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MARKETVIEW GrowthStocks:NewOpportunitiesinaTrumpEconomy? February20,2017 2278Views Theprospectofearningsaccelerationincyclicalsectorsoffersactivemanagers thechancetouncovercompellinggrowthopportunitiesinpreviouslyoverlooked areasofthemarket. Af teradvancingalongsideamarket-widerecoveryf romtheglobalf inancialcrisisof 2008–09, manyeconomicallysensitiveareasof theU.S.equitymarketspentmuchof thesubsequentsix yearsinthedoldrums.Low,andinsomecasesnegative,interestratesandanemiceconomic growtharoundtheglobecombinedtokeepcertain“cyclical”sectorsof themarketincheck. Inparticular,f irmsinthef inancialssector(especiallybanks)struggledwithalowinterest-rate environmentthatkepttheirnet-interestmargins(thespreadsbetweentheirlendingincomeand expenses,andthesourceof muchof theirprof itability)atrazor-thinlevels.Companiesinthe industrialsandmaterialssectorssawtheirrevenuesmoderate,asweakglobalgrowthweighedon demandf ortheirproductsandservices.AsshowninTable1,thesethreesectorslaggedthe broadermarket,tovaryingdegrees,f romthestartof 2011throughthemidpointof 2016,duringa timewhentheef f ectof ultra-accommodativecentralbankpoliciesonbroadswathsof theglobal economycouldbecharacterizedasaf ormof f inancialrepression.* Table1.CyclicalSectorsLaggedtheMarketfromtheStartof2011throughMid-2016 AnnualizedreturnfortheS&P500®Indexandindicatedsectors Source:Bloomberg.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout notice.Projectionsshouldnotbeconsideredaguarantee. Pastperformanceisnoguaranteeoffutureresults. 1 However,inthesecondhalf of 2016,themacrobackdropf orthesecyclicalsectorsbegantoturn f orthebetter,heraldinganexpansionaryeconomicenvironment.Thisshif tbeganwitha surprisinglystrongshowingf orthird-quarterU.S.grossdomesticproduct(GDP),withthe preliminaryestimate,announcedinOctober,of anannualgrowthrateof 3.2%,subsequently revisedevenhigher,to3.5%,inDecember.Thisshif tininvestorsentimentcontinuedwiththeU.S. FederalReserve’s(Fed)announcementof aninterest-ratehikeinDecember2016(thef irstsuch moveinnearlyayear)andtheFed’sf orecastof threeadditionalhikesin2017. Whatreallyseemedtodrivetheshif tinsentiment,though,wastheelectionof DonaldTrumpas U.S.presidentonNovember7.Trump’svictoryseemedtoauguraneraof f iscalstimulusand corporatetaxref orm,withthepotentialtof urtherboostthedomesticeconomy.AsChart1 illustrates,indicationsof f asterpaceof economicgrowthbodeparticularlywellf orthethree af orementionedcyclicalsectors,whichstandtoexperiencethegreatestchangeintheirrateof earningsgrowthoverthenexttwoyears(excludingenergy),basedonanalystf orecastscompiled byFactSet. Chart1.AnalystsRecentlyForecastedStrongEarningsGrowthforCyclicalU.S.Equity Sectors ExpectedchangeinearningsgrowthratebyS&P500sector(excludingenergy)forindicated periods,asofFebruary10,2017 Source:FactSet.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout notice.Projectionsshouldnotbeconsideredaguarantee. Pastperformanceisnoguaranteeoffutureresults. Whileinvestorsmaybeconcernedthattheseearningsgrowthprojectionsarelargelyattributable toPresidentTrump’santicipatedf iscalagenda,thisisnotthecase(asweoutlinedintheJanuary 23,2017,MarketView).Mostsectors,inf act,haveseentheirf orecastedearningsgrowth modestlydecreasesincetheelection.Instead,ongoingf undamentaldevelopments,includingthe potentialf orseveralmoreinterest-ratehikesf romtheFedandarevivalineconomicgrowthnot justintheUnitedStatesbutacrossthedevelopedworld(seeTable2),havehelpedunderpinthe recentrallyinthesecyclicalstocksaswellastheexpectationf orcontinuedearningsgrowth acceleration. 2 Table2.StrengtheningU.S.andGlobalEconomicGrowthCouldSupportCyclical Sectors Real(inflation-adjusted)grossdomesticproduct(GDP)forecastsfor2016–18,asofDecember 31,2016 Source:Organizationf orEconomicCo-operationandDevelopment(OECD).Thehistoricaldataaref orillustrative purposesonly,donotrepresenttheperf ormanceof anyspecif icportf oliomanagedbyLordAbbettoranyparticular investment,andarenotintendedtopredictordepictf utureresults.Forecastsandprojectionsarebasedoncurrent marketconditionsandaresubjecttochangewithoutnotice.Projectionsshouldnotbeconsideredaguarantee. Pastperformanceisnoguaranteeoffutureresults. Forgrowthinvestors,thechancef orastrongpick-upintherateof earningsgrowthinthese cyclicalsectorsholdsthepotentialf orsignif icantopportunity,andalsohighlightstheimportanceof activemanagementinminingthisparticularvein.Thepastsixyearsof f inancialrepressionhave ledtoadistortioninequitymarkets,withmanyhigh-yielding,slow-growthstocksreceivingrich valuationsf rominvestorsamidayield-starvedandlow-growthworld.Thistrendhasledthe predominantbenchmarkf orthisstyle,theRussell1000® GrowthIndex,tobecomepopulatedwitha numberof theseslow-growth,dividend-orientedstocksduetoanindex-constructionmethodology thatplacesanemphasisoncompanieswithhighprice-to-bookvalueratios.Onthef lipside,the stagnationof economicallysensitiveareasof themarketduringthisperiodhasledmanycyclical stockstobecomeunderrepresentedinthegrowthindexrelativetotheirhistoricalexposure.(See Chart2.) Chart2.Slower-GrowingSectorsHaveGainedGreaterWeightinaKeyGrowth Benchmark Sectorweightings(excludingenergy)intheRussell1000®GrowthIndex,2011–16 SourceWilshireAtlas.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any 3 specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout notice.Projectionsshouldnotbeconsideredaguarantee. Pastperformanceisnoguaranteeoffutureresults. Thisskewingof thebenchmarkindexprovidesactivemanagersacompellingopportunityto augmenttheirgrowthportf olioswithmeasuredexposuretothesecyclicalsectorsthatare experiencingthegreatestrateof earnings-growthacceleration.Bydoingso,thesemanagerscan providetheirinvestorswithanothersourceof growththatmaynotberecognizedorf ully appreciatedbymanagerswhof ocusonmorecommonlyf ollowedgrowthareas.Bytakingamore holistic,broad-basedviewof themarket—especiallywhenthewindsof economicchangebeginto increase—activemanagersshouldbeabletoidentif yopportunitiesinareasof themarketignored bytheircounterpartswhoholdaf arnarrowerviewof growthstocks. *CarmenN.ReinhartandM.BelenSbrancia,intheirMarch2011paper,“TheLiquidationof GovernmentDebt,”note thattheterm“f inancialrepression”includesdirectedlendingtogovernmentbycaptivedomesticaudiences(suchas pensionf unds),explicitorimplicitcapsoninterestrates,regulationof cross-bordercapitalmovements,and (generally)atighterconnectionbetweengovernmentandbanks. ANoteaboutRisk:Thevalueof investmentsinequitysecuritieswillf luctuateinresponsetogeneraleconomic conditionsandtochangesintheprospectsof particularcompaniesand/orsectorsintheeconomy.Historically speaking,growthandvalueinvestmentstendtoreactdif f erentlyduringtheeconomiccycle.Sincevaluestocksare of tencyclicalinnature,theymaybenef itf romtheincreasedspendingthatusuallyoccursduringaneconomic expansion.Growthstocksmayalsoperf ormwellduringanexpansion,buttheymayalsobeoutof f avorduringmarket downturns,wheninvestorspaymoreattentiontopriceratios.Whilegrowthstocksaresubjecttothedailyupsand downsof thestockmarket,theirlong-termpotentialaswellastheirvolatilitycanbesubstantial.Noinvestingstrategy canovercomeallmarketvolatilityorguaranteef utureresults. Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithoutnotice. Projectionsshouldnotbeconsideredaguarantee. Thisarticlemaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertainassumptions of f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbenoassurance thatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbemateriallydif f erentf rom thosedescribedhere. Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwillf luctuate.Thereis noguaranteethatmarketswillperf orminasimilarmannerundersimilarconditionsinthef uture. Grossdomesticproduct(GDP):Themonetaryvalueof allthef inishedgoodsandservicesproducedwithina country'sbordersinaspecif ictimeperiod,thoughGDPisusuallycalculatedonanannualbasis.Itincludesallof privateandpublicconsumption,governmentoutlays,investmentsandexportslessimportsthatoccurwithinadef ined territory. Theprice-to-bookratioisusedtocompareastock'smarketvaluetoitsbookvalue.Itiscalculatedbydividingthe currentclosingpriceof thestockbythelatestquarter'sbookvaluepershare. ® 4 TheRussell1000Index® measurestheperf ormanceof the1,000largestcompaniesintheRussell3000Index,which representsapproximately92%of thetotalmarketcapitalizationof theRussell3000Index.TheRussell1000 ® GrowthIndexmeasurestheperf ormanceof thoseRussell1000companieswithhigherprice-to-bookratiosandhigher f orecastedgrowthvalues. TheS&P500 ® Indexiswidelyregardedasthestandardf ormeasuringlargecapU.S.stockmarketperf ormanceand includesarepresentativesampleof leadingcompaniesinleadingindustries. Indexesareunmanaged,donotref lectdeductionof f eesandexpensesandarenotavailablef ordirectinvestment. TheopinionsinMarketViewareasofthedateofpublication,aresubjecttochangebasedonsubsequentdevelopments,and maynotreflecttheviewsofthefirmasawhole.Thematerialisnotintendedtoberelieduponasaforecast,research,or investmentadvice,isnotarecommendationoroffertobuyorsellanysecuritiesortoadoptanyinvestmentstrategy,andis notintendedtopredictordepicttheperformanceofanyinvestment.Readersshouldnotassumethatinvestmentsin companies,securities,sectors,and/ormarketsdescribedwereorwillbeprofitable.Investinginvolvesrisk,including possiblelossofprincipal.ThisdocumentispreparedbasedontheinformationLordAbbettdeemsreliable;however,Lord Abbettdoesnotwarranttheaccuracyandcompletenessoftheinformation.Investorsshouldconsultwithafinancialadvisor priortomakinganinvestmentdecision. Investorsshouldcarefullyconsidertheinvestmentobjectives,risks,chargesandexpensesof theLordAbbettFunds.Thisandotherimportantinformationiscontainedinthefund's summaryprospectusand/orprospectus.Toobtainaprospectusorsummaryprospectusonany LordAbbettmutualfund,youcanclickhereorcontactyourinvestmentprofessionalorLord AbbettDistributorLLCat888-522-2388.Readtheprospectuscarefullybeforeyouinvestor sendmoney. NotFDIC-Insured.Maylosevalue.Notguaranteedbyanybank.Copyright©2017Lord,Abbett& Co.LLC.Allrightsreserved.LordAbbettmutualfundsaredistributedbyLordAbbett DistributorLLC.ForU.S.residentsonly. 5