keep it simple: investing in pro-cyclical …...4 for one-on-one use with institutional investors...
TRANSCRIPT
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%
6For 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: 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%
7For 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: 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.
-20
-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%
9For 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: 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.
-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
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
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
15For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17
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
17For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17
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
18For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17
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
19For one-on-one use with institutional investors and investment professionals only. Not for public distribution.305635 4/17
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
20For 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: Equities outperformed fixed income
Sources: Bloomberg, Putnam.
-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%
21For 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: Growth and value alternate leadership
Sources: Bloomberg, Putnam.
-2
0
2
4
6
8
10
12
14
16
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%
24For 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: 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.
-6
-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%
26For 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 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