Download Charts That Got Us Thinking

Second Quarter 2017
Charts That
Got Us Thinking
Is this a synchronized global recovery?
Nanette Abuhoff Jacobson is a managing director and asset allocation strategist
at Wellington Management Company llp and global investment strategist for
Hartford Funds.
Nanette has selected the charts in this presentation to offer “behind the scenes”
insight into what may be driving the markets.
With more than 25 years of experience in the capital markets, Nanette has
held a variety of roles spanning the major asset classes. As global investment
strategist, she analyzes and interprets markets and investment opportunities for
Hartford Funds’ sales organization, the financial advisor community, and major
broker-dealers and distributors. She also advises Wellington Management’s
institutional clients, including pension funds, insurance companies, endowments
and foundations, and central banks, consulting on strategic asset-allocation
issues to develop multi-asset investment solutions.
2
Table of Contents...............................................................................................................................................................................Page
Key Points........................................................................................................................................................................................................................... 4
Charts:
YTD performance: Reflationary trade in doubt.............................................................................................................................................................. 5
Global synchronized expansion....................................................................................................................................................................................... 6
Deflation looks defeated................................................................................................................................................................................................... 7
The feedback loop of oil prices and production............................................................................................................................................................ 8
Tight labor markets leading to higher wages................................................................................................................................................................. 9
US consumer confidence implies stronger consumption.......................................................................................................................................... 10
Capex intentions set to turn around............................................................................................................................................................................. 11
Expect pendulum to swing back on regulation............................................................................................................................................................ 12
Business leaders are optimistic..................................................................................................................................................................................... 13
Market’s Fed funds expectations rising........................................................................................................................................................................ 14
US dollar strength supported by monetary policy divergence.................................................................................................................................. 15
Key US political dates...................................................................................................................................................................................................... 16
Small-cap equities are more domestically focused..................................................................................................................................................... 17
Japanese equities track the yen..................................................................................................................................................................................... 18
Japan Inc’s profitability: Abenomics effect.................................................................................................................................................................... 19
European consumer confidence implies stronger retail sales................................................................................................................................... 20
Leading business indicators turn positive in Europe.................................................................................................................................................. 21
Markets pricing in less risk of Le Pen victory................................................................................................................................................................ 22
French election doesn’t look like Brexit or Trump....................................................................................................................................................... 23
Emerging economies’ current accounts have improved............................................................................................................................................ 24
Caution on China: Higher rates...................................................................................................................................................................................... 25
Valuations are expensive across most asset classes.................................................................................................................................................. 26
Peak defaults probably behind us................................................................................................................................................................................. 27
Bank loan valuations still attractive............................................................................................................................................................................... 28
Low-volatility equities are expensive............................................................................................................................................................................. 29
Financials valuations are still attractive........................................................................................................................................................................ 30
Think Function, Not Form: Diversify exposure across economic environments..................................................................................................... 31
Putting it all together....................................................................................................................................................................................................... 32
Implementation Ideas................................................................................................................................................................................................33-34
Appendix: More Charts That Got Us Thinking . ......................................................................................................................................................35-53
3
Key Points
Stronger US growth implies higher interest rates
Politics matter but economic fundamentals still most important
I favor Japanese equities due to improving economy and mostly
supportive government policies
I favor adding to European equities due to an improving economy
despite French election risk
Consider taking some profits in US equities – benefits of a strong
economy are offset by rich valuations and political risk
Consider overweighting sectors that do well with higher interest rates
Potential risks: Politics, higher interest rates and US dollar, China
4
YTD performance: Reflationary trade in doubt
2017 year-to-date total return (%)1
MSCI US Energy
Oil*
USD (trade weighted)
Bloomberg Barclays Global Agg
MSCI Japan
MSCI US Financials
US high yield
MSCI US Industrials
MSCI US Utilities
MSCI US Cons Staples
MSCI Europe
MSCI US
Industrial Metals
MSCI EM
-8
-6
-4
-2
0
2
Percent
4
6
8
10
12
During the first
quarter:
• Yields and the US
dollar fell
• Equities beat
bonds
• Interest-rate
sensitive sectors
such as utilities
were competitive
with cyclicals such
as financials
• Oil was the big
loser
• Emerging markets
were the big
winner
* Based on commodity price, not represented by an index.
1
Through 31 March 2017 | Past performance is not indicative of future results. The performance shown above is index performance and is
not representative of a fund’s performance. Indexes are unmanaged and not available for direct investment. Please see Index Definitions on page 54.
Sources: Bloomberg, Wellington
5
Global synchronized expansion
60
The underpinnings
of the reflationary
trade are intact
with all regions’
PMIs well over
50, indicating
expanding
economies
worldwide.
Composite purchasing managers indexes, January 2010 – February 2017
55
50
45
40
US
35
5/10
2/11
11/11
8/12
EU
5/13
Japan
2/14
11/14
Emerging markets
8/15
5/16
2/17
Purchasing Managers Index (PMI) is an indicator that measures economic health. A reading above 50 signals expansion from the current
growth rate and a reading below 50 signals contraction from the current growth rate. | Sources: Haver, Markit
6
Deflation looks defeated
2.5
Deflation was a
prominent risk
as recently as a
year ago. Now,
even Japan has
escaped deflation
risk as observed
in 10-year
breakevens.
Ten-year breakevens, 8 April 2014 – 31 March 2017 (%)
US
Germany
Japan
2.0
1.5
1.0
0.5
0.0
1/14
4/14
7/14
10/14
1/15
5/15
8/15
11/15
Deflation is a general decrease in prices. | Source: Bloomberg
2/16
6/16
9/16
12/16
3/17
7
The feedback loop of oil prices and production
3 April 2015 – 31 March 2017
900
65
Spot oil price (LHS)
Oil rig count (RHS)
60
800
55
600
45
40
500
35
Total oil rig count
Spot oil price (US$)
700
50
Higher prices
lead to higher
oil production,
however, oil
is likely at the
lower end of the
range considering
the potential
extension of the
production cuts
and the heavydemand season.
400
30
300
25
5/15
7/15
9/15
11/15
1/16
3/16
5/16
7/16
Sources: Baker Hughes, Energy Information Administration, Bloomberg
9/16
11/16
1/17
3/17
8
Tight labor markets leading to higher wages
5
June 1994 – February 20171
Employment Cost Index (LHS)
A shortage of
skilled labor is
leading to higher
wages.
25
NFIB: skilled labor shortages (RHS)
20
15
3
10
NFIB: skilled labor shortages
Employment Cost Index (y/y % change)
4
2
5
0
1
12/94
6/96
12/97 6/99 12/00 6/02 12/03 6/05 12/06 6/08 12/09
6/11
12/12
6/14
12/15
2/17
Employment Cost Index quarterly data through December 2016, NFIB: skilled labor shortages two-quarter moving average data through
December 2016 then January 2017 and February 2017 monthly data. | NFIB: skilled labor shortages is the % of respondents signaling that
quality of labor is their single most important problem. | Sources: BLS, NFIB, Haver
1
9
US consumer confidence implies stronger consumption
130
December 2002 – March 20171
10
Consumer confidence – expectations (LHS)
Real consumption (RHS)
8
110
90
4
2
70
0
50
US real consumption (y/y % change)
US consumer confidence – expectations
6
US consumer
confidence
tends to lead
consumption,
which is 2/3 of
the US economy.
-2
30
-4
-6
10
9/03
3/05
9/06
3/08
9/09
3/11
9/12
3/14
9/15
3/17
Consumer confidence – expectations through March 2017, real consumption through December 2016. Consumer Confidence is an index that measures how optimistic or pessimistic consumers are with respect to the economy in the
near future. A high number indicates high confidence, while a low number indicates low confidence. | Sources: Conference Board,
BEA, Bloomberg
1
10
Capex intentions set to turn around
15
CFO capex intentions and actual, 1Q00 – 1Q171
20
15
10
10
Intentions
5
0
0
-5
-5
-10
Actual, lagged 2 months (y/y % change)
5
The confidence
story is not only
for consumers,
but also for the
business side,
too; low business
confidence has
been a hindrance
for the US
economy.
-10
-15
Intentions (LHS)
Actual (RHS)
-15
1Q03
1Q05
1Q07
1Q09
1Q11
1Q13
1Q15
-20
1Q17
Expected growth in capital spending over next 12 months. Intention through 1Q17, actual through 4Q16 Capex intention is the amount CFOs plan to spend on capital expenditures, and capex actual is the amount they actually spent on
capital expenditures. | Sources: Duke University, Haver
1
11
Expect pendulum to swing back on regulation
1,400
US presidential “economically significant”1 federal regulations by calendar year
1,300
1,200
CEOs indicate that
the rollback of
regulations will
be beneficial for
hiring and capital
investment. Banks
could especially
benefit.
1,100
1,000
900
2008
2009
2010
2011
2012
2013
2014
2015
“Economically significant” is defined by Executive Order 12866 Section 3(f)(1). Regulatory action that is likely to result in a rule that may
“Have an annual effect on the economy of US$100 million or more or adversely affect in a material way the economy, a sector of the
economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”
Source: https://regulatorystudies.columbian.gwu.edu/reg-stats Most current data available used.
1
12
Business leaders are optimistic
2Q2005 – 1Q2017
80
8
CFO economic optimism1 (RHS)
US real GDP (LHS)
6
4
60
2
0
50
CFO economic optimism
US real GDP (y/y % change, lagged one quarter)
70
Optimism among
business leaders
has increased
significantly,
which seems to
lead real GDP
growth.
-2
40
-4
30
-6
4Q05
1Q07
2Q08
3Q09
4Q10
1Q12
2Q13
3Q14
4Q15
1Q17
Duke/CFO Outlook: Optimism Index, US economy (scale: 0 – 100, 100 = most optimistic)
Gross Domestic Product (GDP) is the monetary value of all finished goods and services produced within a country’s borders in a specific time
period. | Sources: Duke, Haver, Wellington Management
13
1
Market’s Fed funds expectations rising
2.5
Fed funds rate futures contracts for each year end, December 2015 – March 2017 (%)
2019
2018
2017
2.0
1.5
1.0
After the
presidential
election,
the market’s
expectations
of policy rates
jumped, but
they are still
somewhat below
the Federal
Reserve’s (Fed)
forecast.
0.5
0.0
1/16
3/16
4/16
5/16
7/16
8/16
10/16
11/16
1/17
2/17
3/17
Federal funds rate is the rate at which a depository institution lends funds maintained at the Federal Reserve to another depository
institution overnight. | Source: Bloomberg
14
US dollar strength supported by monetary policy divergence
1.0
The US dollar is
driven by two
important factors:
monetary policy
and the level of
real rates. Tighter
central bank
policy and higher
rates in the US are
supportive of the
US dollar.
10-year real yields, January 2014 – March 2017 (%)
0.5
0.0
-0.5
-1.0
US
-1.5
1/14
4/14
6/14
9/14
12/14
3/15
6/15
9/15
Japan
12/15
Germany
3/16
6/16
9/16
France
12/16
3/17
Note: real yields (i.e., yields after adjusting for inflation) are from inflation-linked bonds | Source: Bloomberg
15
Key US political dates
10 – 24 Apr
Congress in recess
28 Apr
Continuing Resolution (CR) expires.
Action needed to prevent government
shutdown.
29 April
President Trump’s 100th day in the office
Mid-May
Deadline to overrule Obama regulations
using Congressional Review Act (CRA)
31 July – 4 Sep
Congress in recess
30 Sep
End of Fiscal Year 2017 appropriations or
CR needed to keep government open
While it’s
difficult to
predict US
politics,
Washington DC’s
calendar gives
a roadmap of
important
deadlines and
the tight time
frame in which
to implement
tax reform this
year.
16
Small-cap equities are more domestically focused
Percentage of revenue derived from each region, 31 December 2016
Large-Cap Stocks
Small-Cap Stocks
6%
4%
8%
5%
7%
3%
13%
1%
6%
64%
2%
US
78%
Japan
China
Europe
Emerging markets
ex China
Large-cap stocks are represented by the Russell 1000 Index, which measures the performance of the
large-cap segment of the U.S. equity universe.
Small-cap stocks are measured by the Russell 2000 Index, which measures the performance of the
small-cap segment of the U.S. equity universe. | Sources: FactSet, Wellington Management
Other
Small-cap equities’
revenues come
mostly from the
US, whereas
large-cap equities’
revenues derive
about 35% of
their revenues
from outside the
US. Protectionist
policies in the form
of tariffs or other
measures that hurt
big export markets
such as China or
emerging markets
would likely hurt
large caps more
than small caps.
17
Japanese equities track the yen
1,200
December 2003 – March 2017
130
120
1,000
800
100
600
90
400
80
MSCI Japan (LHS)
USD/JPD
MSCI Japan price index
110
The Bank of
Japan’s aggressive
monetary policy
has injected
substantial
liquidity into the
financial system.
This has led to a
weakened yen,
which is good
for exporters—a
critical part of the
economy.
USD/JPY (RHS)
70
200
3/04
3/05
3/06
3/07
3/08
3/09
3/10
3/11
3/12
3/13
3/14
3/15
3/16
3/17
Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any
fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only.
The right-hand scale shows how many Japanese Yen are equal to one US dollar.
MSCI Japan Index is a free-float adjusted market-capitalization index designed to measure large- and mid-cap Japanese equity market performance. | Source: Bloomberg
18
Japan Inc’s profitability: Abenomics effect
7
Beyond a weak
yen, profit margins
have been rising
strongly in Japan
with companies’
greater focus on
return on assets,
return on equity,
and use of excess
cash for buybacks
and dividends.
Japan profit margins (%)
6
5
4
3
2
1
2Q55
3Q65
4Q75
1Q86
2Q96
3Q06
4Q16
Abenomics refers to the economic policies of Japan’s prime minster, Shinzo Abe.
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA is indicative of how efficient a
management is at using its assets to generate earnings.
Return on equity (ROE) is a measure of profitability that calculates how many dollars of profit a company generates with each dollar of
shareholders’ equity. | Sources: Haver, Evercore ISI, Wellington Management
19
European consumer confidence implies stronger retail sales
European consumer confidence and retail sales, December 2002 – March 20171
8
10
Retail sales (RHS)
6
0
4
-10
2
0
-20
-2
Retail sales, three-month moving average (%)
Consumer confidence, advanced three months (y/y % change)
Consumer confidence (LHS)
Similar to the US
but earlier in its
recovery cycle,
Europe’s economy
is getting stronger,
underpinned by
rising employment
and income,
which should also
lead to higher
consumption.
-30
-4
-6
-40
3/02
11/03
7/05
3/07
11/08
7/10
3/12
11/13
7/15
3/17
Retail sales through January 2017, consumer confidence through March 2017 | Sources: Haver, Wellington Management
1
20
Leading business indicators turn positive in Europe
European PMI and industrial production, January 2000 – March 20171
15
65
PMI (LHS)
Industrial production (RHS)
10
60
0
50
-5
45
-10
40
-15
35
-20
Industrial production (y/y % change)
PMI, three-month moving average (%)
5
55
The European
PMI hit 56, a
6-year high and
consistent with
6% industrial
production
growth and 3%
GDP. However,
uncertainty
regarding the
outcome of the
French election
is hanging over
markets.
-25
30
7/00
3/02
11/03
7/05
3/07
11/08
7/10
3/12
11/13
7/15
3/17
PMI through March 2017, industrial production through February 2017 Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a
specific time period.
A PMI reading above 50 signals expansion from the current growth rate, while a reading below 50 signals contraction from the current
growth rate.
Sources: Haver, Wellington Management
1
21
Markets pricing in less risk of Le Pen victory
80
Price indexes, January 2016 – March 2017
French sovereign CDS (LHS)
150
French equities (RHS)
145
140
60
135
50
130
40
125
30
120
20
French equity index
French sovereign credit default swaps index
70
Credit markets
were reflecting
a lot of concern
early in the
year. Recently,
however, French
equities have
moved higher
and French credit
derivative spreads
have narrowed,
reflecting less
concern.
115
110
10
1/16
2/16
3/16
4/16
5/16
6/16
7/16
8/16
9/16
10/16
11/16
12/16
1/17
2/17
3/17
Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any
fund’s performance. Indices are unmanaged and not available for direct investment.
French Sovereign Credit Default Swap (CDS) – A credit derivative similar to insurance because it provides the buyer of the contract with protection against default or other negative credit event.
The MSCI France index is a free-float weighted equity index that reflects the performance of equities listed in France.
For illustrative purposes only. | Source: Bloomberg
22
French election doesn’t look like Brexit or Trump
Poll averages 100 days prior to referendum/election (%)1
Le Pen is currently
trailing Macron
by 20 percentage
points in the
polls, which is
a much wider
gap than in the
Brexit referendum
or the US
presidential
election.
Remain
Brexit
Leave
Clinton
US president
Trump
Macron
French president
Le Pen
0
10
20
30
40
50
60
70
Percent of respondents
The polling numbers are based on data available 100 calendar days prior to the referendum /election. In each case, multiple polls were
released and so we applied a simple average. French Presidential elections typically consist of two rounds and so we use polls for the
expected second round of voting between Marine Le Pen and Emmanuel Macron. | Sources: UK polls – Ipsos Mori, YouGov, ComRes, ICM and
Survation; US national polls – NBC, Ipsos/Reuters, and USC/Los Angeles; French polls – Ifop-Fiducial, Ipsos, and OpinionWay.
23
1
Emerging economies’ current accounts have improved
30
Emerging market
fundamentals
have improved
after currencies’
steep declines
in recent years
allowed countries
to rebalance their
trade and stabilize
their economies.
Current account, sum of countries in JPM GBI-EM Global Diversified,
2004 – 2016 (US$ billions)
15
0
-15
-30
-45
-60
-75
12/04
6/06
12/07
6/09
12/10
6/12
12/13
6/15
12/16
The current account is an important indicator of an economy’s health. It is defined as the sum of the balance of trade (goods and services
exports less imports), net income from abroad, and net current transfers.
JP Morgan Global Bond Index – EM Global Diversified tracks the local currency bonds issued by emerging market governments up to a market
cap weight of 10% per country.
Sources: Haver, Wellington Management
24
Caution on China: Higher rates
6
One risk to
monitor is China
and its interest
rates. Higher rates
could damage the
property cycle—
a key growth
engine.
China five-year swap rate, December 2011 – March 2017 (%)
5
4
3
2
3/12
8/12
Source: Bloomberg
2/13
7/13
1/14
6/14
12/14
5/15
11/15
4/16
10/16
3/17
25
Valuations are expensive across most asset classes
Credit option-adjusted spreads1 (basis points)2
Equity 12-month trailing P/B ratio3
US HighUS High- Yield ex US IG
Global
Euro IG
Yield
energy
Corporate High-Yield Corporate EMBI+
US
Europe
Japan
EM
Current
383
374
118
393
118
338
3.09
1.84
1.32
1.58
10-year
percentile (%)
11
10
13
12
27
55
100
85
58
61
20-year
percentile (%)
22
20
31
23
52
50
97
57
46
60
Equity and credit valuations are
expensive. For equities to perform,
earnings have to beat the market’s
expectations and credit conditions
have to improve.
As of 31 March 2017
1
Option-adjusted spread (OAS) measures fixed-income yields while taking into account any embedded options.
2
A basis point is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
3
Price-to-Book Ratio (P/B ratio) is the ratio of a stock’s price to its book value per share.
Green shading represents relatively inexpensive valuations, red shading represents relatively expensive valuations.
US high yield is represented by the Bloomberg Barclays US Corporate High Yield Index ; US high yield ex energy is represented by the
Bloomberg Barclays US Corporate High Yield Index ex Energy; US IG corporate is represented by the Bloomberg Barclays US Corporate Index;
Global high yield is represented by the Bloomberg Barclays Global High Yield Index; Euro IG corporate is represented by the Bloomberg
Barclays Euro Corporate Index; EMBI+ is an abbreviation for the JPMorgan Emerging Markets Bond Index Plus; US is represented by the MSCI
USA Index; Europe is represented by the MSCI Europe Index; Japan is represented by the MSCI Japan Index; EM is represented by the MSCI
Emerging Markets Index
Sources: Bloomberg, Datastream, Wellington Management
26
Peak defaults probably behind us
16
Moody’s US high yield default rate, actual December 1996 – February 2017, estimated
March 2017 – February 2018 (%)
12
8
Moody’s
forecast
4
Credit
fundamentals are
healthy. Defaults
peaked in the
high yield market
in 2016 during
the shakeup of
the energy and
metals/mining
industries. These
industries are
now healing,
and default rates
should fall.
0
98
00
02
04
06
08
10
12
14
16
Actual results may vary, perhaps significantly, from the estimated data presented | Source: Moody’s
18E
27
Bank loan valuations still attractive
6
Bank loans offer
similar yield as
high-yield bonds,
yet they’ve
historically had a
stronger recovery
rate and could
appreciate if
rates rise given
their floating-rate
characteristics.
High-yield bond yield minus bank loan yield, January 1992 – March 2017 (%)
4
2
0
-2
93
95
97
99
01
03
05
07
09
11
13
15
17
Past performance is not a guarantee of future results. The performance shown is index performance and is not representative of any funds’
performance. Investors cannot invest directly in an index.
The chart shows the yield for high-yield bonds minus the yield for bank loans. Bank loans, represented by the Credit Suisse Leveraged Loan
Index, are below-investment-grade, senior secured, short-term loans made by banks to corporations. They are rated below-investment-grade
because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities.
High-yield bonds, or “junk bonds,“ represented by the Bloomberg Barclays US Corporate High Yield Bond Index, are rated below-investmentgrade because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities.
Sources: Barclays, Credit Suisse, JPMorgan
28
Low-volatility equities are expensive
4.0
Low volatility versus high volatility relative valuations of largest 1,500 US equities,
10th versus 90th percentile, January 1966 – March 20171
P/E ratio
P/B ratio
3.5
3.0
2.5
2.0
1.5
1.0
P/B ratio
median
0.5
0.0
66
69
72
75
78
81
84
87
90
93
96
99
02
05
08
11
14
17
Low-volatility (lowvol) equities are
concentrated in
sectors such as
consumer staples
and utilities, while
high-volatility
equities are
concentrated in
financials. Even
though low-vol
equity valuations
are a bit cheaper
since the election,
they are still well
above the longterm median on
a price-to-book
basis.
Data through 25 March 2017
Price-to-Earnings Ratio (P/E ratio) is the ratio of a stock’s price to its earnings per share based on 12-month forward projections.
Price-to-Book (P/B ratio) is the ratio of a stock’s price to its book value per share.
Low-volatility stocks are defined as the 150 lowest volatility stocks of the largest 1,500 US equities. High-volatility stocks are defined as the
150 most volatile stocks of the largest 1,500 US equities.
Source: Wellington Management
29
1
Financials valuations are still attractive
1.0
12-month trailing price/book, financials index – total market index,
January 2001 – March 2017
MSCI Japan Financials –
MSCI Japan
0.5
MSCI Europe Financials –
MSCI Europe
0.0
MSCI US Financials –
MSCI US
-0.5
-1.0
Valuations for US
and European
financials are
attractive relative
to the market.
The potential for
higher interest
rates, regulatory
relief, and better
economic activity
are all supportive
for financials.
-1.5
-2.0
3/01
3/03
3/05
3/07
3/09
3/11
3/13
3/15
3/17
Past performance is no guarantee of future results. The performance shown above is index performance and is not representative of any
fund’s performance. Indices are unmanaged and not available for direct investment. For illustrative purposes only.
Please see Index Definitions on page 54..
Source: Datastream
30
Think Function, Not Form
Diversify exposure across economic environments
Relative performance by economic environment
Growth
Rising
Bank loans
Public equities
EMD
Private equities
REITs
Long/short equity
hedge funds
Inflation
Stagflation
EM currencies/ILBs
Industrial metals commodities
Weak growth
Natural resource equities
Corporate spreads
High yield
Absolute return/
active risk
Growth
Nominal govt bonds
Agency MBS
Municipal bonds
Energy &
Agriculture
commodities
TIPS
Gold/precious metals commodities
EMD: Emerging Markets
Debt
REITs: Real Estate
Investment Trusts
ILBs: Inflation-Linked
Bonds
MBS: Mortgage-Backed
Securities
TIPS: Treasury Inflation
Protected Securities
While most assets
tend to perform
well in a growth
environment
with benign
inflation, think
about whether
you have assets
that perform well
in an inflationary
environment,
either with
growth (top
right hand) or
without (bottom
righthand).
Falling
Falling
Inflation
Rising
The example presented is for illustrative purposes and reflects the current opinions of Wellington Management Global Multi-Asset
Strategiessm team as of the date appearing in this material only. This is based on historical assumptions and is not intended to be a prediction of how any asset class will perform in the future. | Economic environments are defined by year-over-year changes in GDP growth and
inflation. Growth: + GDP growth, – inflation. Weak growth: – GDP growth, – inflation. Inflation: + GDP growth, + inflation. Stagflation: – GDP
growth, + inflation.
31
Putting it all together
Higher implementation risk with Trump presidency
Strong US-growth momentum still likely to outweigh politics
Asset allocation with stronger global growth:
• I suggest diversifying equity exposure globally
• Consider rotating out of bond-like equities into cyclical equities, including financials and industrials
• I favor small- and mid-cap stocks over large-cap stocks
• Consider tail-risk hedges in gold, US government bonds, or options
32
33
34
Table of Contents...............................................................................................................................................................................Page
Appendix: More Charts That Got Us Thinking
Buying stocks when fear runs high has historically led to long-term gains..................................................................................... 36
Intra-year dips in the S&P 500 Index happen frequently................................................................................................................... 37
Are you an opportunistic or apprehensive investor?.......................................................................................................................... 38
Are value stocks poised to outperform growth stocks after a long period of underperformance?............................................. 39
Domestic stocks and international stocks alternate periods of outperformance........................................................................... 40
Stock market returns after significant oil price declines..................................................................................................................... 41
Asset class returns vs. the average investor........................................................................................................................................ 42
Hypothetical impact of rising rates on fixed income........................................................................................................................... 43
Some asset classes have performed well in rising-rate periods........................................................................................................ 44
US stock reactions to fast vs. slow rate hikes....................................................................................................................................... 45
US interest rates could continue to stay low........................................................................................................................................ 46
US debt to GDP levels are approaching record highs......................................................................................................................... 47
Annual inflation is below its historical average but rising.................................................................................................................. 48
Tax-equivalent yields............................................................................................................................................................................... 49
Municipal bond yields look attractive................................................................................................................................................... 50
The drug revolution unfolds................................................................................................................................................................... 51
Healthcare is trading at a discount to its historical average.............................................................................................................. 52
Fund flows................................................................................................................................................................................................ 53
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
Index Definitions:
MSCI USA Energy Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Energy sector in the Global Industry Classification Standard (GICS®); USD (trade weighted) is a proxy for the US dollar.
Bloomberg Barclays Global Aggregate Bond Index provides a broad-based measure of the global investment-grade fixed-rate debt markets.
MSCI Japan Index is a free-float adjusted market-capitalization index designed to measure large- and mid-cap Japanese equity market
performance.
MSCI Japan Financials Index is a free float-weighted equity index. It was developed with a base value of 100 as of December 31, 1998.
MSCI USA Financials Index is designed to measure the performance of the large and mid cap segments of the US equity universe. All securities
in the index are classified in the Financials sector in the Global Industry Classification Standard (GICS®).
Bloomberg Barclays US High Yield Corporate Bond Index is an unmanaged broad-based market-value weighted index that tracks the total
return performance of non-investment grade, fixed-rate publicly placed, dollar-denominated and nonconvertible debt registered with the
Securities and Exchange Commission.
MSCI USA Industrials Index is designed to the capture large and mid cap segments of the US equity universe. All securities in the index are classified in the Industrials sector as per the Global Industry Classification Standard (GICS®).
MSCI USA Utilities Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index are classified in the Utilities sector as per the Global Industry Classification Standard (GICS®).
MSCI USA Consumer Staples Index is designed to capture the large and mid cap segments of the US equity universe. All securities in the index
are classified in the Consumer Staples sector as per the Global Industry Classification Standard (GICS®).
MSCI Europe Index is a free-float adjusted market-capitalization-weighted index designed to measure the equity market performance of the
developed markets in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, and the United Kingdom.
MSCI Europe Financials Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. All securities
in the index are classified in the Financials sector as per the Global Industry Classification Standard (GICS®).
MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 627 constituents, the index
covers approximately 85% of the free float-adjusted market capitalization in the US.
MSCI USA Financials Index is designed to measure the performance of the large and mid cap segments of the US equity universe. All securities
in the index are classified in the Financials sector as per the Global Industry Classification Standard.
Industrial Metals are represented by Bloomberg S&P GSCI Total Return CME – a widely recognized leading measure of general commodity
price movements and inflation in the world economy.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of
emerging markets. The MSCI Emerging Markets Index consists of 21 emerging market country indices.
54
All investments are subject to risk, including the possible loss of principal. Foreign investments can be riskier than U.S. investments due to the
adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in
foreign countries and regions. These risks are generally greater for investments in emerging markets. Small- and mid-cap securities can have
greater risk and volatility than large-cap securities. Risks of focusing investments on the health-care sector include regulatory and legal developments, patent considerations, intense competitive pressures, rapid technological changes, potential product obsolescence, and liquidity
risk. Investments in the commodities market and the natural-resource sector may increase liquidity risk, volatility and risk of loss if there are
adverse economic consequences in these sectors.
Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are
currently heightened due to the historically low interest rate environment. Investments in high-yield (“junk”) bonds involve greater risk of
price volatility, illiquidity, and default than higher-rated debt securities. Bank loans can be difficult to value and highly illiquid; they are subject
to credit risk and risks of bankruptcy and insolvency. Mortgage and asset-backed securities’ risks include credit, interest-rate, prepayment,
and extension risk. Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be
subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. The value of inflation-protected securities generally fluctuates with changes in real interest rates, and the market for these securities may be less developed or
liquid, and more volatile, than other securities markets. U.S. Treasury securities are backed by the full faith and credit of the U.S. government
as to the timely payment of principal and interest.
The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on
available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.
The Floating Rate Fund and the Floating Rate High Income Fund should not be considered an alternative to CDs or money market funds. This
Fund is for investors who are looking to complement their traditional fixed-income investments.
Investors should carefully consider a fund’s investment objectives, risks, charges and expenses. This and other important
information is contained in the fund’s prospectus and summary prospectus (if available), which can be obtained by visiting
hartfordfunds.com. Please read it carefully before investing.
Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA. Hartford Funds Management Company, LLC (HFMC)
is the mutual funds’ investment manager. Certain funds are sub-advised by Wellington Management Company LLP or Schroder Investment
Management North America Inc. Schroder Investment Management North America Ltd. serves as a secondary sub-adviser to certain funds.
HFD and HFMC are not affiliated with any fund sub-adviser.
Date 4/17 NAJ_FLP_0417 201102
55
At Hartford Funds, your investment satisfaction is our measure of success.
That’s why we use an approach we call human-centric investing that considers
not only how the economy and stock market impact your investments, but also
how societal influences, generational differences, and your stage of life shape
you as an investor.
Instead of cookie-cutter recommendations and generic goals, we think you
deserve personalized advice from a financial advisor who understands your
financial situation and can build a financial plan tailored to your needs.
Delivering strong performance is always our top priority. But the numbers
on the page are only half the story. The true test is whether or not an
investment is performing to your expectations.
NAJ_FLP_0417 201102
hartfordfunds.com888-843-7824 @hartfordfunds hartfordfunds.com/linkedin