behavioral finance discussion and market outlook · source: pew research center, february 2010 when...

Omar Aguilar, Ph.D., CIO – EquitiesApril 2015

Behavioral Finance Discussion and Market Outlook

Omar Aguilar, Ph.D., CIO – EquitiesDecember 8, 2015

Charles Schwab Investment Management 2

Agenda

Millennials− Demographics− Preferences− Investment Decision-Making

Market Overview


Demographics Generations

Source: Pew Research Center, February 2010

When most of the generation was 18-33 years of ageGenerationAge in 2014

Xersages 34-49

Boomersages 50-68

Silentages 69-86

Millennials*ages 18-33

born after 1980

born 1965-80

born 1946-1964

born 1928-45

*Millennial, a term used to refer to the generation, born from 1980 onward, brought up using digital technology and mass media. Source: Dictionary.com


Demographics Populations In 2015

Source: The Boston Company Asset Management, LLC, “Eight Investment Themes for Global Growth”, May 2015

0

1

2

3

4

5

15 20 25 30 34 39 44 49 53 58 63 68 72 77 82

Pop

ulat

ion

in M

illio

ns

Age in Years

80 MillionMillennials

65 MillionGeneration Xers

74 MillionBaby Boomers

27 MillionSilent

Millennials represent thelargest generation to date

Charles Schwab Investment Management

Millennials already possess over

$200 billionin direct spending power

DemographicsMillennials’ Transition Of Wealth

Wealthinheritance

Entering peak earning years

Collective annual income will exceed

Baby Boomers’ by

2018

5

Source: Boston Consulting Group, September 2011


Ethnicity of Millennial Generation

Black Hispanic Asian White

DemographicsMillennials Are the Most Ethnically Diverse Generation

Source: Pew Research Center, Nielsen and Think Finance, February 2010


DemographicsThe Gender Wage Gap Is Historically Narrow

Female Earnings Compared to Male Counterparts

Millennial women are

7%more likely to hold a bachelor’s degree or be enrolled in college

93% versus 84%

Millennials General Population

Source: Pew Research Center, December 2013


DemographicsDebt And Underemployment Are Persistent Challenges

DebtMillennials carry an average of

$30,000in student loan debt

UnderemploymentIt is taking

four years longerto achieve the median-wage

annual income of

$42,000when compared to those who came of

age in 1980

Source: Consumer Financial Protection Bureau, October 2014


Agenda


Market Overview


PreferencesAn Overwhelming Majority Of Millennials Own A Smartphone

As of January 2014

83%of Millennials own a

Smartphone

10

Source: Pew Research Center, January 2015


PreferencesMillennials’ Social Nature Should Not Be Ignored

Socially Conscious

Brand-Image Awareness Value Opinions ofFamily and Friends

11

Social Media

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Agenda

Millennials− Demographics− Preferences− Investment Decision-MakingMarket Overview


Sources: Bloomberg, CSIM, December 2014

Investment Decision-MakingMillennials Have Lived Through Many Different Market Cycles

High School College Job Market Family

Bull Market Cycles


Sources: Cornerstone Macro Research; ICI Annual Mutual Fund Shareholder Tracking Survey, November 2012; Bloomberg Business News, August 4, 2014.

According to a 2012 Investment Company Institute (ICI) survey 22% percent of millennials who owned mutual funds said they would only invest in financial

instruments with no or below-average risk

Cash is the preferred investment option

Another survey showed that 39 percent of millennials said cash was their preferred investment option*

Investment Decision-MakingMillennials Are Risk Averse

* for money they didn’t need for at least 10 years (Bankrate.com, July 2012)


Investment Decision-MakingMillennials Are Cost-Conscious

48% Wished their brokerage firm

would lower its fees

When asked what would most improve their satisfaction with

their brokerage or advisor?

Top Answer: Fee Reduction

69% 56% 48%

Source: Think Finance, October 2014


Source: U.S. Trust 2014 Wealth and Worth Survey

Investor Attitudes About Social-Impact Investing

Investment Decision-MakingMillennials Care About the Environment


Source: Cornerstone Macro Research; Pew Research, July 2014

Millennials cut back on consumer spending While Millennials have a large amount of student-loan debt, they are cutting back on borrowing in

other ways by not buying houses or maxing out their credit cards.

Population living in multi-generational householdshas doubled since 1980

Investment Decision-Making Millennials Spend Less


Investment Decision-MakingCommunication

Education Financial education can help transition from risk

aversion to risk awareness

Preferences Cost-conscious and purpose investing can entice

millennials now and provide foundations for longer relationship

Technology Embrace technology and increase transparency to

serve millennials with innovative solutions

Technological Innovation

Low cost

Low Risk

Transparency

Socially conscious

18


Agenda


Market Overview


Source: Morningstar Index Returns

Market OverviewVolatility Returns 2015: U.S. Dollar Up And Oil DownPeriod Ended October 31, 2015

International rises

US outperforms

No dispersion


Market OverviewEffect of Strong U.S. Dollar on International Equities

Divergent monetary policies from global central banks have increased sensitivity to the US dollar

Source: Bloomberg

Period Ended November 30, 2015

14.1%

‐4.6%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15

MSCI EAFE Local MSCI EAFE USD

18.7% performance difference


Market Overview Oil and Dollar: Stronger Dollar Means Lower Commodity Prices

Source: Cornerstone Macro Research

60

65

70

75

80

85

90

9515

35

55

75

95

115

135

155

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

U.S

. TW

Dol

lar

Inde

x

Oil

Pri

ce In

dex

Oil Price Index U.S. TW Dollar Index (Inverted Scale)



Market OverviewBull Market Cycles

Source: Bloomberg

Characteristic Dec 1996 Mar 2000 Oct 2002 Oct 2007 Mar 2009 Dec 2014 Aug 2015 Nov 2015

Price/Earnings Ratio 6.9 26.4 13.9 16.7 11.1 16.7 16.7 16.3

Dividend Yield 2.0% 1.1% 2.0% 1.8% 4.1% 2.0% 2.2% 2.2%

10-Yr Treasury 6.4% 6.2% 3.6% 4.6% 2.9% 2.2% 2.2% 2.2%



Market OverviewChina Equity Markets

Chinese real GDP growth slowed under 7%

People’s Bank of China actions

Reduce interest rates

Ban short selling

Halt up to 60% of securities

Order buy-backs

Source: Deutsche Bank, 2012

Correction

Margin B

alanceInde

x Le

vel

Source: Bloomberg Source: Bloomberg


Market OverviewVolatility Is Back

Spikes in volatility have generally been related to Federal Reserve announcements since 2013

Volatility has increased to historical averages in 2015

Source: Bloomberg



Market Overview Market Implications Of A Fed Hike

Sources: LPL Financial Research, Bloomberg, UBS, FOMC November 14, 2014

Fed Rate HikesTime to Top of Market (# of Months) 41 8 28 9 40 25Fed Funds Rate Range (Tightening) 6.00 – 20.00% 6.00 – 7.25% 6.50 – 9.75% 4.75 – 6.50% 1.00 – 5.25% -


Top Equity Market Themes

Divergent monetary policies by major central banks

Expectations that the Fed ends an unprecedented era of rock bottom U.S. interest rates

U.S. U.S. economy grows at moderate pace, fueled by labor market strength and consumer spending

Increased equity volatility

U.S. equity valuation above average

− Favor cyclical sectors as growth outperforms value in the last phase of the economic cycle

− Bond proxies like utilities and consumer staples will likely face head winds with higher interest rates

International In Europe, potential outperformance of value over growth as risky assets take advantage of

quantitative easing in Europe and Japan

Emerging markets facing headwinds with inflation concerns, strong dollar, lower commodity prices and political uncertainty in key countries like Brazil, China and Russia

Market Overview2016 Outlook


Important DisclosuresInformation and data provided have been obtained from sources deemed reliable, but are not guaranteed. Past performance is no guarantee of future results.

Charles Schwab Investment Management makes no representation about the accuracy of the information contained herein, or its appropriateness for any given situation.

Founded in 1989, Charles Schwab Investment Management, Inc. is a subsidiary of The Charles Schwab Corporation and is one of the nation’s largest asset management companies, with $266.5B in assets under management as of September 30, 2015 Charles Schwab Investment Management, Inc. managed approximately $255.6B on a discretionary basis and approximately $10.9B on a non-discretionary basis.

The S&P 500 Index or the Standard & Poor’s 500 Index is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The Morningstar Large Cap Index tracks the performance of U.S. large-cap stocks that represent the largest 70 percent capitalization of the investable universe.

The Morningstar Small Cap Index tracks the performance of U.S. small-cap stocks that fall between 90th and 97th percentile in market capitalization of the investable universe.

The Morningstar Emerging Ex US Index captures the performance of the stocks located in the emerging countries across the world.

The MSCI EAFE Index is an index created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia. This international index has been in existence for more than 30 years.

The oil price index is a used as a benchmark. A benchmark crude is a crude oil that serves as a reference price for buyers and sellers of crude oil.

The trade-weighted US dollar index, also known as the broad index, is a measure of the value of the United States dollar relative to other world currencies. It is similar to the U.S. Dollar Index in that its numerical value is determined as a weighted average of the price of various currencies relative to the dollar, but different currencies are used and relative values are weighted differently.

The price-to-earnings ratio, or P/E ratio, is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share.

The dividend yield a dividend expressed as a percentage of a current share price.

The 10-Yr Treasury is a debt obligation issued by the United States government that matures in 10 years. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

China H-shares refer to the shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange.

China A-shares are shares of the Renminbi currency that are purchased and traded on the Shanghai and Shenzhen Stock Exchanges.

The Shanghai Composite is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.

The Shenzhen A-share Index is the index that tracks the daily price performance of all A-shares listed on the Shenzhen Stock Exchange, which are restricted to local investors and qualified institutional foreign investors.

Margin balance is a negative number that represents a debit balance or the amount that is on loan. The debit balance is subject to margin interest charges. Margin balance is only displayed if your account is approved for margin.

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."

Unless otherwise noted, the opinions expressed are those of Charles Schwab Investment Management, Inc., are subject to change without notice, and are not intended to serve as investment advice, a recommendation, offer, or solicitation to buy or sell any securities, or recommendation regarding specific investment strategies.

Some of the statements in this document may be forward looking and contain certain risks and uncertainties.

This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. The types of securities mentioned herein may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

©Charles Schwab Investment Management, Inc. All rights reserved. (1215-7222)


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behavioral finance discussion and market outlook · source: pew research center, february 2010 when...

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