investment strategy brief - stifel · 2020. 2. 20. · investment strategy brief 9 source: stifel...

February 20, 2020

INVESTMENT STRATEGY BRIEF:2020 OUTLOOK

Insights from Stifel’s CIO Office

Michael O’Keeffe, CFA Chief Investment Officer

Nik Eftimov, CFA Senior Investment Strategist

David Motsonelidze, CFA Director of Macro Strategy

Jared BrentInvestment Strategy Analyst

Sneha JoseDirector of Behavioral Finance

2INVESTMENT STRATEGY BRIEF

Introductionpage 3

2020 Outlook page 7

Macro Environmentpage 22

Economic and Market Cyclespage 30

Market Monitorpage 34

Forecasts & Allocation Insightspage 40

Long Term Themespage 45

Table of Contents


Introduction: Equity Performance

Source: Stifel Investment Strategy via Bloomberg, as of February 18, 2020

Performance

2019

2020


Introduction: Market Drivers

Wuhan Coronavirus

ZikaEbola

MERS Coronavirus

Avian Flu

SARS

Swine Flu

Source: Stifel Investment Strategy via Bloomberg, as of February 18, 2020; monthly data.

Coronavirus – MSCI ACWI Index


Introduction: Market Drivers

Source: Stifel Investment Strategy via John Hopkins University CSSE, Stratfor, as of February 19, 2020

Coronavirus impact

• There have been 75,282 confirmed coronavirus cases globally, with 96% of them emanating from Mainland China. Current mortality rate stands at 2.7% versus 20% recovery rate.

• China’s total lockdown to contain virus comes in conflict with economic mobilization as by quarantining results in lost economic output at least in the short term as production stalls, affecting global supply chains.

• Even though economic impact from the virus is largely affecting China so far, the country’s share of global GDP has been increasing substantially and currently is at 16%. Worsening of the crisis might have ripple effects globally.

• Since the beginning of the year, Bloomberg consensus 2020 real GDP has been lowered from 5.9% to 5.8% for China, from 3.10% to 2.95% for the world, and has stayed flat at 1.8% for the U.S.

• China has taken meaningful steps to face the crisis. However, because of the long incubation period of the virus, it remains uncertain whether these steps will be enough.

• Our base case calls for coronavirus containment. The global economy will continue to be affected but such impact will be manageable. Supply chains are likely to be disrupted.


Introduction: Macro, Markets, and Themes

Source: Stifel Investment Strategy data via Bloomberg, as of February 18, 2020

MACRO MARKETS THEMES

Market Environment• Increased volatility• Modestly higher returns forward• Risk of an event-driven correction

Equity Market • Earnings growth slowing, valuations

elevated• Driven by fundamentals• Record bull run expected to continue• Attractive non-U.S. valuations• Correction – “when, not if”

Bond Market• Rates falling, curve flattens, 10Y 3M

inverted • Household credit rising but remains

modest relative to GDP• Stretched corporate credit has improved

Foreign Exchange & Commodities• Dollar (DXY) up 3.1% YTD on rate

differentials and safety premium• Gold up 4.9% YTD to $1,591• Oil (WTI) down 16.3% YTD on

geopolitical tensions and Coronavirus

Mega Themes• Productive Competition• Fourth Industrial Revolution

…and Globalism• Shifting Demographics

…and Millennials• Geopolitical Tensions

…and Protectionism• Late in Economic Cycle

Potential Headwinds • Coronavirus outbreak• Inflation and price pressures picking

up faster than expected• Slower U.S. GDP growth• Trade and tariff tensions• Heightened geopolitical risks (UK,

Europe, Iran)

Existing Tailwinds• 2019 Resolutions• Solid U.S. Economic growth• Favorable 2020 Earnings Outlook• Global Central Banks remain

accommodative • Increasing productivity through

innovation

U.S. Economy• GDP solid, 1.9% (Q1 2020 estimate)• Low unemployment, 3.6%• Non-farm Payrolls 211K (3-month MA)• Wage Growth, 3.1%• Inflation higher, 2.3% (Core CPI)• Recession – “when, not if”

Central Bank Activity• Dovish global central banks• Global M2 increasing• March probability of a rate cut is 10%• Bottoming balance sheet• Carefully rebuilding the tools

Global Economy• Asia ex Japan GDP solid, 5.3% in 2019• Japan Real GDP, 0.8% in 2019• Europe 2-3 years behind U.S.• Europe core stronger than periphery• Global Manufacturing Stabilizing

Geopolitical Events• Protectionism and trade• 2020 Presidential Election • The Democratic Primary• Impeachment Inquiry• Gulf tensions• EU/Brexit• China, Russia, Middle East, North Korea


2020 Outlook: A Decade of Productive Competition


Source: Stifel Investment Strategy data via Bloomberg, as of February 18, 2020https://www.stifel.com/Newsletters/AdGraphics/FlipBooks/SightLines_Archive/SL020720/mobile/index.htmlhttps://www.stifel.com/newsletters/adgraphics/flipbooks/sightlines_archive/sl011720/mobile/index.html#p=1

2020 Outlook

2019 Year in Review: Resolutions


Source: Stifel Investment Strategy

Market Sight|Lines – February 7, 2020

• The next step in the Brexit process is an implementation period, where the main focus is to negotiate a comprehensive trade agreement.

• During this period, the UK will remain a part of the EU’s single market and customs union but will disengage politically, not attending EU meetings.

• Some areas to be negotiated include: general standards and rules, financial services arrangements, automotive exports/imports, commercial fishing rights, border and transportation, and data protection.

• The U.S. remains intent on pursuing a revised trade deal with the EU, and so we believe this will be a priority focus early in 2020.

• The U.S. has also signaled its desire to negotiate a positive trade deal with the UK, so we expect those talks to be held in 2020.

• While we believe some form of a trade deal will get done at some point, we do expect noise in the news and volatility in markets as both sides get to the end result that’s best for them.

2020 Outlook


Source: Stifel Investment Strategy data via World Economic Forum, as of December 31, 2019

2020 Outlook

2020 Outlook: U.S.-China Competition

• The index is an average score of12 pillars, composed of 103indicators, that measure factorssuch as macroeconomicstability, health, labor market,and innovation capability.

• Competitiveness: the attributesand qualities of an economythat allow for a more efficientuse of factors of production.

World Economic Forum Global Competitiveness Index

Rank Economy Score Rank Score

1 Singapore 84.8 +1 1.3

2 United States 83.7 -1 -2.0

3 Hong Kong SAR 83.1 +1 0.9

4 Netherlands 82.4 +1 0

5 Switzerland 82.3 -1 -0.3

6 Japan 82.3 -1 -0.2

7 Germany 81.8 -4 -1.0

8 Sweden 81.2 +1 -0.4

9 United Kingdom 81.2 -1 -0.8

10 Denmark 81.2 - 0.6. . . . .. . . . .. . . . .

28 China 73.9 - 1.3. . . . .. . . . .. . . . .

141 Chad 35.1 -1 -0.4

Diff. from 2018

11INVESTMENT STRATEGY BRIEFSource: Stifel Investment Strategy data via Bloomberg and World Bank, as of December 31, 2019

2020 Outlook

2020 Outlook: U.S.-China competition

GDP (current U.S.$), largest 10 economies

2000

2018

United States

Japan

United Kindom

China

France

United Kindom

Germany

Italy

Canada

Can

ada

Mexico

Source: Stifel Investment Strategy via Bloomberg, as of December 23, 2019

Market Capitalization, largest 10 companies


Source: Stifel Investment Strategy data via Bloomberg, as of December 31, 2019.

2020 Outlook

2019 Year in Review: Market Returns


2020 Outlook

2019 Year in Review: How good were stock returns?

31.48%

• Based on our forward-looking capital market assumptions, we consider the chances of a return equal to or better than the 2019 S&P 500 return of 31.48% to be about 5%.

• In other words, we expect this to happen every 20 years or so.

0% 7.75%


2020 Outlook

A Decade of Productive Competition

We see the ‘20s as a decade of Productive Competition. Examples:

• Economic: U.S. vs. China• Political: capitalism vs. socialism• Business: innovation vs. tradition• Policy: globalism vs. protectionism

Why “Productive” Competition?

• We believe the challenges and friction created through this competition will make us stronger and better in the long run.


2020 Outlook

2020 Outlook: Three scenarios

Base Case: 60% Probability• Economic growth may slow further, but continue.• Earnings growth muted, but positive.• Fiscal support will come into focus.• The 2020 election, while a source of volatility, will support markets.

Bull Case: 25% Probability• The U.S.-China Trade War sees a more speedy resolution.• A business-friendly presidential candidate emerges as the front runner.• Strong manufacturing recovery - productivity and wage growth increase.

Bear Case: 15% Probability• Geopolitical risks resurface.• A business-unfriendly candidate emerges as the front runner.• Despite rising inflation, global growth slows leading to a recession.


2020 Outlook

Getting Ready: the 2020-U.S. Presidential Election

Our approach on preparing for the election focuses on:• Understanding the 4 phases of the election (early primary,

late primary, general election, post-election)

• Anticipating each candidate’s impact on businesses and markets

• Understanding each candidate’s chances of winning

• Assessing any possible changes in congressional control

Source: Stifel Investment Strategy, RealClearPolitics, Business Insider, The Atlantic, Reuters, as of February 18, 2020


Source: Stifel Investment Strategy data via Bloomberg, as of December 27, 2019; Based on 12-month moving average

2020 Outlook

2020 Outlook: The Growing Role of Geopolitics

"Geopolitics" News Story Count

0

50

100

150

200

250

De

c-1

1

Ma

y-1

2

Oct

-12

Ma

r-1

3

Au

g-1

3

Jan

-14

Jun

-14

No

v-1

4

Ap

r-1

5

Se

p-1

5

Feb

-16

Jul-

16

De

c-1

6

Ma

y-1

7

Oct

-17

Ma

r-1

8

Au

g-1

8

Jan

-19

Jun

-19

No

v-1

9


2020 Outlook

2020 Outlook: Geopolitical Dashboard Least (1 - 10) Most, Likelihood = Escalation, Market Impact = Up or Down

Key:

Event Likelihood Market Impact Description

No UK-EU Trade Agreement 3 6Base case: Transition period will be completed in 2020. Expect

volatility in the transition process.

Business Weakening U.S. President 3 8Volatility will likely increase as a result of greater uncertainty around

what might happen in the election.

China Trade Tariffs 3 9Base case: a broader trade deal is likely to happen. Interim news and

tariffs will drive market volatility.

D.C. Gridlock 4 6Base case: drug pricing and internet regulation a focus for both

Parties, expect some compromise.

U.S. - Europe Relations 5 7Still a strategic ally, however, relationship occasionally challenged

via NATO and tariffs.

Coronavirus Pandemic 5 9Coronavirus will be contained. The global economy will be affected,

but impact will be manageable. Company supply chains disrputed.

North Korea Conflict 6 3Denuclearization still in the works. China remains a liaison between

U.S. & North Korea.

LatAm Populism 6 3Populism remains driver in Latin America, anti-establishment policies

may impact investor confidence.

South China Sea Conflict 6 4China expands activity on Spratly Islands, a crucial int'l shipping

route. Potential for military clash with U.S.

Major Terror Attacks 6 4 Terrorist attacks are unpredictable events that may pose disruption.

Russia - West Relations 7 4Russia & U.S. appear to be co-existing but continue to fight for power

through proxies.

Cyber Attacks 7 4As society becomes more digitized, the world is more prone to

attacks via hacking.

Italy Populism 7 5Populism present, but Salvini's position has weakened. Expect Italy

to challenge EU budget rules and institutions.

Gulf Tensions 8 4 Tensions in the Gulf region will likely not subside in 2020.

Hong Kong Tensions 8 5Tensions between Hong Kong and China have risen significantly since

last summer. Likely to remain elevated.

U.S. - China Competition 10 6Competition for global leadership will impact markets; Tech will

continue to play important role.



2020 Outlook

2020 Outlook: U.S. China Competition

• Department of Defense sees long-term strategic competition with China as one of its “principal priorities”

• Economists predict China will surpass the U.S. economy and become the world’s largest economy between 2030 – 2040.

• U.S. wants to maintain global status, and China is aspiring to become a world economic power

• Examples of competition:

• Economic and cultural influence

• Technology

• Healthcare

• Capital Markets


2020 Outlook

2020 Outlook: Stifel Financial ID

• Based in Behavioral Finance

• Helps us understand how investors’ reactions and attitudes toward investing shape their investment decisions

• A simple questionnaire that looks at six dimensions of investing

• Risk attitude

• Composure

• Market Involvement

• Perceived Investment Expertise

• Degree of Delegation

• Belief in Skill


The following summarizes how we deliver our economic and market analysis and corresponding investment guidance, along with some helpful links.

• Each day we broadcast Stifel Investor Insights on iHeartRadio.

• Sight|Lines is a weekly note for clients, along with a video summary and a podcast on Spotify, Apple, Omny, and Google.

• Market Pulse is shared when the S&P 500 Index moves up or down 2%.

• The monthly Investment Strategy Brief video series shares our update on the current economic and market environment. The podcast: Spotify, Apple, Omny, and Google.

• The weekly, monthly, and quarterly Market Perspectives provide a recap of the most recent period’s global market results.

• The monthly Favorite 15 shares our favorite 15 slides for the month.

• Stifel’s Allocation Insights provides our dynamic asset allocation leanings quarterly.

• The Stifel Outlook: provides our annual outlook and related articles.

• Stifel's Approach to Asset Allocation summarizes our asset allocation approach and provides a catalogue of various recommended asset mix models.

• The Stifel Financial ID video series provides an overview of our work in behavioral finance and the related Stifel Financial ID model.

2020 Outlook

2020 Outlook: Stifel Guidance

https://www.youtube.com/playlist?list=PLuq2CRBDJlsBtA55B34FvyvjcMKM9_cXV

https://open.spotify.com/show/6bzjnBnEyyP3c75Y9uQaV4

https://podcasts.apple.com/us/podcast/id1487198072

https://omny.fm/shows/stifel-sightlines/playlists/podcast

https://www.google.com/podcasts?feed=aHR0cHM6Ly93d3cub21ueWNvbnRlbnQuY29tL2QvcGxheWxpc3QvNjUzOWY4YTEtOWE5Ni00MTg3LWJhNWMtYWFmNDAxN2UxZTQ1L2VjN2JmOTg2LTgzNWItNGE0MC04NTIwLWFhZmYwMGZkYzM5Ni9lZjAzNWZmZS05MWIxLTRiZTYtOTE1OC1hYWZmMDBmZTRjNjcvcG9kY2FzdC5yc3M%3d

https://www.stifel.com/newsletters/AdGraphics/InSight/MarketPulse/MarketPulse.pdf

https://www.youtube.com/playlist?list=PLuq2CRBDJlsC6RNiEnC7oeAStlGz5oWCB

https://open.spotify.com/show/4Cuytv32w6SvFlUxQKSp9h

https://podcasts.apple.com/us/podcast/1-stifel-investment-strategy-brief-october-2019/id1486936401?i=1000456198473

https://omny.fm/shows/stifel-investment-strategy-brief/1-stifel-investment-strategy-brief-october-2019

https://www.google.com/podcasts?feed=aHR0cHM6Ly93d3cub21ueWNvbnRlbnQuY29tL2QvcGxheWxpc3QvNjUzOWY4YTEtOWE5Ni00MTg3LWJhNWMtYWFmNDAxN2UxZTQ1LzBiNTY0MjI1LTcwMGMtNGRhNC1iMmUwLWFhZmMwMGYxNDQxZC8xYzZlZWZkZC0zNThiLTQxZTktODI0MC1hYWZjMDE2ODNlYjAvcG9kY2FzdC5yc3M%3d

https://www.stifel.com/newsletters/AdGraphics/InSight/Market_Perspectives/MP_Weekly.pdf

https://www.stifel.com/newsletters/AdGraphics/InSight/Market_Perspectives/MP_Monthly.pdf

https://www.stifel.com/newsletters/AdGraphics/InSight/Market_Perspectives/MP_Quarterly.pdf

https://www.stifel.com/newsletters/AdGraphics/InSight/Favorite15/Favorite15.pdf

http://portal.stifel.com/ProductsServices/InvestmentStrategy/Documents/Asset%20Allocation/G139%20InvStrategy_AssetCatalog_WithLinks.pdf

https://www.youtube.com/playlist?list=PLuq2CRBDJlsAsFFeYRvL_B2EvGDUQBqqH


MACRO ENVIRONMENT


Macro Environment: The Consumer

Very Positive

Neutral

Very Negative


The Consumer

Redbook Ret. Sales 4.8 Personal Income (%) 0.2 Pers. Spending (%) 0.3

Based on a 3-month moving average Based on a 3-month moving average

Retail Sales (YoY) 4.4 Avg. Hrly. Earnings 3.1 Unemploym. Rate 3.6

Based on a 3-month moving average

Consumer Confidence 131.6 Nonfarm Payrolls 225.0 Consumer Credit 4.5

1 yearlong term 1 year long term 1 year long term

1 year

long term 1 year long term 1 year long term 1 year

long term 1 year long term 1 year long term


Macro Environment: Housing

Very Positive

Neutral

Very Negative

Housing

NAHB Home Builder's 74.0 Mortg. Apps (%) 1.1 Pend. Home Sales (%) (4.9)

Based on 26-week moving average Based on a 3-month moving average

CS Home Prices (%) 3.5 Exist. Home Sales (%) 3.6 New Home Sales (%) (0.4)

Based on 3-month moving average Based on 6-month moving average

Housing Starts 1608.0

1 yearlong term 1 year

long term 1 year long term 1 yearlong term 1 year

long term 1 year

long term 1 year long term



NFIB Small Bus. Opt. 104.3 Bus. Inventories (YoY) 2.2 Truck Ship. (YoY %) 6.6

Based on a 3-month moving average

Markit Comp. PMI 53.3 Markit Manufac. PMI 51.9 Markit Services PMI 53.4

ISM Manuf. 50.9 ISM Nonmanufact. 55.5 Chicago PMI 42.9

Core Capex Orders -0.8 Factory Orders 1.8 Constr. Spending (%) (0.2)

Based on a 3-month moving average Based on a 3-month moving average Based on a 3-month moving average

Nonres. Spending (2.3) Wholesale Inventories (0.2) Durable Goods Orders 2.4

Based on a 3-month moving average Based on a 3-month moving average

1 year

long term 1 year long term 1 year

long term 1 year

long term 1 year

long term 1 year

long term 8 quarters

long term 1 year

long term

long term 1 year

long term

long term 1 yearlong term 1 year

long term 1 year

1 year

long term 1 year

long term 1 year

Macro Environment: Business

Very Positive

Neutral

Very Negative


Business


Macro Environment: Inflation

Very Positive

Neutral

Very Negative

Inflation


Core Inflation (CPI) 2.3 Inflation (CPI) 2.5 Inflation (PCE) 1.6

Year over year change Year over year change

Core Inflation (PPI) 1.1 Inflation (PPI) 1.3 Core Inflation (PCE) 1.6

Year over year change Year over year change

Trimmed Inflation 2.2

All Inflation numbers reflect year-over-year changes.

long term 1 year

long term 1 year

long term 1 year




Macro Environment: Fed Monitoring

Fed Monitoring

5-year, 5-year forward inflation swap rate is a measure of expected inflation (on average) over the five-year period that begins five years from today.

Initial Jobless Claims measures the number of individuals who filed for unemployment insurance for the first time during the past week.

Atlanta Fed GDP Now is a running estimate of GDP growth based on available data for current quarter.

Bloomberg Financial Conditions Index tracks the overall stress in the U.S. money market, bond market, and equity market and provides a useful gauge to assess the availability and cost of credit in the U.S. financial market.


1.58

1.99

212

2.350.89


Macro Environment: Labor Market

3.1%Hourly Earnings YoY

3.6%Unemployment Rate

291KADP Net Jobs Added

212KJobless Claims

Source: Stifel Investment Strategy data via Bloomberg, as of December 12, 2019

Labor Market


Macro Environment: Recession Risk Checklist

Recession Risk Checklist

Out of 13 measures, three show caution:

1. A flat to inverted yield curve, which precedes recession eventually

2. Higher money supply growth, which sometimes precedes higher inflation

3. Truck shipments, which may be a sign of a business slowdown



Economic and Market Cycles


Economic Cycles

Source: Stifel Investment Strategy data via Bloomberg, Strategas Research Partners, Haver, as of February 18, 2020

Economic Cycles Since 1950


Market Cycles

Source: Stifel Investment Strategy data via Bloomberg, Strategas Research Partners, as of February 14, 2020

Bull and Bear Markets Since 1932


Economic and Market Cycles: Market Top

Source: Stifel Investment Strategy and Strategas Research Partners, as of February 18, 2020

Bull Market Top Checklist


MARKET MONITOR


Market Monitor: U.S. Fixed Income

OAS Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option

Rates and Spreads



Market Monitor: U.S. Fixed Income


Fixed Income Market Update - Duration


Market Monitor: Equities


U.S. equity market valuations

Trailing P/E is a relative valuation multiple that is based on the last 12 months of actual earnings. Forward P/E is a relative valuation multiple that uses forecasted earnings

International Equity Markets are trading below their historic average multiples

Market Valuations


Source: Stifel Investment Strategy via FactSet, as of February 14, 2020; 4th Quarter 2019 earnings growth is the blended rate. (combines actual results for companies that have reported and estimated results for companies that have yet to report) CY 2020 are consensus earnings growth estimates.

• In the fourth quarter of 2019, 71% of S&P 500 companies reported earnings that were better than consensus, or a positive earnings surprise

• The result remains in line with average results over the last year (74%) and last five years (72%). We see a stronger result for revenue, with 67% of the companies reporting a positive revenue surprise, above the one-year result (59%) and five-year result (59%)

• We can interpret 2019 to be about absorbing the strong growth of 2018

• On a combined basis, the average for 2018 and 2019 is 10%

• Looking forward to 2020, the consensus earnings growth estimate is 8%, which would be in line with the two-year average

Market Monitor: Equities

Earnings Season Update


Sector Index

WeightDynamic Weight Note

Communication Services

10.4% 11.4%A historically defensive sector which now includes growth names where some regulatory risk is priced in.

Consumer Discretionary

9.8% 9.8%Elevated valuations combined with healthy consumer. Risks are balanced.

Consumer Staples 7.2% 5.2%Disconnect between valuations and declining profit margins and weaker earnings growth outlook.

Energy 4.3% 4.3%A slowing economy leads to lower demand, but increased geopolitical tensions can lead to supply shocks.

Financials 13.0% 15.0%Valuations are attractive, consumer spending is still robust, and bank credit quality is strong.

Healthcare 14.2% 14.2%Headline risk going into elections keeps us on the sidelines, for now.

Industrials 9.1% 9.1%Weakening capital expenditure a headwind. Valuations are in line.

Information Technology

23.2% 23.2%Strong balance sheets combined with higher-than-average valuations.

Materials 2.7% 3.7%More sensitive to changes in economic growth. Trade uncertainty easing and global manufacturing bottoming.

Real Estate 2.9% 1.9%Elevated valuations and a weakening cash flow profile due to falling capitalization rates.

Utilities 3.3% 2.3%Stretched valuations with potential downside due to interest rates.

Dynamic Sector Leanings

Market Monitor: Sector Outlook

Source: Stifel Investment Strategy

https://www.stifel.com/newsletters/AdGraphics/InSight/Dynamic-Sector-Leanings/Client-Sector.pdf


FORECASTS & ALLOCATION INSIGHTS



2020 Outlook: Our Forecasts

Core PCE Inflation

Real GDP

Stock Market Volatility

U.S. Dollar

Federal Funds Rate

10-Year Yield

Investment-Grade Credit (OAS)

High Yield Credit (OAS)

1.5% - 1.75% No Change

110 - 135

400 - 450

Slight widening

Slight widening

2.0% - 2.75% Higher

FIXED INCOME

EQUITY

U.S. Equities Large Cap

(S&P 500)

5% return

Positive returns close to

or slightly lower than

our long-term capital

market assumptions

(3,331 index)

U.S. Equities Small Cap

(Russell 2000)

5% return

(1,729 index)

Developed Markets

(MSCI EAFE)

8% return

(2,132 index)

Emerging Markets

(MSCI EM)

7% return

(1,160 index)

2.0% - 2.25% Close to Trend

- A little higher

- A little weaker

2020 Target Our View

MACRO VIEWS

2.0% - 2.25% Stable


2020 Outlook

Asset Allocation

144 ASSET ALLOCATION MODELS FOR YOUR SELECTION

6Risk

Profiles

2Equity

Choices

2Equity

Choices

U.S. Focused

Global

Tax Sensitive

Taxable

3Levels of Liquidity

Tier 1

Tier 2

Tier 3

Strategic (Long Term)2

Time Frames

Dynamic (Near Term)

ConservativeModerately

ConservativeModerate

ModerateGrowth

ModeratelyAggresive

Aggresive


2020 Outlook: Dynamic Asset Allocation

*Our U.S. Large Cap Equity guidance is based on the Russell 1000 Index which includes the Russell Top 200 and Russell Midcap Indices.


PREVIOUS CURRENT COMMENTS

We recommend a diversified approach to investing in U.S. and non-U.S. equity. When investing

dynamically versus our Strategic Asset Allocation (SAA), our current dynamic leaning is to underweight

U.S. equity relative to non-U.S. Equity.

Global economic growth stabilization is likely to provide a boost to large cap company earnings. A tight

labor market and rising cost pressures may challenge profit margins. Even though valuations have risen,

they are not at excessive levels. Note, our neutral is within U.S. equity and relative to U.S. Small Cap.

We have a preference for value over growth due to value's more defensive nature during the late stages of

the business cycle.

U.S. economic growth may slow further, but it's likely to continue. This is supportive of small cap

company earnings. However, a tight labor market and rising wage pressures may especially challenge

company profit margins. Note, our neutral is within U.S. Equity and relative to U.S. Large Cap.

We recommend a diversified approach investing in both small cap value and growth.

We recommend a diversified approach to investing in U.S. and non-U.S. equity. When investing

dynamically versus our Strategic Asset Allocation (SAA), our current dynamic leaning is to overweight non-

U.S. equity relative to U.S. Equity.

A compromise on U.S.-China trade and reduced uncertainty should provide some recovery in the

manufacturing sector, allowing for global economic growth to stabilize. This is supportive of company

earnings. Note, our neutral is within non-U.S. equity and relative to Emerging Markets.

Europe's economic growth has decelerated, but we think the region has the tools to stimulate growth. The

European Central Bank remains accommodative and countries with a budget surplus could provide a

fiscal boost. Political concerns related to Brexit and tariffs have receded.

A compromise on U.S.-China trade and reduced uncertainty should provide some recovery in the

manufacturing sector, allowing for global economic growth to stabilize. This is supportive of company

earnings. China is a key driver for this market, and we expect its economy to be a meaningful contributor

to this region's growth. A combination of a patient Fed, accommodative EM central banks, and a

stable/slightly lower dollar is positive for emerging economies. Note, our neutral is within non-U.S. equity

and relative to non-U.S. Developed Markets.

ASSET CLASS

Large Value vs.

Large Growth

Small Value vs.

Small Growth

Europe vs.

Asia

EQU

ITY

U.S. Equity

U.S. Large Cap*

U.S. Small Cap

Non-U.S. Equity

Non-U.S.

Developed

Markets

Emerging

Markets


2020 Outlook: Dynamic Asset Allocation

PREVIOUS CURRENT COMMENTS

We have a preference for shorter duration. Note, our neutral is within Fixed Income and relative to U.S.

High Yield.

We favor a diversified, market-type approach, that balances the allocation to corporates,

government/agency, and mortgage backed securities (MBS).

Inflation is modest and around the Fed's 2% target. Other inflation measures, such as trimmed inflation,

show inflation is picking up. Short-dated TIPs offer protection if inflation accelerates.

We expect rates will continue to rise, albeit at a slower pace. We recommend maintaining a shorter

duration than the benchmark.

Economic data remains positive. Default rates are low, but have recently increased modestly. We believe

spreads will be stable, but may rise modestly. Note, our neutral is within Fixed Income and relative to U.S.

Investment Grade.

For investors interested in alternative investments and able to handle illiquidity, exposure to some

combination of private equity, private debt, and/or private real estate can be considered as part of a

diversified portfolio.

For investors interested in alternative investments and able to handle less liquidity who have conviction in

manager skill, exposure to hedge funds can be a helpful part of a diversified portfolio. This is especially

true in volatile, low-return environments.

ASSET CLASS

ALT

ER

NA

TIV

ES

Private Assets

Hedge Funds

FIX

ED

INC

OM

E

U.S. Investment

Grade

Corporates

Gov't/Agency

MBS

Inflation

Protected

Duration

U.S. High Yield



LONG-TERM THEMES


Investment Themes

2020s: A Decade of Productive Competition• Economic competition: U.S. vs. China

• Political competition: capitalism vs. socialism

• Business competition: innovation vs. tradition

• Policy competition: globalism vs. protectionism

• Will make us stronger/better in the long run

Inflation, the Fed, and Direction of Interest Rates• Underlying inflation trends are suggesting higher

inflation than what headline numbers might suggest

• Global central banks are signaling more accommodative policies

• Market-based measures suggest low likelihood of continued interest rate cuts early next year

Continued Focus: Late Cycle• 128 months into this cycle

• Real GDP growth expected at 2-2.25%

• Economy remains on a solid footing

• Key focus still future earnings growth

• Build defensiveness into your portfolio

• Focus on U.S. Presidential Elections

Shifting Demographics and Rising Millennials• Millennials now outnumber Baby Boomers

• Demand for housing to increase

• Aging population is likely to boost healthcare demand


Indices are unmanaged, do not reflect fees and expenses, and are not available for direct investment.

Past performance does not guarantee future results. Investing involves risk, including the possible loss of principal. Asset allocation and diversification do not ensure a profit or protection against loss.

Alternative Investments or Non-Traditional Assets – Alternative investments may include, but are not limited to: Real Estate Investment Trusts (REITs), Commodities, Futures, Hedge Funds, Venture Capital, Limited Partnerships, etc.

Real Estate – When investing in real estate companies, property values can fall due to environmental, economic, or other reasons, and changes in interest rates can negatively impact the performance.

Commodities and Futures – The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains.

Hedge Funds – Investors should be aware that hedge funds often engage in leverage, short-selling, arbitrage, hedging, derivatives, and other speculative investment practices that may increase investment loss. Hedge funds can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, and often charge high fees that can erode performance. Additionally, they may involve complex tax structures and delays in distributing tax information. While hedge funds may appear similar to mutual funds, they are not necessarily subject to the same regulatory requirements as mutual funds.

Venture Capital – Venture capital investments involve substantial risks. The risks associated with investing in companies in the start-up or expansion stages of development are greater than those of companies in later stages, because the companies’ business concepts generally are unproven and the companies have little or no track record.

Limited Partnerships – Generally, limited partnership investments are suitable only for a narrow class of relatively sophisticated investors. Limited partnership investments may be speculative in nature and be subject to resale restrictions or illiquidity. An investment is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment.

Bonds – When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. High-yield bonds have greater credit risk than higher quality bonds.

Duration – Duration is a measure of the sensitivity of the price -- the value of principal -- of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years.

Standard Deviation – Standard deviation is a measure of the dispersion of a set of data from its mean. It is calculated as the square root of variance by determining the variation between each data point relative to the mean. If the data points are further from the mean, there is higher deviation within the data set.

International and Emerging Markets – There are special considerations associated with international investing, including the risk of currency fluctuations and political and economic events. Investing in emerging markets may involve greater risk and volatility than investing in more developed countries.

Private Equity – Private equity funds are not appropriate for all investors. Investors should be aware that private equity funds may contain speculative investment practices that can lead to a loss of the entire investment. Private equity funds may invest in entities in which no secondary market exists and, as such, may be highly illiquid. The funds are not required to provide periodic pricing or valuation information to investors and often charge high fees that can erode performance. Additionally, they may involve complex tax structures and delays in distributing tax information.

Short Positions – The investor should note that when a short position moves in an unfavorable way, the losses are theoretically unlimited. The broker will demand more collateral and the manager might have to close out that short position at an inopportune time to limit any further losses.

Small Company Securities – Small company securities are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies.

Appendix: Disclosures


Bloomberg Barclays U.S. Treasury Bills 1-3 Months Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than three months and more than one month, are rated investment grade, and have $250 million or more of outstanding face value.

Bloomberg Barclays U.S. Corporate IG Index is an unmanaged index considered representative of fixed-rate investment-grade taxable bond debt.

Bloomberg Barclays U.S. Aggregate Corporate Index is an unmanaged index considered representative of fixed-rate investment-grade taxable bond debt.

Bloomberg Barclays U.S. Corporate High Yield is an unmanaged index considered representative of fixed-rate, noninvestment-grade debt.

Bloomberg Barclays U.S. Government Bond Index is an unmanaged index considered representative of fixed-rate, investment-grade US Government debt.

Bloomberg Barclays Global Aggregate This index provides a broad-based measure of the global investment-grade, fixed-rate debt market.

DXY Index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners.

S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Russell 1000 Index represents approximately 1,000 of the largest companies in the U.S. equity markets, the Russell 1000 is a subset of the Russell 3000 Index. The Russell 1000 (maintained by the Russell Investment Group) comprises over 90% of the total market capitalization of all listed U.S. stocks and is considered a bellwether index for large cap investing.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 index.

MSCI EAFE Index captures large and mid cap representation across Developed Markets countries around the world, excluding the U.S. and Canada. With 914 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

MSCI Emerging Markets (EM) Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 837 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Morgan Stanley Market implied pace of hikes index (MSPOKE) is the number of Fed rate hikes in the 12 months following the first rate hike implied by the Eurodollar interest rate futures market.

The MSCI World Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets.

Wilshire 5000 Index is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.

VIX Index 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.

Appendix: Index Descriptions


EURO STOXX 50 is a stock index of Eurozone stocks designed by STOXX, an index provider owned by Deutsche Börse Group. According to STOXX, its goal is "to provide a blue-chip representation of Supersector leaders in the Eurozone

Cash & Cash Eq. is represented by the Bloomberg Barclays U.S. Treasury 3-6 months Bill Index, comprised of treasury bills issued by the U.S. government with less than one year to maturity.

U.S. Gov’t Bonds is represented by the Bloomberg Barclays U.S. Government Bond Index, comprised of the U.S. Treasury and U.S. Agency indexes.

U.S. Corp IG Bonds is represented by the Bloomberg Barclays U.S. Corporate Bond Index, comprised of the investment grade, fixed –rate, taxable corporate bond market.

High-Yield Bonds is represented by the Bloomberg Barclays U.S. Corporate High Yield Bond Index, comprised of U.S. Dollar denominated, high-yield, fixed- rate corporate bond market securities.

U.S. LC (Large Cap) equities is represented by Russell 1000 Index, comprised of 1,000 of the largest U.S. securities based on a combination of their market cap and current index membership.

U.S. SC (Small Cap) equities is represented by the Russell 2000 Index, comprised of 2,000 of the smallest U.S. securities based on a combination of their market cap and current index membership.

Dev Int’l Equities is represented by the MSCI EAFE Index, comprised of equity securities that belong to markets outside of the U.S. and Canada.

EM Equities is represented by the MSCI EM Index, comprised of equity securities that belong to emerging markets.

Moderate Bench stands for moderate benchmark portfolio return which is a blended portfolio of stocks (60% weight, represented by MSCI AC World Index) and bonds (40% weight, represented by Bloomberg Barclays U.S. Agg Gov/Credit).

MSCI AC World Index is comprised of equity securities belonging to 23 developed markets and 24 emerging markets countries.

Bloomberg Barclays U.S. Government/Credit Bond Index is comprised investment grade, dollar-denominated, fixed-rate Treasuries, government-related and corporate securities.

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Appendix: Index Descriptions