WHY BULL MARKETS DONT DIE OF OLD AGE CFA SOCIETY DAYTON May 29, - - PowerPoint PPT Presentation

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May 29, 2018

WHY BULL MARKETS DON’T DIE OF OLD AGE CFA SOCIETY DAYTON

Ryan Detrick, CMT Senior Market Strategist Vice President LPL Research

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LET’S TRY ONE MORE

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Why did God create economists?

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To make weather forecasters look good!

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Second Longest Recovery Since WWII, Can It Last?

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What Are Rate Hikes Telling Us?

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What About A Peak In Manufacturing?

The U.S. Institute for Supply Managers (ISM) manufacturing index is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change.

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WHO COULD IT BE?

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REALLY?

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Source: LPL Research, Strategas Research Partners 4/11/18

SIZE OF TARIFFS STILL DWARFED BY FISCAL STIMULUS

100 200 300 400 500 600 Steel 232 232 Retaliation China 301 301 Retaliation (est.) China 301 301 Retaliation (est.) Tax Cuts Spending Repatriation (est.)

$ Impact in 2018

Tariffs Estimated = $81.5 Billion Fiscal Policy = $800 Billion

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“Hubris sells, humility survives." Source Unknown

Source: StockCharts 3/6/18.

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One of Our Favorite Indicators

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Everyone Else In The Picture Was Arrested By That Guy

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"I can explain the motion of the heavenly bodies, but not the madness of people." Sir Isaac Newton

Source: StockCharts 3/6/18.

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Is the Bond Bull Market Over?

Source: StockCharts 5/9/18.

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What Scares You?

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What Scares You?

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What Scares You?

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What Scares You?

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What Scares You? Source: WHO

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What Scares You? Source: WHO

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The Yield Curve Shouldn’t Scare You

Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year, and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic

• utput and growth.

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High-Yield and Investment-Grade Spreads at Tightest Levels of Expansion

Yield Spread is the difference between yields on differing debt instruments, calculated by deducting the yield of one instrument from another. The higher the yield spread, the greater the difference between the yields offered by each instrument. The spread can be measure between debt instruments of differing maturities, credit ratings and risk. Source: LPL Research, Bloomberg, as of 2/13/2018.

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Use As A Diversifier

Source: LPL Research, Bloomberg, as of 2/13/2018. S&P 500 is used to represent stock performance and the Bloomberg Barclay’s US AGG Index is used to represent bonds.

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• Avg. High-Yield Bond Spread - Barclays

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Mortgage-backed securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, market and interest rate risk. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

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“The real key to making money in stocks is not to get scared

• ut of them.”

Peter Lynch

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This chart reflects S&P 500 Index data.

Second Largest Bull Market

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Room to Run?

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What Just Happened Is Normal

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Is January Telling Us Something?

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Sometimes We Ignore The Obvious

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Sometimes We Ignore The Obvious

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Source: LPL Research, FactSet 01/05/17 Indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Remember This One?

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This Makes No Sense

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Higher Volatility Doesn’t Equal A Bear Market

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“Who you gonna believe, me or your own eyes?” Groucho Marx

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Bonds Don’t Like Higher Rates, But Stocks Do

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What Can We Expect This Year? Don’t Ignore The Obvious

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Strong Earnings Growth Expected to Continue

120 125 130 135 140 145 150 155 160 165 170 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 $ Per Share S&P 500 EPS - Next 12 Months

Source: LPL Research estimates, FactSet as of 5/4/18

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Strong Earnings Growth Globally

Estimates may not develop as predicted. 2018 numbers are estimates. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. EPS is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the PE valuation ratio.

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Charlie Brown Shirt Bottom?

Source: FactSet 05/09/18 Note: Chart indicates S&P 500 Index performance.

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“Never confuse a single defeat with the final defeat."

• F. Scott Fitzgerald

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One Man’s Trash ….

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Another’s Treasure ….

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Emerging Markets Update

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Get Ready To Be Confused

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Internals Remain Strong

Source: LPL Financial, FactSet. 04/09/17 The advance/decline line (A/D) is a technical indicator that plots changes in the value of the advance-decline index over a certain time period. Each point on the chart is calculated by taking the difference between the number of advancing/declining issues and adding the result to the previous period's value.

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Economy Is Mature

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When Do Bull Markets Die?

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“If everyone is thinking alike, then somebody isn’t thinking." George S. Patton

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Investors Act Like This Sometimes

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Investors Act Like This Sometimes

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Why You Shouldn’t Always Sell In May

A simple moving average (SMA) is a simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react

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WHY IT PAYS TO THINK OUTSIDE THE BOX

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KEEPING THE DOCTOR HAPPY

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ENJOY THE MOMENT

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The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results. Estimates may not develop as predicted. Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Cyclical stocks typically relate to equity securities whose price is affected by ups and downs in the overall economy and companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. To the extent you are receiving investment advice from a separately registered independent investment advisor, please not that LPL Financial is not an affiliate

• f and makes no representation with respect with such entity.

Please see the Outlook 2018: Return of the Business Cycle publication for additional description and disclosure.

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Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit DEFINITIONS Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Small cap is a term used to classify companies with a relatively small market capitalization. The definition of small cap can vary, but it is generally a company with a market capitalization of between $300 million and $2 billion. The prices of small cap stocks are generally more volatile than large cap stocks. Large cap refers to a company with a market capitalization value of more than $10 billion. Yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the 3-month, 2-year, 5-year, and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. INDEX DEFINITIONS The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond

• market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-

agency). The Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measure the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. For Public Use | Tracking #1-733807 (Exp. 01/19)

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APPENDIX

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▪ Economy: As noted in our Outlook 2018: Return of the Business Cycle, we project real gross domestic product (GDP) growth of around 2.5% in 2018. This is in line with historical mid-cycle growth of the last 50 years. Economic growth is affected by changes to inputs such as business and consumer spending, housing, net exports, capital investments, and government spending. ▪ Stocks: As noted in our Outlook 2018: Return of the Business Cycle, our S&P 500 Index total return forecast of 8–10% (including dividends), is supported by a largely stable price-to-earnings ratio (PE) of 19 and our earnings growth forecast of 8–10%. Earnings gains are supported by our expectations of better economic growth, with potential added benefit from lower corporate tax rates. ▪ Bonds: As noted in our Outlook 2018: Return of the Business Cycle, we forecast flat to low-single-digit returns for the Bloomberg Barclays U.S. Aggregate Bond Index, based on our expectations for a gradual pickup in interest rates across the yield curve. We also expect the 10-year Treasury yield to end 2018 in the 2.75–3.25% range, based on our expectations for a modest pickup in growth and inflation.

Outlook 2018: Forecasts