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First Quarter 2017 Review and 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.

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

1-Year and Q1 Performance

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1-Year Return Q1 Return

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U.S. economic data finally started beating expectations in the 2nd half of last year.





Little threat of a U.S. recession with consumer confidence continuing to improve.





Global recession risks fading in response to improved economic outlook.

ECONOMIC DATA COMING IN ABOVE ESTIMATES IN MOST

COUNTRIES/REGIONS





With outlook improving, inflation pressures are starting to mount globally.

NEW RECORD FOR BREADTH OF COUNTRIES REPORTING

PRICE PRESSURES





Fair value on 10-year should reach 2.8% by year-end, which is where it ended 2013.





Room for yields to rise before they become a headwind to equities.





Corporate tax reform may unlock cash but effective tax rate has been dropping





Secular bull ready to resume after multi-year consolidation.





Prolonged period of consolidation can act as a bear market.





Earnings Environment Back in Growth Trajectory





Sentiment is mixed. Signs of both optimism and nervousness.





Watch Reports Favorable





Potential decline would be limited as long as the majority of indicators remain positive.





Beware the Crowd: Sentiment Coming Down from Excessive Optimism





Don’t Fight the Trend: US and International Market Internals Favorable



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

BWM TacticalPositioning

No strategy assures success or protects against loss.

OVERWEIGHT MARKETWEIGHT UNDERWEIGHT

Stocks

Bonds

Cash

U.S.

Large Cap

Mid/Small Cap

International

Municipal Bonds

Inv. Grade Bonds

High Yield

Bank Loans

Duration


Bottom Line

• Tactically overweight equities, but less so than over the last 12 months

• Holding cash for opportunities, not as long term strategy

• Pros: US economy, global economy, earnings recovery, potential for corporate tax reform

• Cons: Unpredictable US administration, tax reform may not happen or might come later, economy/inflation have too much upside and cause the Fed to move quickly

• Strategy for 2017: Remain Flexible

Questions?


Executive Summary

• After 1.5 years of disappointing economic data coming out of the U.S., positive data started being released in the second half of 2016.• Many of NDR’s Recession Indicators indicate that there is currently very little threat of a U.S. recession. Additionally, the risks of a global recession is

fading as well. Many countries have been releasing positive economic data and NDR’s Global Recession Probability Model continues to improve.• With the global economic outlook improving (as shown by the global PMI chart), inflationary pressures are increasing globally and yields start to move

higher.• Assuming 2-3 more rate hikes and core inflation moving up to the Fed’s target, we see the fair value on the 10-year treasury rising to 2.8%.• Conventional market wisdom used to dictate that stock prices and bond yields generally have an inverse correlation – As interest rates rose, inflationary

fears were heightened and stock prices would suffer. However, this correlation has turned mostly positive in recent years, as extraordinary monetary policy has kept rates low. Rising rates should bode for stocks until the yield on the 10-year treasury hits 4%.

• At 39%, the U.S. stated corporate tax is the highest in the developed world. The federal rate is 35%, and most economists add 4% for state and local taxes. However, it should be noted that most companies pay less than the stated tax rate due to tax breaks, loss carryovers, and non-repatriated overseas profits. The median effective tax rate (taxes paid/pretax income) for S&P 500 companies is 28%, near its lowest level since at least 1973. The four biggest sectors for overseas retained earnings have used their cash in four different ways. Tech has preferred buybacks; Energy: capex; Staples: dividends; Health Care: acquisition. The implication is that the type of restrictions could matter in determining the winners and losers of any repatriation changes. If a repatriation tax cut is not restricted too much, it could offset the lessened relative appeal of firms with low effective tax rates due to large overseas operations.

• The S&P 500 has traded in a tighter and tighter trading range over the course of the last three years. After a five-year run where the markets advanced 178%, this consolidation can be seen as the market catching its breath. Past incenses of multi-year consolidation periods have led to future market advances and often look like the early stages of a bull market.

• Strong earnings could help advance the bull market. Strong earnings growth has historically been good for the markets. • Sentiment is currently mixed and we are seeing signs of both optimism and nervousness. When looking at these mixed sentiment indicators as a whole, it

doesn’t translate into a “peak euphoria” environment that would indicate a cyclical turning point in the markets.• If all three Watch reports and other indicators remain favorable, a drop of low single digits is a reasonable expectation for the next decline. • With sentiment coming down from extreme optimism levels and market internals remaining favorable, we would then expect a subsequent rally back to

new highs.• We remain overweight stocks, underweight bonds, and slightly overweight cash.• Within equities, we are overweight U.S. stocks –primarily overweight large cap, slightly overweight mid/small cap, and market weight international

equities.• Within fixed income, we remain underweight municipal, investment grade, and high yield bonds with a focus on owning shorter duration bonds.

• International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

• The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.• The prices of small cap stocks are generally more volatile than large cap stocks. • High yield bonds are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above.

They generally should be part of a diversified portfolio for sophisticated investors.• P/E is short for the ratio of a company's share price to its per-share earnings, providing a company's valuation.

first quarter 2017 review and outlookbrownwealthmgt.com/.../2017/04/bwm-q1-2017-update.pdf · first...

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