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Weekly Market Recap

Start the week off right with this one-page snapshot of headlines and market performance, including:

The week in review:
  • 3Q GDP increased to 3.2%
  • Consumer confidence jumped to 107.1
  • Markit mfg. PMI increased to 54.1
  • Light vehicle sales were 17.8M in Nov.
  • Unemployment rate fell to 4.6%
The week ahead:
  • Services PMI
  • Productivity
  • Job openings
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The investment outlook for 2017: Economic warming and political warnings

By Dr. David Kelly, David Lebovitz, Gabriela Santos

The global economy appears to be strengthening as it enters 2017, but threats to continued growth are becoming clear. Explore our 2017 investment outlook.
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Weekly Strategy Report

  • Investors have been concerned for many years about the sustainability of Chinese leverage. The lurch higher in aggregate debt in the last 18 months has added to those fears. We share these concerns, but believe the debt bubble will not be popped for the next 12 months.
  • Chinese authorities are mindful of the risk of renewed capital outflows. If money is attracted to the U.S. by the prospect of higher U.S. interest rates, China will likely seek to keep its domestic growth engine revved by maintaining infrastructure spending.
  • In our view, the tailwinds for global growth and commodities, from expansionary U.S. fiscal policy and domestic Chinese growth, limit the downside risk to emerging market equities from potential protectionist trade policies and a continuation of recent U.S. dollar strength.
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The long-term investment implications of the U.S. election


While the near-term reaction to Donald Trump’s victory has been to boost U.S. stocks relative to fixed income and EM investments, the long-term impact of a Trump presidency is a lot less certain. For long-term investors, it is best not to overreact to a significant political surprise but rather to maintain a balanced portfolio shaped by current valuations and longer-term market trends.
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Rising inflation: Options to help protect your portfolio


Inflation rates are set to rise across the developed world. This raises the bar for investment managers as clients require better returns just to stand still.
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U.S. elections: A populist victory

In the long-run, investors would do well to make sure that they are well diversified outside of U.S. stocks and bonds and that they have sufficient exposure to alternatives and international securities.
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Marathon

By Dr. David Kelly

American people have now suffered through their own marathon…a thoroughly dispiriting election campaign, dominated by insults and scandal rather than any serious discussion of the issues that are supposed to divide Republicans and Democrats. From an investment perspective, it has been a perpetual distraction and the two weeks left in the campaign feel a bit like the last two miles of a marathon. However, for investors, it is important to think past the finish line and consider the investment environment after the election.

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Latin America: A Turning of the tide

By Gabriela Santos

This bulletin explores how nascent but encouraging political changes in the region may present opportunities for investors.

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Global Fixed Income Views 4Q 2016

By Bob Michele

Themes and implications from the Global Fixed Income, Currency & Commodities Investment Quarterly meeting

  • Global growth is stabilizing at sub-trend levels, and meaningful signs of inflation are few. While even unorthodox central bank policies are losing their effectiveness, fiscal spending seems unlikely for some time to come. Sub-Trend Recovery remains our base case.
  • The 35-year bull market is not dead yet. Central banks are driving the markets; as long as accommodation continues, rates will remain low—a supportive environment for all fixed income sectors. We expect quantitative easing (QE) to continue through 2017.
  • We view the near-term risk of crisis as low, deferred by stability in commodity markets, in China and in the U.S. dollar (which has likely peaked) and the markets’ muted reaction to Brexit.
  • Our best ideas for the quarter include emerging market (EM) local currency debt, high quality high yield in the U.S. and Europe and higher quality bank capital debt.
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Global Asset Allocation Views 4Q 2016 (Video)

By John Bilton

Watch John Bilton, Head of Global Multi-Asset Strategies discuss themes and implications from the recent Strategy Summit including the Fed, outlook for global growth, the upcoming U.S. election, and more.

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Global Asset Allocation Views 4Q 2016

By John Bilton

Asset allocation for a world of slow growth and extended valuations. We expect a “first, do no harm” Fed, see stocks modestly outperforming government bonds, lean further into credit, and add an overweight to emerging market equity.

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Late innings baseball

By Dr. David Kelly
Over the past year, economic growth has decelerated while labor force growth has quickened, resulting in a much slower reduction in labor market slack than in the early years of the expansion.
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An election of extremes–but a government of moderation

By Andrew Goldberg
In the midst of a unique U.S. election season, this bulletin filters through the noise and explains how long-term investors should view the 2016 election.
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Painting by numbers: The truth about jobs


Dr. David Kelly examines historical and recent labor force data and discusses the health of the U.S. labor market in his monthly commentary for August.
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Living on borrowed time: Understanding global debt and what it means for investing

By Samantha Azzarello, Gabriela Santos, Hannah Anderson

Global debt trends are important to understand. Are currently elevated debt levels healthy, supporting growth, or are they creating a drag—even a potential solvency crisis on the horizon? Explore how we consider debt dynamics in developed and emerging markets, and how investors can take action.

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Cyclicals vs. defensives: The valuation imbalance

This bulletin recaps the second quarter earnings season and discusses the outlook for earnings for the rest of 2016.

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A tortoise on a lunch break

By Dr. David Kelly
From its very start, this expansion has been a tortoise, plodding along at the slowest pace of any post-war recovery. The May employment report suggested the tortoise is now on a lunch break, with a measly 38,000 payroll jobs added, far below consensus expectations, with 458,000 people leaving the labor force.

Investors should not freak out about the lunch break. The slide in job growth was likely exaggerated and should mostly be reversed in the months ahead.
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Brexit: What investors should consider

This bulletin, written by Stephanie Flanders, examines the investment implications of a potential Brexit from the EU.

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China's bond and equity market: Inclusion a new hope?

By Ian Hui
Reform measures opening up Chinese markets to overseas investors have driven speculation that they will soon be included in major benchmark indices.
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1Q16 earnings update: Beating estimates, but not yet growing

By David Lebovitz

Following the 2015 decline, companies beat earnings estimates but missed revenue estimates. We believe earnings growth is in the process of bottoming and should gradually recover over the remainder of this year.

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The future of monetary policy

By Stephanie Flanders, Michael Albrecht, Benjamin Mandel
  • In the aftermath of the first Federal Reserve (Fed) rate hike in nearly a decade, attention has briskly shifted to the future. What’s next for policy interest rates? How will central banks deal with their extraordinarily large balance sheets? In this paper, we take an even longer view. What does developed market monetary policy look like in future cycles, and what does it imply for markets?
     
  • Even as central banks experiment with mildly negative interest rates, we believe that balance sheet policies similar to quantitative easing will remain a regular feature of the landscape. Born of necessity when policy rates hit their zero lower bound, quantitative easing emerged to repair markets and ease financial conditions.
     
  • The process of experimentation with “unconventional” policy will continue so long as central banks face the limit of a lower bound on policy rates. One idea that has gained traction is the direct monetization of fiscal stimulus by central banks (i.e., helicopter money). Such policies need to balance the exigency of economic stimulus with the inherent risks, but it is fair to say that they are less unconventional now than they used to be.
     
  • More active balance sheet policy and muted variation in policy rates imply that yield curve steepening and flattening in subsequent cycles will be more moderate. The inversion of the curve that historically preceded recessions may not arise and, if it does, may not send the same signal in future cycles.
     
  • All of these developments are a mixed blessing for multi-asset investors. On one hand, central banks are finding ever more diverse and creative solutions to achieve their mandates. On the other, it suggests that the warning bell coming from the yield curve will be less informative than it used to be about the most worrisome of risk-off outcomes—when the economy tilts into recession. In our view, variations in quantitative easing among central banks will define the degree of monetary policy divergence in the coming years.
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Why not selling principal is a lousy principle

By Dr. David Kelly

Too many investors feel that it is somehow imprudent to ever sell principal, and so they have been lured into constructing a portfolio mainly with a bias towards yield rather than total return.

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Time to revisit emerging markets

By Pierre-Yves Bareau

In our base case scenario of muddle-through growth, with a gradual recovery of EM growth alpha and moderately tighter financial conditions, we prefer to base our core exposures on higher quality credit names with stronger balance sheets and fiscally prudent positions. This reflects our more cautious longer-term view, given the still- considerable downside structural risks from commodities, China and U.S. monetary policy normalisation. For the second quarter, however, the prospect of lower market volatility and a cyclical stabilisation leads us to favour tactical positions in idiosyncratic high yield stories.

From a sector perspective, we remain constructive on duration, as the challenging growth backdrop, global easing bias, currency stability and generally moderate inflation dynamics should continue to support local currency rates. While yields have rallied this past quarter, we still believe there is further room for compression.

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Saying "no" to the NIRP

Rather than carefully reviewing the way monetary policy is interacting with the economy, central banks have pressed ahead with ever more exotic forms of stimulus, including cutting overnight rates to near zero levels, implementing quantitative easing programs and employing schemes designed almost to bribe financial institutions into lending. The most recent expansion of these policies has been the introduction of a negative interest rate policy (or NIRP) by which central banks seek to expand lending and spending by setting short-term rates at a negative level. It should be noted that NIRP refers to an explicit central bank decision to set short-term policy rates at negative levels.

In judging whether NIRP constitutes “safe and effective” monetary policy, it is important to consider first how it is supposed to help the eurozone and second the extent of its side effects.

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Four E’s and an F

By Dr. David Kelly
This bulletin, written by Dr. David Kelly, examines the economy, earnings, energy, elections and the Federal Reserve.
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A transition with Chinese characteristics

By Gabriela Santos
This bulletin, written by Gabriela Santos and Hannah Anderson, examines the impact of China's slowing economy on developed and emerging markets.
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Asset Allocation Views 1Q 2016

By John Bilton
  • After a year of growth scares and choppy markets, we see a modestly better outlook in 2016, with the U.S. economy in mid-cycle, the recovery broadening out in Europe and some early signs of stabilization in emerging economies.
  • The trajectory of the U.S. dollar is pivotal; as U.S. rates start to rise, the dollar’s climb should slow as the gap between growth in the U.S. and the rest of the world narrows.
  • Stabilization in the U.S. dollar and oil will reassure equity and credit markets; recovering earnings plus consumer resilience in developed markets will give investors the confirmation they crave that gradually rising U.S. rates will not snuff out growth.
  • We start the year overweight stocks (notably Europe ex-UK and the U.S.) and credit, neutral duration and commodities, and underweight cash and emerging markets (EM).
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Skirting the hard landing

By George Iwanicki

While we do not believe an EM crisis is under way or inevitable, we believe emerging markets equities are still range-bound, constrained by the triumvirate of headwinds. Valuations are not sufficiently cheap to prompt a tactical "buy today" mentality. However, they are cheap enough (including consideration of the EM currency de-rating) to encourage investors to be setting valuation or fundamental "guideposts" to add to the asset class rather than run from it because of the news flow and worries that have overtaken investors.

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A brave new world: the deep de-carbonization of electricity grids

By Michael Cembalest
Previously we analyzed the individual components of the electricity grid: coal, nuclear, natural gas, wind, solar and energy storage. This year, we look at how everything fits together in a stytem dominated by renewable engergy, with a focus on cost and CO2 emissions. The importance of understanding such systems is amplified by President Obama's "Clean Power Plan", a by-product of which will likely be greater use of renewable energy for electricity generation.
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Dr. Kelly's Commentary: The North Star of the Economy

By Dr. David Kelly
This commentary, written by Dr. David Kelly, discusses how the unemployment rate affects the length of economic expansions.
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Dr. Kelly's Commentary: Deflation delusions  

By Dr. David Kelly
This bulletin, written by Dr. David Kelly, addresses the impact that deflationary fears have had on the Fed's decision to postpone rate hikes.
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Avoiding the stagnation equilibrium

By Dr. David Kelly
At their September meeting, the Federal Reserve decided, for the 54th consecutive time, to leave short-term interest rates unchanged at a near-zero level. While only one voting member of the Federal Open Market Committee (FOMC) dissented, the Fed’s action, or rather inaction, was hotly debated.

Those advocating an immediate hike argued that the economy had progressed far beyond the emergency conditions that had led to the imposition of a zero interest rate policy in the first place and that the Fed was already dangerously “behind the curve.” Those lobbying for further delay pointed to a lack of wage inflation and signs of weakness in the global economy.

However, frustratingly, we believe this argument, like all monetary policy debates in recent years, has been waged on a false premise, namely that increasing short-term interest rates, even from these extraordinarily low levels, would hurt aggregate demand. We believe that the opposite is true. The real-world relationship between interest rates and aggregate demand is non-linear and an examination of the transmission mechanisms suggest that the first few rate hikes, far from depressing aggregate demand, would actually boost it.
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The Millennials - Executive Summary

By Michael Cembalest, Katherine Roy

The millennial generation (individuals born between 1982 and 2000) is the subject of intense scrutiny: their likes and dislikes, social media inclinations and digital footprints, fashion sense, dining habits, reproductive trends, political and religious views, workplace objectives, etc. This year, millennials will overtake the baby boomers as the largest living generation in the United States, so there are plenty of reasons to study them. This is the abbreviated version of the study.

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The Millennials

By Michael Cembalest, Katherine Roy
The millennial generation (individuals born between 1982 and 2000) is the subject of intense scrutiny: their likes and dislikes, social media inclinations and digital footprints, fashion sense, dining habits, reproductive trends, political and religious views, workplace objectives, etc. This year, millennials will overtake the baby boomers as the largest living generation in the United States, so there are plenty of reasons to study them.
 
Our focus here is not on smartphone usage or cultural preferences, but on how millennials will manage their finances and maintain their financial independence throughout their working years and through retirement. Our analysis is presented in the form of a proposal for a web-based show (The Millennials) available for live streaming, complete with backstory, a list of episodes and detailed production notes. Millennials that binge-watch the series in its entirety, as well as their financial advisors, employers and parents, will gain a greater understanding of the drivers of financial security in a rapidly changing world, one that the millennials will now inherit.
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Dr. Kelly's Commentary: Waiting on the world to change

This bulletin, written by Dr. David Kelly, addresses the Federal Open Market Committee meeting announcement on September 17.
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The long and short of baby boomer balance sheets

Baby boomers are entering retirement, bringing with them a median level of household assets considerably higher than that of their parents’ generation and, in all likelihood, far exceeding that of the next generation as well. We refer to this massive accumulation of assets—and the impact it is likely to have on the economy, markets and the retirement prospects of multiple generations—as baby boomers' "financial exceptionalism." This research examines the evolution of baby boomer balance sheets and attempts to assess and quantify its implications for markets and investors.
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Rethinking the "core": Finding the middle ground in equities

In an environment of lower returns and higher volatility, equity approaches that straddle both actively and passively managed strategies can help investors generate higher returns or minimize volatility.

In a lower-return environment, the contribution from any excess return is a more meaningful contributor to overall return. But because finding consistently outperforming active managers can be difficult, many investors have gravitated toward benchmark-oriented solutions.

Investors who have adopted a core-and-satellite approach for their core equity allocation should consider substituting some or all of their passively managed equity allocations for incremental return-enhancing or risk-reducing strategies. Doing so should result in better risk-adjusted returns.

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In the context of our macro views and a multi-asset portfolio

Global Multi-Strategy Team comments on recent market moves, the most current being driven by a combination of genuine fears over emerging markets and Chinese growth and exacerbated by a thin summer market and uncertainty over the Federal Reserve’s (the Fed) next move.

  1. Global growth — There will be some drag on global growth, but this does not look like 2008 and the prospect of emerging markets derailing the (admittedly sluggish) domestic growth in US and Europe is low.
  2. Fed policy — September hike now unlikely, but we expect the Fed to match a delay with a modestly hawkish rhetoric.
  3. Other Central Bank policy — It is the PBoC not the Fed that hold the keys to stabilising this recent move, watch for RRR and outright rate cuts in the near future.
  4. Inflation — Our low inflation macro theme remains in play, breakeven inflation has fallen sharply recently, but a repeat of the deflation scare of early 2015 does not seem to be on the table.
  5. Stocks — An ugly run in stocks would probably present a buying opportunity but the pace of the recent washout has caught many by surprise. We expect to now need policymaker reassurance before buyers step up.
  6. Bonds — Duration is not giving much protection to weak stocks as term risk premia are already very compressed. The risk-reward in long duration looks stretched now.
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Take stock: Equity investing for P&C insurers

By Mark Snyder

Mark Snyder, Head of Institutional Strategy & Analytics, explains how SMAs have led to a wide dispersion in results, large deviations from standard benchmark returns, and in many cases underperformance.

For U.S. property and casualty (P&C) insurers, public equity investments diversify risk in income-oriented portfolios, typically offer higher expected returns than fixed income securities and provide a ready source of liquidity. They have regularly made up the second-largest allocation in P&C portfolios after fixed income and currently account for nearly 10% of total non-affiliated investments.* P&C insurers hold most of their equity investments in separately managed accounts (SMAs). The low-turnover, buy-and-hold strategies of many SMAs, while allowing for precise control of the timing of realized gains and losses for tax purposes, have led to a wide dispersion in results and large deviations from standard benchmark returns—with substantial under performance in many cases, as our analysis shows.

P&C companies have allocated a much smaller portion of equity investments to funds and exchange-traded funds (ETFs). These allocations trade the ability to manage tax outcomes for the SMA’s ability to track a benchmark at low cost or gain access to skilled managers who can potentially outperform a benchmark. We believe insurers should give this trade-off serious consideration, weighing the advantages of a buy-and-hold strategy against the drag it can impose on returns that chronically lag an established benchmark.

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Recent Market Events: Regarding the Chinese Renminbi and recent market corrections

By Richard Titherington
Comments from Richard Titherington, CIO Emerging Markets and Asia Pacific Equities, regarding the Chinese Renminbi and recent market corrections.
 
Panic selling can create opportunities for long-term managers with discipline and stock selection expertise to buy stocks that they previously thought were too expensive. Our Emerging Markets Equity team is revisiting their portfolios and looking to add to high conviction ideas whose share prices have corrected to attractive levels.
 
Historical analysis suggests that investors can potentially enjoy significant upside when entering the markets at low Price to Book levels.
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The Wage Puzzle - Long version

By Dr. David Kelly

This bulletin, written by Dr. David Kelly, discusses factors affecting the lack of wage growth in the U.S.:

  • Structural, not cyclical, factors are largely responsible for the lack of wage growth in recent years. These factors—such as the retirement of baby boomers, the continued fall in union membership, growth in part-time workers and a slowdown in productivity—cannot easily be fixed by monetary or fiscal stimulus.
  • U.S. wage growth has also failed to respond to falling unemployment due to temporary forces, such as the plunge in inflation and pessimistic attitudes on the economy, which should fade in the months ahead. As these influences wane and as the unemployment rate continues to decline, wages should move higher.
  • The lack of wage growth does not appear to justify the Federal Reserve’s (Fed) near-zero interest rate policy. We expect the Fed will, in the absence of further shocks, initiate the first rate hike in more than nine years in September.
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Chinese yuan devalued — Reform not stimulus

By Tai Hui
This bulletin, written by Tai Hui, Chief Market Strategist — Asia, discusses the PBoC’s move to devalue the Chinese currency and how this decision will impact economic growth in region.
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Dr. David's August 2015 Commentary: The wage puzzle (short version)

By Dr. David Kelly

Dr. Kelly's Commentary for August 2015:

The July U.S. jobs report was solid and mostly in line with expectations. However, it is notable that, in a steadily improving job market, both labor force growth and wage growth remained weak. We have argued in the past that most of the labor force problem is structural rather than cyclical. That is to say, it is largely due to the retirement of babyboomers, a surge in disability benefits and a growing number of Americans who are essentially excluded from the job market due to prior felony convictions, educational deficiencies and issues with addiction. All of these are important issues and deserve the urgent attention of the government.

However, unlike a general lack of economic demand, they cannot be fixed by monetary or fiscal stimulus. Wage growth also remains very weak with wages of production and nonsupervisory workers up just 0.1% in July compared to June and up just 1.8% year-over-year. This is remarkably different from the last three economic expansions. The July jobs report showed only a marginal drop in the unemployment rate from 5.28% to 5.26%. However, the last three times the unemployment rate hit 5.3% on the way down, wage growth was much stronger, achieving year-over-year gains of 3.3% in November of 1988, 3.4% in June 1996 and 2.6% in January 2005.

So why are wages so weak, this time around? A full explanation is elusive. However, statistical analysis suggests that, as is in the case of labor force participation, the problems are largely structural or else due to factors that are mostly independent of demand in the economy.

Continue reading Monthly Commentary

2Q15 Earnings season recap: High hopes, low expectations

We estimate that 2Q 2015 earnings-per-share (EPS) for S&P 500 companies declined by 6.9% on a year-over-year (y/y) basis. Lower oil prices and the stronger U.S. dollar have dragged down earnings growth since 4Q 2014.
 
Fortunately, because these factors are transitory in nature, downward revisions to earnings estimates have stabilized and there are high hopes for EPS to rebound by 4Q and in 2016.
 
Excluding the energy sector, S&P 500 EPS grew by 4.1%, below historical trends. This is because the stronger dollar resulted in an average EPS decline of 5% for the most dollar-sensitive companies.
 
While share buybacks have boosted EPS over this market cycle, they have been of secondary importance at best. The primary drivers of earnings have been sales and margin growth.
 
We continue to favor U.S. equities despite the recent slowdown in EPS growth. Our base case for 2015 still calls for a single-digit return for the S&P 500, which we believe is attractive for most portfolios in this market environment.
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India and Mr. Modi: A progress report

By Tai Hui

Market reaction to the Modi government’s reform program has cooled. After a strong 2014, India’s equities market have grown only moderately this year, with the MSCI India gaining 4.5% in dollar terms (USD) and 5.6% in local currency.

  • Nevertheless, the government has made much progress in the past 12 months, implementing measures to encourage foreign direct investment (FDI) and a more friendly business environment for foreign companies and promoting energy, coal and mining reforms, as well as implementing enhanced social welfare programs.
  • Some reforms are still works in progress, however, and have not yet met market expectations. Manufacturing growth has been disappointing and the tax system is still unfavorable for foreign companies. Both the Goods and Services Tax (GST) and land reforms have been delayed, casting doubt on the government’s ability to push ahead with reform.

While we believe India’s reform agenda is progressing at a steady pace, clearly more remains to be done—and to judge from the market’s reaction, more will be expected in 2H 2015.

Continue reading Market Bulletin

Dr. Kelly's July 2015 Commentary: Annual checkup

By Dr. David Kelly

Dr. David Kelly's commentary for July 2015:

He warns that it is only prudent to consider both careful monitoring and a prescriptiont to make exact predictions of long-term outcomes for U.S. stock and bond investors. The most effective monitors are market prices and the monthly employment report. If stock prices continue to rise and longterm yields remain low, even as the employment report shows a tightening job market and anemic labor supply, then the eventual risks to both bond and stock markets will rise.

As for a prescription, it is relatively simple at this stage. Given the super-low yields on cash, it still makes sense for long-term investors to be in long-term assets. However, this should also be a time to be a little underweight fixed income overall, while looking at global opportunities in both equities and fixed income. It also makes sense to have a broad and active approach in asset allocation across stocks, bonds and alternative assets and in hiring managers who can focus on what is still good value in markets that, after a very long run, are no longer so cheap.

Continue reading Monthly Commentary

Seeking direction in a volatile market: Trends in endowments & foundations

Endowments and foundations generated low-double-digit returns in fiscal year 2014 as a result of strong U.S. public equity markets and a shift to alternatives and longer-lived investments. However, as volatility and interest rates increase and global macroeconomic and financial cycles start to normalize, institutional investors will need to adapt to the changing market environment.

In this article, Monica Issar, Global Head, J.P. Morgan Endowments & Foundations Group, and Anthony Werler, Chief Strategist, J.P. Morgan Endowments & Foundations Group, highlight the key trends in nonprofit investment management, as well as areas of opportunity for investors.

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Europe's recovery: From caterpillar to butterfly?

Last year, we laid out our view that structural reforms, much looser monetary policy and a weaker euro had finally set the European economy on the road to recovery. We felt that markets had largely underestimated this improvement, opening up opportunities for investors wishing to increase their exposure to the European equity and bond markets.

This optimism has been borne out by the turnaround in market sentiment towards Europe since the start of 2015. As we approach the second half of the year, it seems a good opportunity to take stock of progress over the past 12 months, gauge whether this improvement is sustainable and assess further opportunities for investors in European assets.
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Balancing Investment Objectives for Colleges and Universities

We use a real world example for a comprehensive volatility and liquidity assessment to understand the implications of asset allocation shifts in a university's portfolio. Working closely with our Institutional Solutions & Advisory group, an internal team focuses on providing objective analysis and solutions for institutions.
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Stephanie Flanders speaks to Bloomberg about Greece

By Stephanie Flanders

Get Stephanie Flanders' reaction to the unfolding events in Greece. In this interview on Bloomberg Business, she discusses impact of the referendum, the weakened government, political change in Greece and the IMF memo leak.

Watch the interview

Creating Opportunities through Risk Management and Diversification

Real world liquidity, volatility, risk/return scenarios to drive enhanced returns for a non-profit healthcare client. Discover which three trends are found in this case study and how the client achieved their investment goals across a broad range of asset pools by employing our robust analytic and risk-management capabilities.
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A Focus on Partnership

By Monica Issar
In this case study, we emable clients through our global insights and investment platform. Using a real world example, we provide the foundation with access to our robust analytics platform, capital markets knowledge, and local on-the-ground investment expertise across asset classes to help address the challenge of seeking increased sources of return while managing an appropriate spending policy.
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Health care costs in retirement

A sound retirement strategy must plan for increasing health care expenses. While managing and investing for current income, an effective retirement strategy must also include sufficient growth investments to cope with the added health care costs.
 
This paper will:
  • Analyze the forces driving health care spending growth
  • Assess the pressure points and sustainability of the current Medicare system
  • Consider options for future retiree health care coverage
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Reducing constraints to maximize potential

By Peter Kirkman
From November 2014: Peter Kirkman, portfolio manager for the Global Thematic and Sector Funds, discusses how an unconstrained approach enables him to build a concentrated portfolio of his highest conviction ideas.
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Dr. Kelly's June 2015 Commentary: The advice surplus

By Dr. David Kelly

Historians generally agree that Napoleon’s fatal mistake on June 18, 1815 was that he thought the ground was too soft and he thus waited too long before launching an attack on the forces of the Duke of Wellington. This allowed the Prussian army the opportunity to regroup and attack him from the side.

Dr. David Kelly illustrates the dire conclusions from delaying any rate hike until 2016. The Fed appears to be gradually getting more comfortable with the pace of demand growth and, barring some macroeconomic shock, we believe that they will finally raise interest rates by September. As was the case two centuries ago, waiting for firmer ground would be a mistake.

Continue reading Monthly Commentary

European assets: Volatility strikes back

What has happened? Rather than abating, as many had expected, the sell-off in European markets that began in late April has continued into June.

What has been driving this? There are a number of factors being touted as the primary driver of recent market movements, including:
  • Changing inflation expectations relative to the start of 2015
  • Unwinding of speculative positioning
  • Liquidity concerns in key markets
  • A mild softening of economic data
  • Worries over Greece
  • Worries over a rising euro
Do we think this will last? It is good news to see bond yields rising, if that increase comes as a result of reduced fears of deflation and/or increased hopes of economic recovery.
Continue reading Retirement Insights

Living in a less liquid world: The do's and don'ts for bond investors

The bond liquidity issue is one of the hottest topics in finance today. But what exactly is it? Is liquidity lower today and, if so, why? Most importantly, what does it mean to investors? In this bulletin we explore these timely subjects, focusing primarily on liquidity in the corporate bond market. We conclude with a list of do’s and don’ts for bond investors to consider.
Continue reading Market Bulletin

CIO Perspectives: Innovative asset class solutions

By Jeff Geller
Investors are challenged with constructing portfolios for today's risks. Listen to Jeffrey Geller, CIO of Multi-Asset Solutions Group, discuss key findings in this episode of our Insights audio program from October 2014.
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What's in store for emerging markets in 2015

By Pierre-Yves Bareau
In January 2015, Pierre-Yves Bareau wrote about how the growth picture remained challenging for emerging market economies, with momentum fading and the growth differential over developed markets continuing to narrow. Some of what we said:
 
Against this backdrop, our investment focus will continue to center on differentiation, while we will remain defensively positioned with a focus on technicals and liquidity. We currently favour higher quality issuers, monitoring fundamentals for signs of a catalyst to time entry into higher yielding "turnaround" stories.
 
We are more defensively positioned with respect to EM currencies, maintaining a U.S. dollar bias. While we acknowledge that value has been created in EM FX, both fundamentals and timing need to be right. We favour oil importing currencies that are not threatened by deflation concerns—the Turkish lira and Indian rupee being two such currencies. On the corporate side, liquidity remains the chief concern. Valuations have recovered to attractive levels, while fundamentals have declined on the margin and solvency is not an issue.
Continue reading Investment Insights

Accessing Asia: Investing in the infrastructure imperative

By Pulkit Sharma
Our Global Real Assets expert Pulkit Sharma, with Real Asset Strategist Michael Hudgins, discusses the infrastructure opportunity in Developing Asiaone of the world’s fastest growing regional economies, in this video from September 2014.
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Absolute return bond investing: multiple approaches to mitigate risk

By William Eigen
In this video from August 2014, Bill Eigen, head of Absolute Return and Opportunistic Fixed Income, describes his philosophy toward absolute return fixed income investing.
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Managing risk, delivering results

By Raffaele Zingone
Catch Raffaele Zingone, Portfolio Manager for the U.S. Research Enhanced Index Strategies, discuss his three-pronged investment approach and how he mitigates risk while delivering returns in this video from October 2014:
  • Stock prices follow long-term earnings
  • The market often misprices stocks based on those long term projections
  • If you can capture those mispricings consistently over time you can generate excess return
He also discusses managing risk in the portfolio through a set of simple rules, quanititative risk modeling, and proactive risk control.
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Missing Link: Economic exposure and pension plan risk

By Alex Christie
This October 2014 paper by Alex Christie, provides a framework for managing extreme economic risks such as those that could affect a plan sponsor during periods of high market volatility. The problem can be compounded when poor investment performance affects the pension plan at the same time as a downturn in the sponsor's business.
 
Pension plan trustees are increasingly aware of the range of risks present in defined benefit pension plans. Volatile markets have led to volatile funding ratios, compounding the impact of falling interest rates and increasing longevity. This heightened awareness has led many plans to look at ways of managing these risks.
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Are tailwinds the new headwinds for bonds?

By William Eigen
Bill Eigen, CIO of Absolute Return and Opportunistic Fixed Income Investing, explains today's fixed income markets in this video from August 2014.
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Hedge funds: Back to normal?

By John Anderson
As quantitative easing unwinds in the U.S. and markets begin to normalize after five years of recovery, will hedge funds reassert the long-term risk-return profile investors have come to value and expect? John Anderson's analysis from November 2014 suggests:
  • While hedge funds have underperformed conventional assets on an absolute basis over the last five years, they continue to provide alpha and portfolio diversification.
  • Long-term investors who focus on performance over an investment cycle have benefited from allocating to hedge funds.
  • Managers with more flexible investment toolboxes may benefit from recent structural changes in markets, such as the decline in market liquidity.
  • Historically, low growth, low inflation and rising rate environments have been attractive for hedge funds, while volatile markets have provided a relative advantage.
  • The greater dispersion of hedge fund returns vs. long-only strategy returns highlights the importance of manager selection.
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Case for concentration: Greater focus, greater insights

By Gregory Luttrell
In this video from July 2014, Gregory Luttrell discusses his views on the current environment and how a concentrated approach helps him capitalize on today's opportunities.
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The great re-alignment

By Richard Oswald
This paper from April 2014 discusses three key challenges with traditional fixed income benchmark strategies:
  • Duration: Significant sensitivity to changes in interest rates
  • Concentration: Highest allocation to the most stressed and frequent borrowers
  • Constraints: Limited flexibility to capture returns outside the confines of the index
Employing an unconstrained approach to fixed income investing can address each of these issues. In this Strategy Insights we look at one approach to unconstrained investing and examine the potential effects on risk and return when benchmark-agnostic strategies with more flexibility to change duration and sector exposures are blended with traditional core fixed income allocations.
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The hedging edge: How much beta do you want?

By Hamilton Reiner

Have a refresher course on how investors have learned that unexpected threats and volatility can quickly erase their hard-won equity gains in the market.

This paper from February 2014 provides a broad overview of these equity hedging strategies and insight on what to consider when evaluating different types of equity hedges, as well as an examination of the roles these strategies can play in asset allocation and investor portfolios. Successful equity hedging strategies start with an effective stock valuation and investment process. In addition, the complexities of managing options and short positions also require a set of unique and robust operational capabilities, as well as a portfolio team with the skills and experience in shorting and managing derivatives- and options-based strategies.

Equity hedging strategies, which can include hedged equity or long/short strategies, help investors stay in the market during bouts of volatility. They do this, in part, by capturing gains when the markets are rallying and cushioning the falls when the markets are dropping. Given the variety of approaches to hedging equities, investors need to consider their objectives, risk profile and desired beta exposure when selecting an appropriate strategy.

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Is the ECB’s QE too late? - Chart of the week

In the game of quantitative easing (QE), there are costs to being late. With eurozone inflation and yields at extremely low levels, this chart from the Market Insights team shows that the European Central Bank’s (ECB) latest QE move is coming late in the QE game.

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When will the Fed raise rates? Look at wages and job gains - Chart of the week

Despite a strong employment report, wage growth, which tends to have an inverse relationship with the unemployment rate, declined in December. This chart shows that investors should pay close attention to both job gains and wage growth for any developments that might change the Fed’s timeframe for raising rates.
 
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Investing for the long-term: Consider a barbell approach - Chart of the week

By Michael Cembalest
Investors should consider a “barbell” approach when thinking about rebalancing in 2015 and beyond.
 
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Tracking the business cycle

By Michael Hood

This paper examines past and current business cycles, outlines the current stages of the U.S., UK and the euro area cycles, and looks at the relationship between business cycles and financial market performance:

  • Economic cycles play a key role in driving capital market outcomes and why a tilt toward growth-sensitive assets is still warranted
  • Five main conclusions emerge from the preceding examination of business cycle history, theory, and market relationships
  • Assets that will perform relatively well during a recession, such as government bonds and high-quality corporate credit, represent an integral component of investing for the long run, given the difficulty in predicting the timing of such downturns
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Deeper dive on infrastructure investing

By Michael Cembalest
This video from May 2014 takes the infrastructure conversation deeper with Michael Cembalest, and discusses what surprised him about this research and where he sees opportunities going forward.
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Sovereign Client experience

By Patrick Thomson
From May 2014: in this video, Patrick Thomson discusses what sovereign clients can expect from their partnership with JPMAM.
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