Issue 30: 2015

Investment outlook

The Giant Experiment

Confusion and concern abound, but our outlook is for signs of life ahead.

Photograph by Andy Ryan

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High volatility, sinking equity averages and the worst quarterly performance in the United States since 2011 — the S&P 500 fell 6.9% in this year’s third quarter — are just a few of the factors driving today’s negative market sentiment. However, as 0% interest rates and other monetary policy initiatives — what we’re calling the “Giant Experiment” — wind down, it seems that fears of another recession will go unrealized.

A new cycle

As our economy exits the Giant Experiment, we’re expecting the emergence of a new macro environment and for the global economy to continue rebalancing. We are shifting away from a growth model dominated by emerging markets and toward one driven by developed-world growth, consumer spending, low input costs and higher interest rates.

With this transition, we understand that there is confusion, and that it’s common to extrapolate worrisome downturns in emerging markets into concerns about a global recession. But for now a recession doesn’t seem likely.

Open road ahead

Although recessionary winds are blowing across some emerging markets, growth in the United States, Europe, the United Kingdom and Japan is improving, as the benefits of lower commodity and energy prices feed into consumer purchasing. Also a still-expanding China (5%–6% growth is lower than in the past, but it’s still enviable) is contributing significantly to global growth.

As The Giant Experiment
Winds Down, It seems that fears of another recession will go unrealized.

We are also looking for positive catalysts large enough to turn asset prices back up, and we see higher earnings in the third and fourth quarters as promising candidates.

We also expect repositioning opportunities to present themselves, helping drive positive sentiment in 2016. As the Giant Experiment winds down, investors should have many opportunities to add to equity exposure through the remainder of the year. They should keep their rebalancing plans ready as earnings season and a possible Fed liftoff approach.

Bears vs. bulls

Taking an extremely bullish or bearish stance on financial markets is a way to get noticed, but we take a more balanced approach, as all environments contain positive and negative trends, developments and events. By examining factors such as valuations, stress indicators, credit spreads, sentiment and profit cycles, we aim to separate the noise from the fundamental backdrop, gauge what is already discounted in asset prices and highlight potential catalysts that might help attract cash flows.

The catalysts are often vague, and since valuations can vary, the yield curve can change and stress levels can point to something deeply wrong with the economic backdrop, we think it is important to remain vigilant and to resist complacency.

Based on our comprehensive views of the market environment, we would diversify portfolios across all assets and protect against volatility by using a mixture of growth and high-quality investments. In addition, we would accumulate cash flow through dividend growth, investment-grade fixed income and real assets. As the bears and bulls battle, we prefer to get paid to wait.

Photograph of science lab by Offset

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

Fixed Income Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

Commodities Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Other Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.

The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large capitalization U.S. stocks.

International International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

High volatility, sinking equity averages and the worst quarterly performance in the United States since 2011 — the S&P 500 fell 6.9% in this year’s third quarter — are just a few of the factors driving today’s negative market sentiment. However, as 0% interest rates and other monetary policy initiatives — what we’re calling the “Giant Experiment” — wind down, it seems that fears of another recession will go unrealized.

A new cycle

As our economy exits the Giant Experiment, we’re expecting the emergence of a new macro environment and for the global economy to continue rebalancing. We are shifting away from a growth model dominated by emerging markets and toward one driven by developed-world growth, consumer spending, low input costs and higher interest rates.

With this transition, we understand that there is confusion, and that it’s common to extrapolate worrisome downturns in emerging markets into concerns about a global recession. But for now a recession doesn’t seem likely.

Open road ahead

Although recessionary winds are blowing across some emerging markets, growth in the United States, Europe, the United Kingdom and Japan is improving, as the benefits of lower commodity and energy prices feed into consumer purchasing. Also a still-expanding China (5%–6% growth is lower than in the past, but it’s still enviable) is contributing significantly to global growth.

As The Giant Experiment
Winds Down, It seems that fears of another recession will go unrealized.

We are also looking for positive catalysts large enough to turn asset prices back up, and we see higher earnings in the third and fourth quarters as promising candidates.

We also expect repositioning opportunities to present themselves, helping drive positive sentiment in 2016. As the Giant Experiment winds down, investors should have many opportunities to add to equity exposure through the remainder of the year. They should keep their rebalancing plans ready as earnings season and a possible Fed liftoff approach.

Bears vs. bulls

Taking an extremely bullish or bearish stance on financial markets is a way to get noticed, but we take a more balanced approach, as all environments contain positive and negative trends, developments and events. By examining factors such as valuations, stress indicators, credit spreads, sentiment and profit cycles, we aim to separate the noise from the fundamental backdrop, gauge what is already discounted in asset prices and highlight potential catalysts that might help attract cash flows.

The catalysts are often vague, and since valuations can vary, the yield curve can change and stress levels can point to something deeply wrong with the economic backdrop, we think it is important to remain vigilant and to resist complacency.

Based on our comprehensive views of the market environment, we would diversify portfolios across all assets and protect against volatility by using a mixture of growth and high-quality investments. In addition, we would accumulate cash flow through dividend growth, investment-grade fixed income and real assets. As the bears and bulls battle, we prefer to get paid to wait.

Photograph of science lab by Offset

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

Stocks of small and mid cap companies pose special risks, including possible illiquidity and greater price volatility, than stocks of larger, more established companies

Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.

Fixed Income Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments, and yield and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices generally drop, and vice versa.

Commodities Trading in commodities, such as gold, is speculative and can be extremely volatile. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest-rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Tangible assets can fluctuate with supply and demand, such as commodities, which are liquid investments, unlike most other tangible investments.

Other Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex in nature and involve risks, including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.

The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large capitalization U.S. stocks.

International International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.