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Allison Spielman Advisors Outlook for 2014 and Beyond.
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Transcript of Allison Spielman Advisors Outlook for 2014 and Beyond.
Allison Spielman Advisors
Outlook for 2014 and Beyond
Education
Participation
5 Predictions• S&P 500 close on 12/31/2014• Developed International Market results relative to U.S.• Emerging International Market results relative to U.S.• 10-Year Treasury Yield on 12/31/2014• Percentage Growth or Decline in your Portfolio at end of
2014
Famous Predictions
“Stocks have reached what looks like a
permanently high plateau”
• Irving Fisher (well known early 20th century economist)• 10/21/1929• Dow lost 12.82% on 10/28/1929• Dow lost 11.76% on 10/29/1929
“There is no reason anyone would want a computer in
their home”
• Ken Olson (founder of Digital Equipment Corp.)
• 1977
“There’s no chance that the iPhone is going to get any
significant market share. No chance”
• Steve Ballmer• 2007
“Man will not fly for 50 years”
• Wilber Wright• 1901 (First successful flight was in 1903)
“Whatever happens the U.S. Navy is not going to be caught
napping”
• Frank Knox (Secretary of the Navy, 1940-1944)• 12/4/1941
“The Beatles have no future in show business”
• Decca Records executive to Brian Epstein (Beatles manager)• 1962
Types of Analysis• Technical
o Statisticalo Short-term Trendso History Repeatso Charts
• Fundamentalo Long-term Trendso Economic Factors
• Unemployment Rates• GDP Growth• Corporate Earnings
o News Stories
S&P 500• Mean Trailing P/E Ratio = 16X
S&P 500• Jan. 1926 through Dec. 2013: Mean return = 10.1%• Jan. 2009 through Dec. 2013: Compound return = 17.45%• Reversion to the mean• 46 times since 1925 the S&P 500 has generated 5 year
returns in excess of 10.1%.• 27 times (59%) the following year produced a return in
excess of 10.1%.
S&P 500• Unemployment Rate as Dec. 2013 = 6.7%
S&P 500
• 2013 Corporate Earnings up 6.1%• 2014 Projected Earnings Growth = 8.5%
S&P 500• U.S. Corporate CEOs expect increase in capital
expenditures• U.S. Corporate CEOs are concerned about tight profit
margins• 2013 Ends with weakest job growth in years• Many Americans feel economy isn’t improving
Your S&P 500 Projection
• Current = 1840.76
2014 S&P 500 Predictions:David Bianco – Deutsche Bank: S&P 500 = 1850Brian Belski - BMO: S&P 500 = 1900Barry Knapp – Barclays: S&P 500 = 1900David Kostin – Goldman Sachs: S&P 500 = 1900Michael Kurtz – Nomura: S&P 500 = 1925Sean Darby – Jefferies: S&P 500 = 1950Jonathan Golub – RBC: S&P 500 = 1950Julian Emanuel – UBS: S&P 5 = 1950Andrew Garthwaite – Credit Suisse: S&P 500 = 1960Tobias Levkovich – Citigroup: S&P 500 = 1975Savita Subramanian – BofA: S&P 500 = 2000Adam Parker – Morgan Stanley: S&P 500 = 2014John Stoltzfus – Oppenheimer: S&P 500 = 2014Tom Lee – JP Morgan: S&P 500 = 2075
Developed International
• Mean Trailing P/E Ratio = 15.3X• Current Trailing P/E Ratio = 11.6X
Developed International
• MSCI EAFE Mean Return = 10.0%• 5 years ending 12/31/2013 = 14.37%• Reversion to the Mean• 17 times the 5 year return exceeded 10.0%• 7 times (41%) the following year produced a return in
excess of 10.0%
Develop International• Unemployment rate was 12.0% as of 12/31/2013
Developed International
• Poor Start to European Earnings Season• Analysts are forecasting European profits for 2014
to increase by 13%
Developed International• President Barroso (European Council): “2013 was a
breakthrough year in terms of getting Europe’s economy back on track”
• Europe’s Economic Crisis could be Mutating Again: Deflation could be replacing debt as the main problem – and there’s nothing to suggest the ECB is up to the job.”
• Europe has agreed to the core elements of a banking union that mark the most significant pooling of national power since the birth of the Euro.
Your Developed International Projection
• Current = 1915.6
Emerging International• Mean Trailing P/E Ratio = 15.5X• Current Trailing P/E Ratio = 12.0X
Emerging International
• Emerging Market Mean Return = 12.1%• 5 years ending 12/31/2013 = 15.14%• Reversion to the Mean
Emerging International
• 2013 GDP Growth = 4.5%• 2014 Projected GDP Growth = 4.8%
Emerging International
• Fed taper could spark emerging market inflation• Argentina’s protracted fight with bondholders is clouding
its future.• Emerging countries will be paying back more debt than
they issue in 2014.
Your Emerging International Projection
• Current = 1002.7
10-Year Treasury• Historical average = 6.55%• 12/31/2013 yield = 3.04%
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
10 Year Treasury Yields 1962 - Present
10-Year Treasury• Due to their small yield advantage over U.S. Treasuries,
corporate bonds’ performance will likely remain closely tied to that of government bonds in 2014 – indicating that there is little room for them to deliver meaningful total returns.
• In 2013, the benchmark 10-year note Treasury yield already saw a fairly sizeable increase from 1.69% in late December 2012, to an intraday high at 3.021% in late December 2013— its highest level since July 2011.
• Assuming an inflation rate of 1.5% and a real yield of 2.0%, a move up to 3.5% in yields seemed reasonable.
Your 10-Year Treasury Projection
• Current = 3.04%
Your Portfolio Projection
Thom’s Predictions
• S&P 500 will close at 2011• MSCI EAFE index will close 1.7% better than the S&P 500• MSCI Emerging Market index will close 3.2% better than
the S&P 500• 10-year treasury will close at 3.12• All four predictions above will be wrong
Academic Perspective
Bull and Bear Markets
Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by Standard & Poor’s Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.
LT1370.15
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
6 mos.-30%
2 mos.-19%
6 mos.-21%
4 mos.-10%
44 mos.193%
2 mos.92%
6 mos.100%3 mos.26%
4 mos.12%
34 mos.-83%
23 mos.133%
9 mos.61%
5 mos.22%
13 mos.-50%
4 mos.-16%
31 mos.-30%
6 mos.-22%
49 mos.210%
116 mos.491%
5 mos.12%
48 mos.105% 43 mos.
90%26 mos.
52%
7 mos.-10%
5 mos.-15%
6 mos.-22%
8 mos.-16%
30 mos.76%
9 mos.55%
15 mos. 35%
19 mos.-29%
33 mos.86%
21 mos.-43%
3 mos.-11%
14 mos.-14%
20 mos.-17% 3 mos.
-30%
5 mos.-15%
2 mos.-15%
25 mos.-45%
61 mos.282%
92 mos.355%
30 mos.71%
24 mos.63%
61 mos.108%
Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market
Jun 201348%
10 mos.34%
14 mos.65%
5 mos.-16%
2 mos.-13%16 mos.
-51%
Average Duration Average ReturnBull Market 30 Months Bull Market 111%Bear Market 11 Months Bear Market -26%
S&P 500 Index (USD)Monthly Returns: January 1926–June 30, 2013
Bull and Bear Markets
Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data copyright MSCI 2013, all rights reserved. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.
MSCI Emerging Markets Index, Gross Dividends (USD)Monthly Returns: January 1988–June 2013
LT1370.15
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
17 mos.98%
1 mo.-12%
16 mos.101%
8 mos.43%
17 mos.92%
29 mos.38%
5 mos.21%
19 mos.114%
7 mos.42%
18 mos.89%
21 mos.109%
16 mos.85%
1 mo.-14%
4 mos.-29%
5 mos.-14%
3 mos.-12% 5 mos.
-25%
13 mos.-56%
18 mos.-48%
5 mos.-24%
4 mos.-11%
2 mos.-11%
Feb 200916 mos.-61%
4 mos.31%
Jun 2013-18%
Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market
Average Duration Average ReturnBull Market 15 Months Bull Market 72%Bear Market 6 Months Bear Market -26%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Belg. Austria UK H.K. H.K. H.K. Norway Switz. Spain Switz. 44.25
Belg. 67.76
Sing. Switz. Austral.
Austria Sweden
Austria Can. Spain 49.36
H.K. J apan Norway Sweden US Belg.53.63 103.91 10.29 49.52 32.29 116.70 23.57 44.12 40.05 44.25 67.75 99.40 5.85 1.68 16.55 64.53 71.52 28.31 49.36 41.20 -29.21 87.07 33.75 1.36 39.55Den. Ger. H.K. Austral
.Switz. Sing. J apan US Swede
nItaly Italy Swede
nCan. Austria Austral
.Ger. Belg. J apan Sing. Ger. Switz. Austral. Den. UK Den.
52.67 46.26 9.18 33.64 17.23 67.97 21.44 37.14 37.21 35.48 52.52 79.74 5.34 -5.65 -1.34 63.80 43.53 25.52 46.71 35.21 -30.49 76.43 30.73 -2.56 31.27Swede
nNorway Austria US US Switz. Swede
nSwede
nH.K. Den. Spain J apan Den. Belg. Norway Spain Norway Austria Norway Norway US Sing. H.K. Switz. Sing.
48.33 45.53 6.33 30.07 6.39 45.79 18.34 33.36 33.08 34.52 49.90 61.53 3.44 -10.89 -7.26 58.46 38.39 24.64 45.12 31.43 -37.57 73.96 23.23 -6.77 30.96Norway Den. Norway Sing. Sing. Norway Neth. Spain Norway US France H.K. Norway Spain Italy Austria Swede
nDen. Can. Spain Sweden Sing. Norway Ger.
42.40 43.94 0.65 24.96 6.28 42.04 11.70 29.83 28.63 33.38 41.54 59.52 -0.89 -11.36 -7.33 56.96 36.28 24.50 29.57 -40.60 64.16 22.14 -10.01 30.90France Sing. Den. France France Swede
nItaly Neth. Can. Spain US Can. Italy Norway J apan Can. Italy Norway Den.
38.77Sing. France H.K. Can. Belg. H.K.
37.87 42.26 -0.91 17.83 2.81 36.99 11.56 27.71 28.54 25.41 30.14 53.74 -1.33 -12.22 -10.28 54.60 32.49 24.26 38.77 28.35 -43.27 60.15 20.45 -10.62 28.27Austral
.France US Neth. Neth. Ger. Belg. Belg. Neth. Ger. Ger. Norway Neth. US Switz. Austral
.Den. Switz. Belg. Austral
.Can. Belg. J apan Austral. Austria
36.40 36.15 -3.15 17.80 2.30 35.64 8.24 25.88 27.51 24.57 29.43 31.70 -4.09 -12.39 -10.31 49.46 30.82 16.33 36.66 28.34 -45.51 57.49 15.44 -10.95 25.90J apan Neth. Neth. Den. Belg. Neth. Sing. H.K. UK Neth. Switz. France France UK Sing. Den. Austral
.Austral
.Austria 36.54
Den. Ger. Can. US Neth. Austral.35.39 35.79 -3.19 16.56 -1.47 35.28 6.68 22.57 27.42 23.77 23.53 29.27 -4.31 -14.05 -11.05 49.25 30.34 16.02 36.54 25.59 -45.87 56.18 14.77 -12.12 22.07Sing. Swede
nSwitz. UK UK Austral
.Austral
.UK US UK Neth. US Austral
.Den. Can. Norway Spain Sing. Ger. Spain Sing. Spain Austral. Spain Sweden
33.32 31.79 -6.23 16.02 -3.65 35.17 5.40 21.27 23.24 22.62 23.23 21.92 -9.95 -14.81 -13.19 48.11 28.93 14.37 35.99 23.95 -47.35 43.48 14.52 -12.28 21.97H.K. US Ger. Switz. Ger. Den. Ger. Den. Den. Belg. UK Ger. UK H.K. Belg. France H.K. Neth. Neth. Den. UK Switz. Can. France28.12 30.01 -9.36 15.77 -10.27 32.81 4.66 18.78 21.79 13.55 17.80 20.04 -11.53 -18.61 -14.97 40.22 24.98 13.85 20.59 -47.56 43.30 11.79 -12.71 21.29Ger. Switz. Belg. Spain Austria Spain Den. Can. France Swede
nSwede
nAustral
.Austria Can. UK H.K. Sing. Swede
nFrance Neth. Austria Norway J apan Neth.
20.60 26.21 -10.98 15.63 -10.65 29.78 3.77 18.31 21.20 12.92 13.96 17.62 -11.96 -20.44 -15.23 38.10 22.27 10.31 13.24 -48.22 43.20 10.95 -14.33 20.59Can. Can. Sing. Swede
nAustral
.Italy Switz. Ger. Austral
.Can. Den. UK US Switz. Spain Italy Can. Ger. Neth.
31.38UK UK Neth. Austria Sweden Switz.
17.07 24.30 -11.66 14.42 -10.82 28.53 3.54 16.41 16.49 12.80 8.99 12.45 -12.84 -21.38 -15.29 37.83 22.20 9.92 31.38 8.36 -48.34 42.25 9.88 -15.98 20.35US UK Can. Belg. Can. Austria US France Ger. France Austral
.Den. H.K. Neth. Den. Sing. UK France Austral
. 30.86Italy Swede
nDen. UK Den. Norway
14.61 21.87 -13.00 13.77 -12.15 28.09 1.13 14.12 13.58 11.94 6.07 12.06 -14.74 -22.10 -16.03 37.60 19.57 9.88 30.86 6.06 -49.86 36.57 8.76 -16.02 18.65Neth. Italy France Can. Swede
nJ apan UK Austral
.Italy Norway J apan Neth. Ger. France H.K. J apan France Belg. UK
30.61US Italy France Ger. H.K. US
14.19 19.42 -13.83 11.08 -14.41 25.48 -1.63 11.19 12.59 6.24 5.05 6.88 -15.59 -22.36 -17.79 35.91 18.48 9.05 30.61 5.44 -49.98 31.83 8.44 -16.02 15.33Spain Belg. Spain J apan J apan UK Can. Sing. Belg. Austria Austria Spain Spain Ger. Neth. Belg. Ger. H.K. H.K.
30.35Switz. Austral
.Italy Neth. France UK
13.53 17.29 -13.85 8.92 -21.45 24.44 -3.04 6.45 12.03 1.57 0.35 4.83 -15.86 -22.39 -20.83 35.33 16.17 8.40 30.35 5.29 -50.67 26.57 1.74 -16.87 15.25Italy Spain Austral
.Ger. Spain Belg. Spain Norway Austria Austral
.H.K. Italy Belg. Sing. France Switz. J apan UK Switz.
27.40Austria H.K. US Belg. Sing. Italy
11.46 9.76 -17.54 8.16 -21.87 23.51 -4.80 6.02 4.51 -10.44 -2.90 -0.26 -16.85 -23.42 -21.18 34.08 15.86 7.35 27.40 2.17 -51.21 26.25 -0.42 -17.92 12.48Switz. Austral
.Italy Italy Italy France France Italy Switz. H.K. Can. Switz. Swede
nItaly US UK Switz. US Can.
17.80Swede
nNorway Switz. France Ger. Can.
6.18 9.30 -19.19 -1.82 -22.22 20.90 -5.18 1.05 2.28 -23.29 -6.14 -7.02 -21.29 -26.59 -23.09 32.06 14.96 5.14 17.80 0.62 -64.24 25.31 -4.11 -18.08 9.09UK H.K. Swede
nAustria Norway Can. Austria J apan Sing. J apan Sing. Austria Sing. Swede
nSwede
nUS Neth. Spain US
14.67Belg. Belg. Ger. Italy Italy J apan
5.95 8.39 -20.99 -12.23 -22.29 17.58 -6.28 0.69 -6.86 -23.67 -12.88 -9.11 -27.72 -27.18 -30.49 28.41 12.24 4.41 14.67 -2.73 -66.48 25.15 -15.01 -23.18 8.18Austria J apan J apan Norway Den. US H.K. Austria J apan Sing. Norway Belg. J apan J apan Ger. Neth. US Italy J apan
6.24J apan Austria J apan Spain Austria Spain
0.57 1.71 -36.10 -15.50 -28.25 9.15 -28.90 -4.72 -15.50 -30.05 -30.06 -14.26 -28.16 -29.40 -33.18 28.09 10.14 1.90 6.24 -4.23 -68.41 6.25 -21.95 -36.43 3.00
France 34.48
Italy 32.49
Sweden 43.39
Equity Returns of Developed Markets
40
Structure Determines Performance
• The vast majority of the variation in returns is due to risk factor exposure.
• After fees, traditional management typically reduces returns.
sensitivity to market
[market return minus T-bills]
sensitivity to size
[small stocksminus big stocks]
sensitivity to BtM
[value stocksminus growth]
randomerrore(t)
++ + +=average expected return
[minus T-bills]
average excess return
THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING
Priced Risk• Positive expected return• Systematic• Economic• Long-term• Investing
Unpriced Risk• Noise• Random• Short-term• Speculating
Structured Exposure to Factors
Unexplained Variation
• Market• Size• Value/Growth
RR1260.4
THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING
41
World Market Capitalization
In US dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. 1. An example large cap stock provided for comparison.
$37.5 Trillion as of December 31, 2012
DV1060.7
Capitalization over time ($ trillions):
Developed Markets Emerging Markets Frontier Markets
• Equity Market(complete value-weighted universe of stocks)Stocks tend to have higher expected returns than fixed income over time.
• Company Size(measured by market capitalization)Small company stocks tend to have higher expected returns than large company stocks over time.
• Company Price(measured by ratio of company book value to market equity)Lower-priced “value” stocks tend to have higher expected returns than higher-priced “growth” stocks over time.
Value
Large
Small
Growth
Increased RiskExposure andExpected Return
TotalStockMarket
Decreased Risk Exposure and
Expected Return
Dimensions of Stock Returns around the World
Risk and Return Are Related
Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (June 1992): 427-65.Eugene F. Fama and Kenneth R. French are consultants for Dimensional Fund Advisors. This page contains the opinions of Eugene F. Fama and Kenneth R. French but not necessarily of Dimensional Fund Advisors or DFA Securities LLC, and does not represent a recommendation of any particular security, strategy, or investment product. The opinions expressed are subject to change without notice. This material is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. Dimensional Fund Advisors (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services described. ©2012 by Dimensional Fund Advisors. All rights reserved.
RR1274.3
Tadas Viskanta – Abnormal Returns blog:
Index card financial guidelines:
Max your 401(k) or equivalent employee contributions Buy inexpensive, well-diversified mutual funds Never buy or sell an individual security. The person on the other side
of the table knows more than you about this stuff. Save 20% of your money. Pay your credit card balance in full every month. Maximize tax-advantaged savings vehicles like Roth, SEPs and 529
accounts. Make your financial advisor commit to a fiduciary standard. Promote social insurance programs to help people when things go
wrong.
Allison Spielman Advisors
Outlook for 2014 and Beyond