Presentation on theme: "Client Name Market Analysis / Fourth Quarter 2009."— Presentation transcript:
Client Name Market Analysis / Fourth Quarter 2009
4Q 09 Markets Rebounded Strongly in 2009 Stocks surged after reaching lows in early March Bond returns were mixed, ranging from sharply negative for Treasuries to strongly positive for some corporate credits High-yield bonds surged by 56% and emerging-markets equities gained 76% in 2009 Market Analysis 4Q2009 2
4Q 09 Asset Class Returns Through 12/31/2009. Past performance may not be indicative of future returns. Market Analysis 4Q Asset Class 4th Qtr Months 5 Years (Ann.) Russell 1000 Value iShare (Domestic Large-Cap Value) 4.2%19.6%-0.3% Russell 1000 Growth iShare (Domestic Larger-Cap Growth) 7.9%36.9%0.3% Vanguard 500 Index (Domestic Larger-Cap Blend) 6.0%26.5%0.9% Russell 2000 Value iShare (Domestic Smaller-Cap Value) 3.6%20.4%-0.1% Russell 2000 Growth iShare (Domestic Smaller-Cap Growth) 4.1%34.4%0.8% Russell 2000 iShare (Domestic Smaller-Cap Blend) 3.8%27.1%0.5% Vanguard Total Intl Stock Index (Foreign Stocks) 3.2%36.7%5.3% Vanguard REIT Index (Real Estate Investment Trust) 9.1%29.6%0.6% Merrill Lynch High Yield Master (High-Yield Bonds) 5.8%56.3%6.2% Vanguard Total Bond Mrkt Index (Domestic Invest-Grade Bonds) 0.1%5.9%4.9% Citigroup World Gov’t Bond (Global Invest-Grade Bonds) -1.9%2.6%4.5% Dow Jones-AIGCI (Commodity Futures) 9.0%18.9%2.0% JP Morgan Emg Local Mrkt+ (Short-term Local Currency Emg Markets Bonds) 1.0%11.7%7.6%
4Q 09 Asset Class Returns in 2009 Market Analysis 4Q2009 4
4Q 09 The Economy Still Faces Major Headwinds Household debt reduction is far from over It comes at a time of declining home equity, tight credit, and continued fear relating to the job market and economy In other words, the big drivers of spending in past years are unlikely to be in place in the years ahead If consumer spending remains curtailed (as we expect), economic growth will not be robust in coming years Market Analysis 4Q2009 5
4Q 09 The Consumer is One Important Factor… the Government is Another As stimulus spending winds down it’s possible the economy could tip back into recession More spending and less tax revenue is creating a spike in public debt So far demand for Treasuries has been strong, allowing the government to finance its deficit at low rates But high levels of borrowing are likely to put upward pressure on rates in the next few years Longer-term, entitlement spending will massively increase the debt unless taxes are increased or benefit spending is cut Market Analysis 4Q2009 6
4Q 09 Job Losses and the Length of Time Out of Work Are Both Very High Market Analysis 4Q Stimulus spending and falling tax receipts have caused a spike in public debt. The debt burden is forecast to worsen significantly due to the increasing cost of entitlement programs like Medicare and Social Security, and of servicing the national debt.
4Q 09 Investing Requires Deciding How Much Risk to Take We use scenario analysis to assess shorter- and longer- term risk and reward potential Investing is never certain, but we can use our analysis to try to put the odds in our favor “The ability to say ‘no’ is a tremendous advantage for an investor.” —Warren Buffett We can pass on an investment if we don’t think the reward justifies the risk We can wait for better opportunities to come along Market Analysis 4Q2009 8
4Q 09 We Don’t See a Lot of Payoff for Taking on Risk After their powerful run, strong multi-year returns from stocks would require a level of economic growth we consider unlikely With economic risk remaining elevated and lower returns likely, we don’t see a lot of reward for taking on the risk of owning equities Therefore we are underweighted to equities in our portfolios We recently increased this underweighting further in our balanced strategies by eliminating emerging-markets equities Market Analysis 4Q2009 9
4Q 09 Asset Class Return Estimates Market Analysis 4Q Economic Scenario Scenario 1: Sub-par Recovery Scenario 2: Stagflation Scenario 3: Recession Recurrence/ Deflation Scenario 4: Goldilocks 1/14/2010: S&P 500 at 1149, Barclays Aggregate yield at 3.1% (estimated), 10-Year Treasury at 3.8%, MSCI EM Index at Equity Asset ClassesEstimated Average Annual Returns over Next Five Years U.S. Equities3.2%-0.8%-3.1%10.2% Developed International Similar to U.S. Equities REITs-2.6%-1.1%-3.3%0.6% Emerging Markets5.4%n/a-2.2%12.9% Fixed Income Asset Classes Investment-Grade Bonds1.8% 2.6%1.8% High-Yield Bonds3.0%3.4%2.7%4.3% TIPS2.2%6.3%3.3%2.2% The chart represents gross return forecasts for several asset classes. The forecasts are forward looking statements based upon the reasonable beliefs of Litman/Gregory and are not a guarantee of future performance. Actual results may differ materially from the forecasts above.
4Q 09 Volatility Should Create Additional Opportunities Fear creates opportunities as prices temporarily disconnect from fundamentals We expect to see such periods in the future especially given the potential for further short-term shocks Such periods result in opportunities for our stock and bond managers It also creates opportunities to “rebalance” portfolios Market Analysis 4Q
4Q 09 Our Decisions Are Based on Long-Term Analysis We can analyze longer periods with more confidence and make decisions that better balance reward with risk The willingness to be wrong in the short term is what enables us to outperform over the more important longer spans Market Analysis 4Q
4Q 09 Final Thoughts Our strong showing in 2009 is a reminder of the opportunities that volatile markets can present But given the currently unexciting return potential from stocks and the fragile economy, we don’t see incentive to take on a lot of risk at this time Market Analysis 4Q