Presentation on theme: "1 Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Capital Markets Review Q2 2010 Reviewing the quarter ended March."— Presentation transcript:
1 Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Capital Markets Review Q Reviewing the quarter ended March 31, Klingman and Associates, LLC Avenue of the Americas Suite 2725 New York, NY
2 Economic Outlook Capital Markets Index Returns Asset Class Returns S&P 500 Sector Returns Equity Styles U.S. Treasuries Fixed Income Yields Price-Earnings Ratio Foreign Exchange Rates Commodity Prices CAPITAL MARKETS REVIEW Q2 Themes S&P 500 Inflection Points Government Spending Consumer Credit Mutual Fund Flows 27-Week Unemployment Disclosure
3 Published April 27, 2010 What a difference a year makes. The first sentence of a client Market Update we sent on March 6, 2009 began “I know. It’s scary”. A little over a year later the S&P 500 has risen 64% from its lows. Figures showed that the U.S. economy grew at its fastest pace in six years during the final three months of 2009, with gross domestic product (GDP) increasing at a 5.6% annualized pace. For 2009 in total, GDP fell 2.4%. And although the fed funds rate remained at between zero and 0.25%, the Federal Reserve did raise the discount rate that banks must pay for emergency loans from 0.5% to 0.75%. The Fed also closed most of the special liquidity facilities it created to support the markets during the worst of the credit crisis – the only one of those facilities left is due to close June 30. Both are optimistic signs that the Fed calculates that the economy is in a recovery stage. We have moved from worrying about the collapse of the global financial system to somewhat more mundane concerns of unemployment, budget deficits, tax increases, corporate earnings and the long term effects of health care reform. I guess this qualifies as progress. In our January Economic Outlook, we said “We believe the effects of this massive government stimulus will result in a slightly stronger recovery in the short term than most analysts are expecting.” Corporate earnings have delivered and the markets have moved higher. We continue to believe that earnings will surprise on the upside, but expectations have risen considerably and the chances of companies significantly outperforming expectations have diminished. Continued ECONOMIC OUTLOOK By Gerard A. Klingman, CFP®, CLU®, ChFC® Founder and President Gerry received a bachelor’s degree in Economics from Princeton University and a Certified Financial Planner™ certification from the College of Financial Planning. He earned his CLU® and ChFC® designations from the American College, as well as a CFS designation from the Institute of Business & Finance. With more than 27 years of experience, Gerry is nationally recognized in the field of investments and financial planning. Gerry is Ranked* within Barron’s Financial Weekly publication’s annual list of “America’s Top 100 Independent Advisors” and Registered Rep Magazine annual list of “America’s Top 100 Independent Advisors”. He is a current member of Forbes.com “Intelligent Investing” Panel. Gerry has been featured on CNN as well as in several local and national publications, such as BusinessWeek. *The Barron’s “Top 100 Independent Financial Advisors” list was compiled by the Winner’s Circle, a research organization that Barron's acquired in Registered Rep: Compiled by the monthly trade magazine which weighed such factors as total assets under management and years in the industry.
4 We believe equity markets will finish the year modestly higher, but that current prices already reflect the improved short term outlook. Housing prices (page 11) and unemployment (page 8) have finally stopped worsening, which has been a catalyst for the improvement in asset prices, but will not be returning to pre “Great Recession” levels anytime soon. We continue to keep our weightings to US Equities neutral, with a bias toward Large Cap, financially strong, dividend paying equities. US corporations have built up considerable cash reserves. We believe these strong balance sheets will lead to increased merger and acquisition activities as we move through the remainder of While companies don’t always make good decisions with this extra cash, it will be a short term tailwind for the equity markets. China. Can any economic or market discussion start or end without debating the opportunity, the “bubble”, the Yuan, trade imbalances, etc? China and the rest of the developing markets are the “Elephant” in the room. If we are going to discuss them, I think some broader perspective is important for long term investors. Despite having only 4% of the world’s population, the United States produces 27% of the world’s Gross National Product. Japan is second at 9% and China at 7%. The US produces 23% of the world’s manufacturing output, followed by China at 17%. US research and development spending is 3 times that of China and Japan. Needless to say, the end of the US as an economic powerhouse has been greatly exaggerated. However, we as investors must recognize that we live in a very different economy than the period when most of our current economic thought and analysis was formulated. The Cold War has been won and, with numerous variations, the world has embraced capitalism and trade. Continued ECONOMIC OUTLOOK (continued) By Gerard A. Klingman, CFP®, CLU®, ChFC® Founder and President
5 While we believe that this is a welcome stride forward for most of the world’s population, it will create dislocation in the process. Capitalism is an effective economic system, but it’s messy. We continue to believe the growth in emerging markets is the most powerful positive force for global economies and markets, but we continue to be careful as to how we invest in this growth. While we want some direct exposure to companies based in these countries, we are cautious as to their volatility. Many companies based in the US and Europe derive significant revenue from these markets and are often a less volatile way to invest. We also continue to increase exposure to Non US Fixed Income, particularly managers investing in bonds denominated in emerging market currencies. As we discussed in our January Outlook, although we are positive on the global economy and markets in the near term, we continue to be very concerned about the growth of government deficits (US, sovereign, state and local government). Although needed to stem the financial crisis, these deficits don’t come without a price. At best, they will lead to slower economic growth as these public borrowings “crowd out” the need for capital of private businesses. At worst, these deficits could lead to significantly higher interest rates and inflation. We are not predicting this worst case scenario, but we are preparing for the possibility by shortening maturities in our fixed income portfolios and increasing our exposure to TIPS (Treasury Inflation Protection Securities), Commodities, REIT’s and energy related Master Limited Partnerships. ECONOMIC OUTLOOK (continued) By Gerard A. Klingman, CFP®, CLU®, ChFC® Founder and President
6 Capital Markets Tactical Overlay of our Strategic Asset Allocation Models: US Large Cap Equities should be even weighted with a focus on high quality, dividend paying companies. US Mid Cap and Small Cap should be slightly under weighted. Because of concerns about higher interest rates, maturities of Fixed Income portfolios should be over weighted to short and intermediate terms. Treasuries are overvalued and should be under weighted. TIPS should be a significant part of US Bond weighting. Non US Bonds and Stocks should be even weighted. Investment Grade Corporates should be over weighted. High Yield should be even weighted. Municipals have had a significant move upward and should now be equal weighted. Commodities, REITs, and Energy Master Limited Partnerships should be over weighted as a hedge against future inflation. ECONOMIC OUTLOOK (continued) There is no assurance any of the trends mentioned will continue in the future.
7 GROSS DOMESTIC PRODUCT GDP rose at an annualized rate of 5.5% in Q4, its highest pace since September Source: FactSet, as of 12/31/09 Economic Review
8 EMPLOYMENT Unemployment stayed level at 9.7% as job creation began to catch up with job losses. Source: FactSet and Bureau of Labor Statistics, as of 3/31/10 Civilian Unemployment RateMonthly Payrolls Changes
9 Economic Review INFLATION CPI-U, excluding food and energy, remains below historical norms at less than 3%. Source: FactSet, as of 2/28/10
10 Economic Review KEY INTEREST RATES The Fed hiked the discount rate 25 bps to 0.75%, but most rates remain relatively stable. Source: FactSet and Federal Reserve, as of 3/31/10
11 Economic Review HOUSING MARKET Most markets continue to see slightly higher housing prices, but some still struggle. Top 5 Housing Markets Quarterly % Change* Idaho86.4% Alaska42.6% Minnesota40.4% Vermont32.1% New Hampshire31.9% *Seasonally Adjusted Sales (Annual Rate, Q309 vs. Q409) Source: Standard & Poor’s, as of 1/31/10 Home Prices Bottom 5 Housing Markets Quarterly % Change* Virginia-8.5% Louisiana-4.8% Michigan0.9% California1.4% Arizona1.6% Largest States by Population Quarterly % Change* California1.4% Texas10.4% New York5.8% Florida23.1% Illinois20.5% Source: National Association of Realtors, as of 2/28/10 Home Sales
12 Capital Markets INDEX RETURNS Growth of a Dollar Source: Callan, as of 3/31/10. Investors cannot invest directly in an index. Past performance is not indicative of future results. See asset class benchmarks on slide 30. YTD1-Year3-Year5-Year10-Year U.S. Equity Non-U.S. Equity Fixed Income Real Estate Cash and Equivalents Commodities Capital Markets
13 Capital Markets ASSET CLASS RETURNS U.S. equities led most markets in Q1, in part, due to a stronger dollar. Source: Callan, as of 3/31/10. Annual Returns for Key Asset Classes ( ). See asset class benchmarks listed on slide 30.
14 Capital Markets ASSET CLASS RETURNS Source: Russell, Barclays Capital, Dow Jones, JP Morgan, Callan and Associates. Past performance is not indicative of future results. U.S. small caps were one of only a few broad indices to outperform the S&P 500 in Q1.
15 Capital Markets S&P 500 SECTOR RETURNS Source: Callan. Returns are based on the GICS Classification model. Returns are cumulative total return for stated period, including reinvestment of dividends. Past performance is not indicative of future results. Industrials and financials led Q1 and the trailing 12 months; telecom and utilities lagged.
16 Capital Markets EQUITY STYLES 12 Months ending 3/31/10Q110 Style box returns based on the GICS Classification model. All values are cumulative total return for stated period including reinvestment of dividends. The Indices used from left to right, top to bottom are: Russell 1000 Value Index, Russell 1000 Index, Russell 1000 Growth Index, Russell Mid-cap Value Index, Russell Mid-cap Blend Index, Russell Mid-cap Growth Index, Russell 2000 Value Index, Russell 2000 Index and Russell 2000 Growth Index. Past performance is not indicative of future results. Value continues to lead growth for the quarter and the year by a slim margin. 6.8%5.7%4.6% 9.6%8.7%7.7% 10.0%8.6%7.6% Large Mid Small ValueBlendGrowth 53.6%51.6%49.8% 72.4%67.7%63.0% 65.1%62.5%60.3% Large Mid Small ValueBlendGrowth
17 Capital Markets U. S. TREASURIES The 2- and 10-year Treasury spread reached at least a 30-year high, indicating expansion. Source: U.S. Treasury, as of 3/31/10Source: FactSet, as of 3/31/10 Treasury Yield Curve2YR/10YR Treasury Spreads
18 Capital Markets FIXED INCOME YIELDS Bond yields, little changed from Q4, seem likely to continue gaining from a year earlier. Source: FactSet, as of 3/31/10Past performance is not indicative of future results.
19 Capital Markets PRICE - EARNINGS RATIO With trailing P/E ratios at or near historical norms, higher earnings could spur gains. Source: Bloomberg, as of 3/31/10
20 Capital Markets FOREIGN EXCHANGE RATES In Q1, the dollar rose against many major developed markets but is off its 2008 highs. Source: Federal Reserve, as of 3/31/10 Source: FactSet as of 3/31/10 3/31/093/31/10 Japanese Yen (¥) / U.S. Dollar ($) Euro (€) / U.S. Dollar ($) British Pound (£) / U.S. Dollar ($)
21 Capital Markets COMMODITY PRICES Both gold and oil finished the quarter higher. Gold was up 3%, oil rose 6%. Source: FactSet, as of 3/31/10
22 Q2 Themes S&P 500 Inflection Points Although rallying significantly since March ’08, the S&P is far below its October ’07 high. Source: Yahoo, as of 3/31/10Past performance is not indicative of future results.
23 Q2 Themes GOVERNMENT SPENDING Annual Deficit/SurplusOutstanding Debt Source: Congressional Budget Office and Federal Reserve, as of 3/31/10 Over the last 30 years, government debt has reached new highs as a percent of real GDP.
24 Q2 Themes CONSUMER CREDIT Source: FactSet, as of 1/31/10 Consumer credit shows signs of stabilizing, moving slightly higher as borrowing picks up.
25 Q2 Themes MUTUAL FUND FLOWS Money still flows into bonds from stocks despite 12 months of favorable equity returns. Source: Morningstar, as of 12/31/09
26 Q2 Themes 27-WEEK UNEMPLOYMENT Source: Federal Reserve, as of 3/1/10 A record number of workers have been jobless for over six months – and could slow real GDP growth.
27 DISCLOSURE Data provided by Raymond James Asset Management Services. This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account. There is no assurance that any investment strategy will be successful or that any securities transaction, holdings, sectors or allocations discussed will be profitable. It should not be assumed that any investment recommendation or decisions made in the future will be profitable or will equal any investment performance discussed herein. Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product that attempts to mimic the performance of an index will incur expenses that would reduce returns. Past performance is not indicative of future results. Fixed income securities are subject to interest rate risk. Generally, when interest rates rise, bond prices fall, and vice versa. Specific-sector investing can be subject to different and greater risks than more diversified investments. The Consumer Price Index (CPI) is a measure of inflation. Gross Domestic Product (GDP) is the annual total market value of all final goods and services produced domestically by the United States. Investing in small-cap and mid-cap stocks generally involves greater risks, and, therefore, may not be appropriate for every investor. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer’s credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio. Commodities trading is generally considered speculative because of the significant potential for investment loss. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Fixed Income Sectors: Returns based on the four sectors of Lehman Global Sector Classification Scheme: Securitized (consisting of U.S. MBS Index, the ERISA- Eligible CMBS Index and the fixed-rate ABS Index), Government Related (consisting of U.S. Agencies and non-corporate debts with four sub sectors: Agencies, Local Authorities, Sovereign and Supranational), Corporate (dollar-denominated debt from U.S. and non-U.S. industrial, utility, and financial institutions issuers), and Treasuries (includes public obligations of the U.S. Treasury that have remaining maturities of one year or more).
28 INDEX DESCRIPTIONS Asset class and reference benchmarks: The Dow Jones AIG Commodity Index: Composed of futures contracts on 19 physical commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. The index serves as a diversified and highly liquid benchmark for the commodity futures market. The Dow Jones-UBS Commodity Indexes SM : Composed of exchange-traded commodity futures contracts rather than physical commodities. Barclays Capital Aggregate Index: Measures changes in the fixed-rate debt issues rated investment grade or higher by Moody’s Investors Service, Standard & Poor’s, or Fitch Investor’s Service, in that order. The Aggregate Index is comprised of the Government/Corporate, the Mortgage-Backed Securities and the Asset- Backed Securities indices. Barclays Capital U.S. Aggregate Index: Represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. BC Global Aggregate ex-U.S. Dollar Bond Index: Tracks an international basket of bonds that currently contains 65% government, 14% corporate, 13% agency and 8% mortgage-related bonds. BC High Yield: Covers the universe of fixed-rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures and 144-As are also included. Citigroup 3-Month T-Bill Index: This is an unmanaged index of three-month Treasury bills. FTSE EPRA/NAREIT Global Real Estate Index Series: Designed to represent general trends in eligible listed real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income producing real estate. MSCI All Country World Index Ex-U.S.: A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. It includes both developed and emerging markets. Asset ClassBenchmark Used Cash and Cash EquivalentsCiti 3-month T-Bill Fixed IncomeBC Aggregate U.S. EquityRussell 3000 Non-U.S. EquityMSCI World, Ex-U.S. Real EstateFTSE EPRA NAREIT Global Real Estate CommoditiesDJ UBS Commodity Index