2018 Market Outlook › wp-co… · 2018 market outlook. the advisors of brown wealth management...

2018 Market Outlook

THE ADVISORS OF BROWN WEALTH MANAGEMENT ARE LPL REGISTERED REPRESENTATIVES WITH AND SECURITIES OFFERED THROUGH LPL FINANCIAL, MEMBER FINRA/SIPC. INVESTMENT ADVICE OFFERED THROUGH STRATOS WEALTH PARTNERS,

LTD., A REGISTERED INVESTMENT ADVISOR. BROWN WEALTH MANAGEMENT AND STRATOS WEALTH PARTNERS ARE SEPARATE ENTITIES FROM LPL FINANCIAL.

THE ECONOMIC FORECASTS SET FORTH IN THE PRESENTATION MAY NOT DEVELOP AS PREDICTED AND THERE CAN BE NO GUARANTEE THAT STRATEGIES PROMOTED WILL BE SUCCESSFUL. ALL PERFORMANCE REFERENCED IS HISTORICAL AND IS

NO GUARANTEE OF FUTURE RESULTS. ALL INDICES ARE UNMANAGED AND MAY NOT BE INVESTED INTO DIRECTLY.

Please see important disclosures, chart explanations, summary and commentary at the end of this report.© Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html.

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Remarkable statistics for 20172017’S NOTABLE STATISTICS

1. The S&P 500 (total return) rose every month for the first time on record.

2. The S&P 500 (price only) has gone 282 trading days without a 3% correction, the longest run on record.

3. The DJIA hit 71 record highs, eclipsing old record of 69 in 1995.

4. The Russell 3000 Growth beat the Russell 3000 Value, continuing this decade’s pattern of Growth beating Value in odd

years and Value beating Growth in even years.

5. Thanks in part to FANGs, Technology comprises 23.8% of the S&P 500, the third highest weight of any sector after Tech

(1999-00) and Energy (1980-81).

6. Energy’s contribution to earnings (9.6% as of Q317) was the biggest year/year swing since Financials after the Great

Recession.

7. For the first time since 2002, crude oil was up while the S&P 500 Energy sector was down.

8. The U.S. Dollar Index posted its worst year since 2003 (-9.9%).

9. The median one-year correlation among S&P 500 stocks fell to its lowest level since 2001, yet domestic equity mutual funds

saw $236 billion outflows versus $178 billion inflows into domestic equity ETFs.

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YTD and Q4 Performance



Please see important disclosures, chart explanations, summary and commentary at the end of this report.

Please see important disclosures, chart explanations, summary and commentary at the end of this report.© Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at

www.ndr.com/copyright.html. For vendor disclaimers refer to www.ndr.com/vendorinfo/

Positives: We are only

eight years into this secular bull






Earnings growth is best in years






Market breadth looks healthy






The 2014-2016 consolidation paved the way

for this advance





Global economy on synchronized tear

Global Manufacturing PMIs (Heat Map)






Low probability of recession near term





Concerns: Sentiment remains extremely optimistic






We are due for at least a 5%

correction





Employment and output gaps have closed…a concern for inflation






Valuations, while stable, are no longer cheap






Mid-term elections could be a headwind

in 2018





A History of Bull and Bear markets






Positioning: Still overweight

equities





International was a winner in 2017. Remain overweight?





Could 2018 finally be the year for rising rates?





Watching indicators for signs of trouble




BWM TacticalPositioning

No strategy assures success or protects against loss.

OVERWEIGHT MARKETWEIGHT UNDERWEIGHT

Stocks

Bonds

Cash

U.S.

Large Cap

Mid/Small Cap

International

Credit

Duration


Bottom Line

• Market breadth, earnings and the global economy are all very positive

• Higher valuations, the lack of a pull back and excessive optimism pose a risk for the inevitable next correction

• What’s on tap for 2018? We are looking for evidence of rising rates, more volatility and a more meaningful correction before the bull resumes

• Watching indictors for signs of a more troubling pull back or a shift in strategy.

Questions?

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Executive Summary

• Slide 3 - points out notable statistics that occurred in 2017.

• Slide 5 - This chart compares the price action of the Dow Jones Industrial Average from its February 2009 bottom to its price action during the 192, 1942, and 1982 secular bull markets. Since its bottom in 2009, the DJIA has followed a price pattern consistent with the first few years of the three prior secular bulls: extended periods of strong positive performance (cyclical bulls) interlaced with relatively shallow periods of negative performance (cyclical bears).

• Slide 6 - This chart shows the relationship between the S&P 500 and the direction of earnings growth. The chart's top clip plots the S&P 500 Index's monthly close, while the bottom clip plots the year-to-year percent change in S&P 500 reported (GAAP) earnings per share. As shown in this chart, earnings growth is the best it has been in years.

• Slide 7 – The chart in this slide analyzes how healthy the market is, known as “Market Breadth”, from a technical perspective. he model, plotted in the lower clip of the chart, aggregates the signals of over 100 component indicators and generates a reading between 0% and 100%, reflecting the percentage of the component indicators which are currently giving bullish signals for the S&P 500 Index. The indicator still remains in the “bullish” zone.

• Slide 8 - One of the most overlooked observations on the market has been the three year trading range. The trading range over the past three years has been one of the tightest in history. Historically, this has resulted in a solid two year run for equities.

• Slide 9 - We continue to see improvement in the global economy, with NDR’s measures of economic breadth remaining at high levels. The share of individual-country PMIs in expansion territory also continued to stay at high levels with 91% in experiencing expansion. Almost 62% of the world’s PMIs have risen on a month-to-month basis, the most in nearly a year, while 82% of countries have PMIs above the level they were one year ago. The “Heat Map” on the right side of the slide supports this synchronization

• Slide 10 – NDR’s Global Recession Probability Model remains at low levels.

• Slide 11 – Optimism has continued to rise and is now at extreme levels. High levels of extreme optimism has typically been bad for equities.

• Slide 12 - The S&P500 has gone a lengthy time (374 days as of 12/28/17) without a 5% correction which is the longest on record. Typically, 5% corrections happen every 84 days during secular bull markets indicating that we might be due for a correction.

• Slide 13 - The difference between the unemployment rate and NAIRU is called the unemployment gap. If the unemployment gap is positive, then there is excess supply of labor, which puts downward pressure on wages and inflation. If the unemployment is at or below zero, then there is labor or skill shortages, which puts upward pressure on wages and inflation. If the unemployment gap continues to decline, we could see more inflationary pressure this year.

• Slide 14- The Chart on slide 14 shows that the S&P 500 valuations have stabilized as of late. However, the S&P is still currently overvalued, making stocks more expensive than they have been in the past.


Executive Summary

• Slide 15 - This chart follows the trend in the Dow Jones Industrials over a four-year presidential cycle based on daily data starting in the year 1900. In this graph, the trend is more important than the actual level of the Dow. As one can see, the chart shows that the mid-term elections could be a headwind in 2018.

• Slide 16 – The charts on this slide show the history of Bull and Bear markets going back to 1900. The current bull market is indicated by the black dot on the chart on the left. The average return for all bull markets has been an 85.5% gain over 567 trading days. The average returns for all bear markets has been -30.9% over 307 trading days.

• Slide 17 - This chart plots the performance of NDR’s Global Asset Allocation Recommendations versus a benchmark of 55% stocks, 35% bonds, and 10% cash. Currently, their model is overweight equities and underweight bonds and cash

• Slide 18 - US and International Market internals still remain favorable. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

• Slide 19 - We see the fair value on the 10-year treasury at 2.19%. This has remained relatively unchanged since last year. The chart on the right compares weekly dollar flows into mutual funds and exchange-traded funds (ETFs) that invest solely in bonds, both U.S. and internationally. For each clip, the bars represent the total weekly dollar flows, while the dashed lines track the 13-week moving average for the weekly flows. We will be keeping a close eye to these indicators to help determine if/when we will begin to see interest rates start rising.

• Slide 20 - The charts on slide 16 are two that we are watching for signs of major trouble for the stock market. The first is the NDR bear market watch indicator, which still remains in very healthy territory. The top clip plots the global stock price index, which is a blend of the MSCI World Index price returns prior to 1988 and the MSCI ACWI price returns thereafter. The bottom clip plots the percentage of Bear Watch indicators that have reached key bearish levels historically. As shown in the table at the bottom of the chart, there have been eight cases since October of 1985 where the percentage of indicators have risen above 40% for the first time in at least six consecutive months. The median drawdown over the next 12 months for all cases has been very high. The chart on the right aggregates the rally watch, top watch, and bearish watch indicators. As shown, all three are in the bullish zone. This could indicate that we are in a mature bull market.

• We remain overweight equities in our portfolios. This has been confirmed by our momentum indicators for U.S. and Global equities.

• We remain overweight stocks, underweight bonds, and marketweight cash.

• Within equities, we are overweight U.S. stocks –primarily overweight large cap, marketweight mid/small cap, and overweight international equities.

• Within fixed income, we are overweight credit and have a focus on owning bonds with shorter duration.

• The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

2018 Market Outlook › wp-co… · 2018 market outlook. the advisors of brown wealth management...

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