues or spending. They are not meant to be predictions of future budgetary outcomes; rather, they represent CBO’s best assessment of how the economy and other factors would affect revenues and spending if current law generally remained unchanged.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
2015201620172018201920202021202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045204620472048204920502051
Perc
ent o
f GDP
(%)
Stac
ked
Char
t
Interest Expense
Medicaid, CHIP and Exchange Subsidies
Medicare
Social Security
Defense and OtherDiscretionary
CBO’s latest 2015-26 projections, previous slides.
43
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
Federal deficit and debtFederal debt % of GDP through 2040
Source: Congressional Budget Office (CBO), The 2015 Long-Term Budget Outlook, June 2015. 1CBO’s 10-year and extended baselines are meant to serve as benchmarks for measuring the budgetary effects of proposed changes in federal revenues or spending. They are not meant to be predictions of future budgetary outcomes; rather, they represent CBO’s best assessment of how the economy and other factors would affect revenues and spending if current law generally remained unchanged.
Revolutionary WarLouisiana Purchase Civil War
WWI
GreatDepression
WWII
Rising Deficits1980s
Extended baseline
projection1
-10
10
30
50
70
90
110
130
179017951800180518101815182018251830183518401845185018551860186518701875188018851890189519001905191019151920192519301935194019451950195519601965197019751980198519901995200020052010201520202025203020352040
Perc
ent o
f GDP
(%)
ForecastActual
44
45Source: OECD, Revenue Statistics, 2015 Edition. 2014 data for all countries except 2013 data for Australia, Japan, Netherlands and Poland. Does not include non-OECD countries such as China, Brazil, India and Russia. Includes all forms of taxes: federal, state and local; income taxes, sales taxes, VAT taxes, estate taxes, property taxes, etc.
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
While the U.S. has the highest corporate tax rate, the U.S. has one of the lowest total tax burdens among developed economies.
The U.S.’s comparatively low tax burden allows flexibility in solving its long-term entitlement spending problem.
TaxesTaxes % of GDP – comparison
0.0
10.0
20.0
30.0
40.0
50.0
ChileKoreaU
nited StatesSw
itzerlandAustraliaTurkeyIrelandJapanCanadaSlovak RepublicIsraelPolandN
ew Zealand
United Kingdom
EstoniaSpainCzech RepublicPortugalG
reeceG
ermany
SloveniaN
etherlandsLuxem
bourgHungaryIcelandN
orway
Sweden
AustriaItalyFinlandBelgiumFranceDenm
ark
Tota
l tax
reve
nue
as a
per
cent
of G
DP (%
)
46
Jobs job formation has not been “anemic” new jobs will be limited at full-employment good news in full-time employed record job openings strong relative U.S. job formation forecast
long-term strong real wage and income growth mean and median incomes bottomed myth: “… but we’re not creating good jobs”
Point of ViewJuly 2016
www.EndowmentWM.com
Economic data - jobsNet new job formation and the unemployment rate
Source: Bureau of Labor Statistics. Data through June 2016.
Job growth stronger for longer in this recovery due to the depth of the last recession.
Job growth will decline as the unemployment rate sinks further.
287,000
Shaded bands represent recession.
4.9%
0
2
4
6
8
10
12
-850
-650
-450
-250
-50
150
350
550
Jan-95Sep-95M
ay-96Jan-97Sep-97M
ay-98Jan-99Sep-99M
ay-00Jan-01Sep-01M
ay-02Jan-03Sep-03M
ay-04Jan-05Sep-05M
ay-06Jan-07Sep-07M
ay-08Jan-09Sep-09M
ay-10Jan-11Sep-11M
ay-12Jan-13Sep-13M
ay-14Jan-15Sep-15M
ay-16
Une
mpl
oym
ent r
ate
(%)
Mon
thly
cha
nge
in to
tal n
onfa
rm p
ayro
lls (0
00)
47
48Source: U.S. Department of Labor, NBER. Data through April 2016, released June 8, 2016.
April job openings at record high.
Job growth is slumping as employers can’t find enough workers.
Economic data - jobsJob openings – record high
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Job
Ope
ning
sth
ousa
nds
Shaded bands represent recession.
49
Economic data - jobsLabor force participation rate1
Source: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis. Participation rate data through June 2016. Working age population: aged 15-64, data through March 2015. 1Labor force participation rate: the proportion of the civilian noninstitutional population 16 years of age and older either at work or actively seeking work.(247.4 million).
Participation rate is in a structuraldecline driven partially by demographics.
Recessions drive cyclical slides in the participation rate.
61.0
62.0
63.0
64.0
65.0
66.0
67.0
68.0
Jan-77Feb-78M
ar-79Apr-80M
ay-81Jun-82Jul-83Aug-84Sep-85O
ct-86N
ov-87Dec-88Jan-90Feb-91M
ar-92Apr-93M
ay-94Jun-95Jul-96Aug-97Sep-98O
ct-99N
ov-00Dec-01Jan-03Feb-04M
ar-05Apr-06M
ay-07Jun-08Jul-09Aug-10Sep-11O
ct-12N
ov-13Dec-14Jan-16
Perc
ent (
%)
working age population ÷ total population
labor force participation rate
50
“Winning is crucial to my retirement plans.”
Saving and Investing for Retirement
www.EndowmentWM.com
51
Inve
stm
ent S
trate
gy
Wal
l Stre
et’s
sect
or c
alls
for 2
016
–sh
ould
you
take
thei
r adv
ice?
Source: Barron’s, December 14, 2015.
www.EndowmentWM.com
521 Published December 14, 2015.
Consumer Discretionary
Consumer Staples Energy Financials
Health Care Industrials
Information Technology Materials
Telecom Services Utilities
Federated Investors - + + + + -Blackrock - + + -Barclays Capital - - +Columbia Management + - -Goldman Sachs - - + + - -JPMorgan Chase + + - + - -Citi Research - + + - + -Morgan Stanley + - - + -Prudential + + - -BofA Merrill Lynch
Net (+/-) 0 -4 -2 +8 0 -1 +7 -5 -1 -5
Barron’s 2016 Forecast1
Survey of 10 stock market strategists’ sector picks and pans for 2016
Investment StrategyWall Street’s sector calls for 2016 – should you take their advice?
www.EndowmentWM.com
53
Investment Strategy S&P 2016 sector returns YTD – the strategists1 are a disaster
Source: Standard and Poor’s1 From Barron’s survey of 12 Wall Street strategists, published December 14, 2015.
Least favored
Neutral
Most favored
Most favored
Least favored
Least favored
Not favored
Neutral
Not favored
Not favored
-10.0 -5.0 0.0 5.0 10.0 15.0 20.0
Financials
Technology
Health Care
Consumer Discretionary
S&P 500
Industrials
Materials
Consumer Staples
Energy
Telecom Services
Utilities
S&P Sector Performance YTD thru 7-8-16 (%)
54
“The only value of stock forecasters is to make fortunetellers look good.” – Warren Buffet
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Investment Strategy Tactical asset allocation funds
Source: The New York Times, January 27, 2014. The Wall Street Journal, November 8-9, 2014.
55
Asset allocation and diversification do not guarantee a profit or eliminate the risk of loss.Source: Riskglossary.com
Modern portfolio theory was introduced by Harry Markowitz with his paper “Portfolio Selection,” which appeared in the 1952 Journal of Finance.
Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection.
Modern Portfolio Theory
Diversify
Optimize
Rebalance
Investment StrategyModern Portfolio Theory = Asset Allocation
www.EndowmentWM.com
56
Investment StrategyAsset Allocation — An ExampleLet’s construct a global balanced portfolio using 7 asset classes …
Large U.S. Stocks
Small U.S. Stocks
Non-U.S. Stocks
Bonds
Cash
Real Estate
Commodities
Stocks (43%)
Bonds (14%)
Cash (14%)
Real Estate (14%)
Commodities (14%)
Source: ©2012 The 7Twelve ™ Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large-cap USequity represented by the S&P 500 Index. Small-cap US equity represented by the Ibbotson Small Companies Index from 1970-1978, and the Russell 2000Index starting in 1979. Non-US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from 1970-1977 and the Dow JonesUS Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became theS&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays CapitalAggregate Bond index starting in 1976. Cash represented by 3-month Treasury Bills.
www.EndowmentWM.com
57
Investment StrategyAsset Allocation — An Example
1Compound annual growth rate.Past performance is not a guarantee of future results. An investment cannot be made directly in the indexes used in this illustration.Source: ©2016 The 7Twelve ™ Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large-cap USequity represented by the S&P 500 Index. Small-cap US equity represented by the Ibbotson Small Companies Index from 1970-1978, and the Russell 2000Index starting in 1979. Non-US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from 1970-1977 and the Dow JonesUS Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became theS&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays CapitalAggregate Bond index starting in 1976. Cash represented by 3-month Treasury Bills.
S&P 500 CAGR1
= +10.3%
Diversified Portfolio CAGR1
= +9.8%
50
500
5000
19691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015
Inde
x (1
/1/7
0=10
0)(lo
garit
hmic
scal
e)
Large US Equity
Small US Equity
Non-US Equity
Aggregate US Bonds
Cash
Real Estate
Commodities
Equally Weighted DiversifiedPortfolio
REITs CAGR1
= +11.5%
58
Investment StrategyAsset Allocation — MPT has delivered
Large US Stocks
SmallUS Stocks
Non-USStocks
Aggregate US Bonds
Cash
Real Estate
Commodities
Equally Weighted Diversified Portfolio
4
5
6
7
8
9
10
11
12
0 5 10 15 20 25 30
Com
poun
d An
nual
Ret
urn
(%)
Standard Deviation of Annual Returns (%)
Risk vs. Return by Asset Class1970-2015
www.EndowmentWM.com
59
Source: Federal Reserve and ©2015 The 7Twelve ™ Portfolio powerpoint presentation, by Craig Israelsen. Used with permission.1 3-year average annual return of the U.S. Aggregate Bond index represented by the Ibbotson Intermediate Term Bond Index from 1970-75 and the Barclays Capital Aggregate Bond index starting in 1976. Annual data through 2015.
Investment StrategyDeclining bond returns
Fixed income returns can no longer boost portfolio total returns as they have over the last 40 years.
Expect very modest fixed income returns going forward.
3-year average annual return of just +1.5%
Bond Index Annual Return1
10-year U.S. Treasury Yield
0
5
10
15
20
25
19721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015
Perc
ent (
%)
Bonds’ shrinking contribution to
portfolio returns.
60
Inve
stm
ent S
trate
gyM
anag
ing
clie
nt e
xpec
tatio
ns
Source: The Wall Street Journal, September 5-6, 2015.
Pension funds are trimming their total return assumptions.
average target of 7.68%
New portfolio arithmetic?
60/40 stocks/bondsstocks: .6 X 8% = 4.8%bonds: .4 X 1.5% = 0.6%
5.4%
my back of the envelope figures:
61
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