Transcript Outlook 2016 - Northwest Financial Advisors

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LPL Research expects routine year-end
outcomes in many areas of the economy
and financial markets.
How we get there may be anything but
routine, and 2016 will require a solid
investment plan to navigate the year.
By maintaining our investment process, we
can focus on what matters most and block
out short-term distractions.
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Driven by mid- to high-singledigit earnings gains, stocks may
produce modest positive returns
in 2016 typical of the mid-to-late
stage of the business cycle.
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THE 2016 AGENDA
Things To Do
Regularly Scheduled
Avoid Distractions
Investment ideas
worth adding to your
calendar in 2016:
Fundamental ideas
for your routine in
2016:
Investment ideas that
may slow down your
momentum in 2016:
 Emerging Market
Stocks
 Large Cap
U.S. Stocks
 U.S. Defensive
Stocks
 Developed
International
Stocks
 Cyclical Growth
Stocks
 Long-Term
High-Quality
Bonds
 Bank Loans
 Global Macro
Alternative
Strategies
 Investment-Grade
& High-Yield
Corporate Bonds
 Intermediate-Term
Municipal Bonds
 Developed
International
Bonds
 Small Cap Stocks
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Steady Growth Ahead for U.S. and Global Economy
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ECONOMY
Economic Growth Holding Near 2% Despite Headwinds
Source: LPL Research, U.S. Bureau of Economic Analysis 11/11/15
Data are as of 10/31/15.
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ECONOMY
The Dollar Has Surged Three Different Times Over the Past 45 Years,
Including in 2014–15
Source: LPL Research, Federal Reserve Board, Haver Analytics 11/11/15
Shaded areas indicate recession.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across
national borders, they face currency risk if their positions are not hedged.
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ECONOMY
Wage Pressures Are Beginning to Appear for the First Time in This Business
Cycle, and the Fed Is Watching
Source: LPL Research, Bureau of Labor Statistics, Haver Analytics 11/11/15
Average hourly earnings for production & nonsupervisory employees, total private industries.
Shaded areas indicate recession.
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Assumed progress through
current expansion indexed
from key data points based
on historical averages for
prior expansions
Sources: LPL Research, Federal Reserve, U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics, U.S. Bureau of the Census, Standard and Poor’s, Robert Shiller, National
Bureau of Economic Research, Haver Analytics 11/11/15
Data for all series are as of October 31, 2015. Starting point for all series is June 1954 except housing starts (March 1961), hourly earnings (December 1970), and commodity prices (December
1970). Real prices and real earnings determined using the Consumer Price Index for all urban consumers (CPI-U). Commodity prices are based on the GSCI Total Return
Index. Profitability is
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based on real profit per unit value added for non-financial corporate business based on current production as calculated by the BEA.
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ECONOMY
Fiscal Stimulus Slowing Around the Globe Since the Great Recession
Source: LPL Research, International Monetary Fund 11/11/15
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ECONOMY
Global Economies at a Glance
Source: LPL Research, World Bank, CIA Factbook, U.N. Comtrade, U.S. EIA 11/16/15
The dependency ratio is the number of people 65 years and older per 100 people 15-64 years old.
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ECONOMY
Rebalancing the Chinese Economy to Consumer Spending
Source: LPL Research, China National Bureau of Statistics, Haver Analytics, World Trade Organization 11/11/15
Data are as of 12/31/14.
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ECONOMY
How to Invest
 Developed International
 Emerging Markets
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated
with varying accounting standards. Investing in emerging markets may accentuate these risks.
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Gains May Require Tolerance for Volatility
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STOCKS
Historical Mid-Cycle Returns Suggest Modest Gains for Stocks in 2016
Source: LPL Research, FactSet 11/11/15
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of
the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Mid-cycle years (highlighted) are defined as more than a year away from the start or end of a recession.
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STOCKS
Earnings Poised to Accelerate in 2016 as Energy Drag Abates
Source: LPL Research, FactSet 11/06/15
Based on the consensus of analysts’ estimates collected by FactSet.
This is for illustrative purposes only and is not representative of the performance of any index or investment product. The economic forecast may not develop as predicted.
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STOCKS
Stock Valuations Historically Higher at Low Interest Rate Levels
Source: LPL Research, FactSet 11/06/15
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for
valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
All indexes are unmanaged and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results.
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STOCKS
Stock Market Corrections Are Normal Even in Positive Years
Source: LPL Research, FactSet 11/06/15
Maximum drawdown is calculated as maximum peak-to-trough decline in a given calendar year.
All indexes are unmanaged and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results.
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STOCKS
2016 Election
 Tax reform
 Healthcare reform
 Energy policy
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STOCKS
How to Invest
 Large Cap U.S. Stocks
 Cyclical Growth Stocks
 Productivity
 Energy
 Healthcare
Investing in U.S. equities includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential
illiquidity of the investment in a falling market.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility
than investing more broadly across many sectors and companies.
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Bond Returns Expected to Remain Flat
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BONDS
Bonds Provide Key Diversification Benefits Even in a Low-Yield Environment
Source: LPL Research, Bloomberg, Standard & Poor’s, Barclays 11/06/15
All indexes are unmanaged and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
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BONDS
Barclays Aggregate Bond Index Scenario Analysis
Source: LPL Research, Barclays 11/06/15
Scenario analysis is based on a return of 3.2% as of 11/06/15 for the Barclays Aggregate, based upon one-year time horizon, parallel shift in the yield curve, no change to yield
spreads, and no reinvestment of interest income.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and
charges inherent to investing.
Indexes are unmanaged and cannot be invested into directly.
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BONDS
Real Yields Remain Very Low by Historical Comparison and Reflect
an Expensive Valuation
Source: LPL Research, Bloomberg 11/06/15
Shaded area indicates recession.
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
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BONDS
Although Gap Has Narrowed, Futures Already Reflect a Slower Pace of Rate Hikes
Source: LPL Research, CBOT, Federal Reserve 11/06/15
Long run is defined as five years.
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BONDS
Municipal Valuations Improved in 2015 but Remain Attractive on Long-Term Basis
Source: LPL Research, Municipal Market Advisors 11/06/15
The credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The
highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be
subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
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BONDS
How to Invest
 Intermediate-Bonds
 Bank Loans
 High-Yield Bonds
 Municipal Bonds
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject
to availability and change in price.
Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
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Embrace “The New Routine”
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NEW ROUTINE
Total Returns of Various Indexes After the Start of Rate Hikes
Source: LPL Research, S&P, Barclays, MSCI, Russell, Bloomberg 11/11/15
The performance data presented represents past performance and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
Asset class returns are represented by the indexes defined in the disclosures section on slides 34-35.
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NEW ROUTINE
PE Ratios Have Been a Good Forecaster of Long-Term Stock Returns
Source: LPL Research, S&P, FactSet, Haver Analytics 11/11/15
PE Ratio = S&P 500 Price/Operating Earnings Ratio
All indexes are unmanaged and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results.
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NEW ROUTINE
Yield Is the Dominant Driver of High-Quality Bond Returns Over the Long Term
Source: LPL Research, Barclays, FactSet 11/11/15
All indexes are unmanaged and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results.
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NEW ROUTINE
Stock PEs & Bond Yields Point to Likelihood of Average Historical Risk Premium
Source: LPL Research, Standard & Poor's, Federal Reserve, Aswath Damodaran 11/11/15
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CONCLUSION
Embrace the Routine
 We believe the key to success, in life and investing, is juggling the
familiarity of old routines with the need for change that is brought on by an
ever-evolving world, market, and life. At the center of this strategy is
finding the ideal balance between old versus new, habits versus
adaptations, process versus progress.
 It is likely that 2016 will offer a menu full of items that will require changes
to the routine we have grown accustomed to, such as a new U.S.
president, Fed rate hikes, and shifts in global growth.
 Regardless of the changes in the investment landscape, some good habits
never fade, including the guidance of a well-formulated investment plan, a
portfolio comprised of diversified investments, a longer-term focus, and
using LPL Research’s Outlook 2016: Embrace the Routine to help identify
the thought leadership ideas that may guide you toward success.
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IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations
for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and
is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
Economic forecasts set forth may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return
and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk,
and risk associated with varying settlement standards.
Mortgage-backed securities are subject to credit, default, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension
risk, the opposite of prepayment risk, market, and interest rate risk.
Global macro strategies attempt to profit from anticipated price movements in stock markets, interest rates, foreign exchange and physical commodities. Global macro risks include
but are not limited to imperfect knowledge of macro events, divergent movement from macro events, loss of principal, and related geopolitical risks.
Alternative strategies may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed
in the management of alternative investments may accelerate the velocity of potential losses.
Asset classes represented: U.S. Stocks: S&P 500 Index; International Developed Stocks: MSCI EAFE Index; Emerging Market Stocks: MSCI Emerging Markets Index; Large
Cap Stocks: Russell 1000 Index; Mid Cap Stocks: Russell Midcap Index; Small Cap Stocks: Russell 2000 Index; Treasuries: Barclays U.S. Treasury Index; Mortgage-Backed
Securities: Barclays U.S. MBS Index; Investment-Grade Corporate Bonds: Barclays U.S. Corporate Bond Index; High-Yield Bonds: Barclays U.S. Corporate High-Yield Bond
Index; Municipals: Barclays Municipal Bond Index; Emerging Markets Debt: JP Morgan Emerging Markets Global Index; Foreign Bonds: Barclays Global Aggregate ex-USD Index
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market
value of 500 stocks representing all major industries.
The Russell Midcap Index offers investors access to the mid cap segment of the U.S. equity universe. The Russell Midcap Index is constructed to provide a comprehensive and
unbiased barometer for the mid cap segment and is completely reconstituted annually to ensure that larger stocks do not distort the performance and characteristics of the true
mid cap opportunity set. The Russell Midcap Index includes the smallest 800 securities in the Russell 1000.
The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index
representing approximately 10% of the total market capitalization of that index.
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IMPORTANT DISCLOSURES
The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000
of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.
The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The
index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).
The Barclays U.S. Treasury Index is an unmanaged index of public debt obligations of the U.S. Treasury with a remaining maturity of one year or more. The index does not include
T-bills (due to the maturity constraint), zero coupon bonds (strips), or Treasury Inflation-Protected Securities (TIPS).
The Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed rate and hybrid ARM) guaranteed by Ginnie Mae
(GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
The Barclays U.S. Corporate Index is a broad-based benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate, taxable corporate bond market.
The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bonds. Securities are classified as
high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging markets debt.
The Barclays Municipal High Yield Bond Index is comprised of bonds with maturities greater than one year, having a par value of at least $3 million issued as part of a transaction
size greater than $20 million, and rated no higher than ‘BB+’ or equivalent by any of the three principal rating agencies. (The long and the short are subindexes of the Municipal
Bond Index, based on duration length.)
The JP Morgan Emerging Markets Bond Index is a benchmark index for measuring the total return performance of international government bonds issued by emerging markets
countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements.
The Barclays Global Aggregate ex-USD Index is an unmanaged index considered representative of bonds of foreign countries.
The MSCI Emerging Markets Index is a free float-adjusted, market capitalization index that is designed to measure equity market performance of emerging markets.
The MSCI EAFE Index is a free float-adjusted, market-capitalization index that is designed to measure the equity market performance of developed markets, excluding the United
States and Canada.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking # 1-444140 Exp. 11/16
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