insights and perspectives 2016 e
TRANSCRIPT
The Great Disconnect2016
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March 9, 2009 – The Bottom Was In
Cash Flows Out of Equities into Bonds Unabated
Source: ICI (excludes MMKT) – Net new cash flow is the dollar value of new sales minus redemptions combined with net exchanges. Note: Data for funds that invest primarily in other mutual funds were excluded from the series. Components many not add to the total because of rounding.
2008 2009 2010 2011 2012 2013 2014 2015 Total-$600
-$400
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
-229
-2 -24
-129 -153
160
25
-76
428
30
371
232
118
306
-71
44
-27
1003
Equity
Bonds
$B
U.S. Industry - Net Mutual Fund Cash Flows
As They Relentlessly Focus On Macro Economic Risks
No **** Way
But Investor Confidence Continues To Decline
On A Constant Fear Of The Next Crisis
> “George Soros says U.S. Banks ‘basically insolvent’”– Reuters, April 6th, 2009> “Fed to buy $600 billion in bonds to aid economy” – Toledo Blade, March 11th, 2010> “Debt crisis unsettles European economy” – The Washington Post, February 9th, 2010> “Fears grow over length of U.S. job crisis” – Economic Times, December 3rd, 2010> “Obama: Raise debt ceiling or risk global recession” – Bloomberg, April 15 th, 2011> “United States of America [Credit] Rating Lowered to ‘AA+’ due to Political Risks, Rising
Debt Burden” – Standard & Poor’s, August 5th, 2011> “Occupy Wall Street: Civil society’s awakening” – LA Times, November 22nd, 2011> “U.S. approaches ‘fiscal cliff’ and world watches from the sidelines” – The Washington
Post, November 2nd, 2012> “Five years after Lehman, Americans still angry at Wall Street” – Reuters, September 15 th,
2013
The Great Disconnect
Total Return from March 9, 2009
*MSCI World133.4%
Source: Bloomberg, In Canadian Dollars to December 31, 2015
S&PTSX110.0%
S&P500272.2%
*MSCI Europe105.6%
(*MSCI World / Europe Price only)
The Hedge Fund Disconnect
Source: arborresearch.com
The Most Hated Bull Market in HistoryChart 1: Sell Side Consensus Indicator (as of 29 February 2016)
Source: BofA Merrill Lynch Global Research US Equity & Quant StrategyNote: Buy and Sell signals are based on rolling 15-year +/- 1 standard deviations from the rolling 15-year mean. A reading above the red line indicates a Sell signal and a reading below the green line indicates a Buy signal.
Essentially The Macro Market Flux Capacitor Failed
The Fallacy of Forecasts
-1%
How That Contributed To The Wealth Effect
So Why Have Global Markets Performed So Well
Corporate Profits Have Exploded Since 200919
29-3
2
1933
-37
1937
-38
1938
-41
1941
-46
1946
-50
1950
-52
1952
-56
1956
-58
1958
-59
1959
-61
1961
-69
1969
-70
1970
-74
1974
-75
1975
-80
1980
-83
1983
-89
1989
-91
1991
-00
2000
-02
2002
-07
2007
-09
2009
+
-100%
-50%
0%
50%
100%
150%
200%
-+75%
+198%
-+49%
+92%
-+29%
+238%
-+18%
+58%
-+22%
+19%
-+12%
+94%
-+13%
+78%
-+16%
+100%
-+19%
+103%
-+23%
+179%
-+22%
+109%
-+46%
+130%
S&P 500 EPS Cycles
Median EPS increase over 11 expansions: +100% Average EPS increase over11 expansions : +115%
Source: IGIM, UBS, NBER
Corporate Profits Ultimately Drive Equity PricesQ1-1964
Q1-1965
Q1-1966
Q1-1967
Q1-1968
Q1-1969
Q1-1970
Q1-1971
Q1-1972
Q1-1973
Q1-1974
Q1-1975
Q1-1976
Q1-1977
Q1-1978
Q1-1979
Q1-1980
Q1-1981
Q1-1982
Q1-1983
Q1-1984
Q1-1985
Q1-1986
Q1-1987
Q1-1988
Q1-1989
Q1-1990
Q1-1991
Q1-1992
Q1-1993
Q1-1994
Q1-1995
Q1-1996
Q1-1997
Q1-1998
Q1-1999
Q1-2000
Q1-2001
Q1-2002
Q1-2003
Q1-2004
Q1-2005
Q1-2006
Q1-2007
Q1-2008
Q1-2009
Q1-2010
Q1-2011
Q1-2012
Q1-2013
Q1-2014
Q1-2015
0
500
1000
1500
2000
0
20
40
60
80
100
120S&P 500EPS
Source: IGIM, UBS, Bloomberg
Today’s Headlines Revolve Around Oil
38 Years Ago – We Were Running Out of Oil
“World oil production can probably keep going up for another six or eight years. But, sometime in the 1980’s it can’t go up much more. Demand will overtake production.”
Nationally Televised Speech, April 18, 1977
And Today We Have Too Much – Drill Baby Drill!
Source: arborresearch.com
The Oil Price Collapse in Perspective
19
This Chart Could Well Determine The Future Price of Oil
If I Had A Million Dollars ... I’d Be Rich (Wouldn’t I?)
The Stock/Bond Valuation Disconnect
U.S. 10 Yr Bond – S&P 500 CDN 10 Yr Bond – S&P TSX
Source: IGIM, as at January 15, 2016
Expansion S&P500 increase % expansion
# of 15% corrections
during expansion
# of 8% corrections
during expansion
2009+ + 190% 2 10
2001 - 2007 + 105% 1 5
1990 - 2000 + 415% 1 9
1983 - 1990 + 247% 1 15
1975 - 1981 + 126% - 7
1970 - 1973 + 73% - 2
1960 - 1970 + 107% 2 6
1957 -1960 + 56% - -
1953 - 1957 + 117% - 2
1948 - 1953 + 93% 3 5
Average Cycle + 149% 1 6
Source: IGIM, NBER, Bloomberg
15%+ corrections- 2012- 2011- 2003- 1998- 1987- 1966- 1962- 1950- 1949- 1947
*1981 Double-dip
8%+ corrections in
2009 cycle- 2009 x 1- 2010 x 3- 2011 x 3- 2012 x 2- 2015 x 1
Corrections are a Normal Part of the Cycle
What You Do Here Will Largely Determine Your Success
S&P 500 Intra-year Declines vs. Calendar Year Returns
Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management
1980198
1198
2198
3198
4198
5198
6198
7198
8198
9199
0199
1199
2199
3199
4199
5199
6199
7199
8199
9200
0200
1200
2200
3200
4200
5200
6200
7200
8200
9201
0201
1201
2201
3201
4201
5-60-50-40-30-20-10010203040
26
-10
15 17
1
26
15
212
27
-7
26
4 7
-2
34
20
31 2720
-10-13-23
26
93
144
-38
2313
0
13
30
114
-17 -18 -17-7
-13-8 -9
-34
-8 -8
-20
-6 -6 -5 -9-3
-8 -11-19
-12-17
-30-34
-4 -8 -7 -8 -10
-49
-28
-16-19-10
-6 -7 -13
Probability stock fell since you last checked
If you check the value of your portfolio...
Daily Weekly Monthly Yearly Each Decade0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%47%
44%
40%
28%
20%
Source: Source S&P 500, March 4th, 1957-Present
The Seventy Per Cent Advantage
S&P500 Total Return Ranges 1926-2015‘14
'12
'10
'04
'15 '93 '09 '13
'00 '11 '88 '03 '97
'90 '07 '86 '99 '95
'81 '56 '79 '98 '91
'77 '94 '72 '96 '89
'69 '92 '71 '83 '85
'62 '87 '68 '82 '80
'53 '84 '65 '76 '75
'46 '78 '54 '67 '55
'01 '40 '70 '59 '63 '50
'73 '39 '60 '52 '61 '45
'02 '66 '34 '56 '49 '51 '38 '58
'08 '74 '57 '32 '48 '44 '43 '36 '35 '54
'31 '37 '30 '41 '29 '47 '26 '42 '27 '28 '33-40% to -
50%-30% to -
40%-20% to -
30% -10% to 20% 0% to -10% 0 % to 10% 10% to 20% 20% to 30% 30% to 40% 40% to 50% 50% to 60 %