Monthly Economic Update: July 2015

Transcription

1 Monthly Economic Update: July 2015

2 U.S. Equity Returns INDEX July 3 Month 1 Year 3 Year 5 Year Russell 1000 Value TR USD Russell 1000 TR USD Russell 1000 Growth TR USD S&P 500 TR USD S&P 500 Low Quality TR USD S&P 500 High Quality TR USD Russell 2000 Value TR USD Russell 2000 TR USD Russell 2000 Growth TR USD Returns as of 7/31/2015 Source: Morningstar Direct 2

3 International Equity Returns INDEX July 3 Month 1 Year 3 Year 5 Year MSCI EAFE Value NR USD MSCI EAFE NR USD MSCI EAFE Growth NR USD MSCI AC Europe NR USD MSCI Japan NR USD MSCI United Kingdom NR USD MSCI Portugal NR USD MSCI Ireland NR USD MSCI Italy NR USD MSCI Greece NR USD MSCI Spain NR USD MSCI EM NR USD MSCI Brazil NR USD MSCI Russia NR USD MSCI China NR USD MSCI India NR USD Returns as of 7/31/2015 Source: Morningstar Direct 3

4 Fixed Income Returns INDEX July 3 Month 1 Year 3 Year 5 Year Barclays US Aggregate 1-3 Yr TR USD Barclays US Agg Bond TR USD Barclays Global Aggregate TR USD Citi WGBI USD Barclays US Corporate High Yield TR USD Barclays US High Yield Loans TR USD Barclays Municipal 1-3 Yr TR USD Barclays Municipal Interm 5-10 Yr TR Barclays Municipal TR USD Barclays HY Muni TR USD Returns as of 7/31/2015 Source: Morningstar Direct 4

5 Corporate Spreads vs. U.S. Treasuries Month Over Month Change Chart reflects change in corporate spreads vs. U.S. Treasuries from end of June to end of July. Financials Average Life 1 Year 3 Years 5 Years 10 Years 30 Years AAA AA A BBB BB B Industrials AAA AA A BBB BB B Utilities AAA AA A BBB BB B Note: -- indicates spread not available Source: FactSet as of 7/31/2015 5

6 Real Asset Returns INDEX July 3 Month 1 Year 3 Year 5 Year DJ Gbl Select REIT TR USD DJ US Select REIT TR USD Bloomberg Commodity TR USD Alerian MLP TR USD Returns as of 7/31/2015 Source: Morningstar Direct 6

7 GDP Growth 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% US Real GDP Growth Launch full data release Quarterly Change in GDP Annual Change in GDP The first estimate of second quarter GDP growth came in at 2.3%. While this is positive, it reflects a weaker recovery from the first quarter than we experienced in At the same time, the government revised growth numbers over the last three years. Included in these revisions was an upward revision to Q115 from -0.2% to 0.6%. In addition, 2012 and 2013 full year GDP were revised down. These revisions reflect that the economic recovery to date continues to be weaker than average. Through Q2 2015, based on first estimate of Q2 GDP at 2.3% Source: FactSet '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 7

8 Contribution to GDP Growth 8% US Contribution to GDP Growth Business Spending Consumer Spending Government Spending Net Exports Launch full data release 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -4% -6% Second quarter GDP was driven primarily by consumer spending. It is notable that all components of GDP were positive for the quarter. -2% -4% -6% -8% -10% Source: FactSet '06 '07 '08 '09 '10 '11 '12 '13 '14-8% -10% 8

9 ISM Manufacturing and Non-Manufacturing Indices 65 ISM Report on Business ISM Manufacturing Index ISM Non-Manufacturing Index Launch full data release Through July The Institute for Supply Management s (ISM) Manufacturing index ticked down slightly to The more important ISM Non-Manufacturing index accelerated to 60.3, the strongest reading of the recovery. It is in fact the strongest reading since The service sector continues to grow faster than manufacturing Source: FactSet '06 '07 '08 '09 '10 '11 '12 '13 '14 '

10 Non-Farm Payrolls and the Unemployment Rate 600 US Change in NonFarm Employment & Unemployment Rate Monthly Change in Non-Farm Employment U.S. National Unemployment Rate Launch full data release 11% 400 Through July % % 8% ,000 The economy added 215,000 jobs in July. This continues a trend of positive reports. The unemployment rate remained unchanged at 5.3%. Overall, the employment report likely means the Federal Reserve has a green light to move forward with the first interest rate hike at their next policy meeting in September. Source: FactSet 4% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 7% 6% 5% 10

11 New Unemployment Filings 700 Weekly Initial Unemployment Claims (000's) The decline in new unemployment filings has generally been oscillating between 250,000 and 300,000 for the last several months. Recent reports are not significant, as none have represented an outlier and all have been consistent with an improving labor market Through July 31, Source: FactSet '06 '07 '08 '09 '10 '11 '12 '13 '14 '

12 Job Openings and Labor Turnover Survey (JOLTS) Report 6,000 Total Jobs Available in U.S. (000's) 5,000 Through May ,000 3,000 2,000 1,000 The latest available government JOLTS report (which tracks the number of jobs available in the economy) shows the number of available positions at yet another post-recession high, with nearly million jobs available through May. This level of jobs should result in a continuation of more hiring. 0 Source: FactSet '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 12

13 Capacity Utilization 90% US Capacity Utilization U.S. Capacity Utilization Launch full data release 90% 85% Through June % 80% 80% % 70% 65% Capacity utilization is an indirect leading indicator of hiring. In theory, there is a limit to how much a company can produce with existing equipment and employees. Once that limit is reached, companies have to hire additional employees or purchase equipment. In the expansion of , hiring was strongest when capacity utilization reached the lower 80% range. Capacity utilization has been declining over the last several months. The decline is one of a few negative economic indicators suggesting future growth will continue to be slow. '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Source: FactSet 75% 70% 65% 13

14 Conference Board Survey of Consumer Confidence Consumer Confidence Consumer confidence rebounded in June to The rebound moves us closer to the postrecession high of set in January. In addition, the rebound reflects a reversal of the decline experienced since January and suggests economic activity likely rebounded and became stronger towards the end of the second quarter Source: FactSet through July 2015 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 14

15 Small Business Confidence Indices 120 Small Business Optimism Index Small Business Confidence through June 2015 Small business optimism fell in June. It is unclear what caused the decline, but a month full of uncertainty brought on by international geopolitics may have contributed Source: FactSet '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 15

16 Home Affordability vs. 30-Year Mortgage Rates 220 U.S. Housing Affordability Index 30 Year Conventional Fixed Mortgage Rate Affordability as of March 31, The home affordability index increased through the first quarter as mortgage rates declined. Home prices have been recovering with regional variances. Mortgage rates remain reasonable. '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 ' Mortgage rate as of June 30, Source: FactSet

17 Existing and New Home Sales 6,000,000 Existing Home Sales - United States (Left) New Residential Sales, Thousand Houses - United States (Right) 600 5,500,000 Data through June ,000, ,500, ,000,000 Existing home sales increased through June, while new homes sales declined. The trend in both continues to suggest a housing recovery at the national level ,500,000 '11 '12 '13 '14 '15 Source: FactSet

18 S&P 500 vs. S&P 500 EPS 2,400 2,200 2,000 1,800 1,600 S&P 500 S&P Price S&P EPS - LTM The S&P has generally traded sideways on a year to date basis as earnings have declined. Much of the decline is based in the energy sector, but earnings growth has broadly been weaker than the last several years. The market may continue to search for appropriate levels as future earnings growth remains somewhat uncertain , , , Trailing EPS is blend of actual 2014 earnings and estimated earnings for Q As of August 7, 2015 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: FactSet

19 10-Year Treasury Yield U.S. 10-Year Treasury Yield Following a spike in 2013, the 10-Year Treasury declined through The 10-Year rate has been volatile year to date as investors attempt to forecast Federal Reserve action. Following the March FOMC meeting, rates settled down as it seemed apparent the Fed would hold off on a rate increase. Now, with some improvement in economic data, rates have been increasing in anticipation of a late year raise by the Fed. International political developments (primarily Greece) have added to recent rate volatility, with the 10-Year Treasury trading in a range between 2.3 and 2.5% /6/ '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: FactSet 19

20 U.S. Treasury Yield Curve 4.0% 3.5% 3.0% 2.5% 2.0% Yield (%) The treasury yield curve has flattened some relative to a year ago; that means short rates are higher while longer rates are generally lower. Recent movement may reflect an anticipation of Federal Reserve action to raise short term rates. 1.5% 1.0% 0.5% 0.0% 6M1Y 2Y 3Y 5Y 10Y 15Y 20Y 30Y Now One Week Ago One Month Ago One Year Ago Tullett Prebon Information Source: FactSet, August 7,

21 Oil Supply and Price 140 Brent Crude Oil (Left) U.S. Oil Production (000's Barrels Per Day) (Right) West Texas Intermediate Crude Oil (Left) 10, Oil Production through July 31, 2015 WTI and Brent Price as of August 6, , , , , The price of oil reversed in July to fall near the lowest levels since prices started to decline. U.S. production has stayed surprisingly resilient given the amount of drilling which has been idled. The lack of a significant decline in U.S. production has helped to keep global oil supply approximately 2 million barrels of oil per day ahead of demand. The imbalance is forcing the price of oil down. While lower oil prices should ultimately be good for economic growth, it likely means no recovery in earnings for the battered energy sector. '11 '12 '13 '14 '15 5,000 4,000 Source: FactSet through June end 21

22 Global Risks Geopolitical In general, the same geopolitical issues have dominated for the last few months. Greece Following escalation and speculation that Greece may be near an exit from the Eurozone, an agreement was finally reached and the situation was diffused for now. As has been the case for the last rounds of bailout, the current agreement may amount to nothing more than a kicking of the can into the future. Ultimately, Greece has to get its budget under control and figure out how to restart its economy. There really are only two ways out debt default or grow. Default is off the table temporarily. It remains to be seen if Greece can figure out how to grow. Oil Pressures The price of oil reversed its second quarter recovery and declined to recent lows. Energy production in the U.S. has stayed much more resilient than market participants expected, making the U.S. the true marginal producer globally. The low price will continue to put pressure on exporters in the Middle East and South America, as well as Russia. Iran Nuclear Deal A deal was reached with Iran. The U.S. Congress must now deliberate the specifications. However, under the terms of a law passed earlier in the year, the deal will not be considered a treaty subject to approval by Congress. Instead, the deal is subject to disapproval by Congress. Anything less than a 2/3 majority is expected to be vetoed by President Obama. 22

23 Global Risks Economic Fed Policy error As economic indicators rebound, the Fed is running out of excuses not to increase interest rates. Consensus expectations suggest the Fed will move in September. However, an outstanding concern is the lack of inflation. The limited inflation may result in the Fed waiting too long to raise rates, creating imbalances in the system. Earnings Misses Through August 6, 436 companies in the S&P 500 have reported earnings, with the blended earnings growth rate at -1.0%. The decline in the price of oil also means there will not be a recovery in the energy sector in the third quarter. Earnings are expected to rebound in the fourth quarter, but overall growth for 2015 is expected to be weak at 1.2% before rebounding to 10.6% in China data has failed to meet expectations and the country continues to struggle with a broken credit system. July saw significant volatility in the Chinese A share market. The government intervened with purchases to support existing market levels. While these actions have temporarily tempered volatility, the real concern is rampant use of leverage and bubble-like investment flows into equities coupled with intervention by a government inexperienced in managing equities. Further volatility may follow, especially if data does not improve. 23

24 Disclosures Domestic equities: The value of the fund s domestic and foreign investment will vary from day-to-day in response to many factors. Stock values fluctuate in response to the activities of individual companies, and general market and economic conditions. The prices of small and medium sized company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Investing in foreign securities presents certain risks that may not be present in domestic securities. For example, investments in foreign and emerging markets present special risks, including currency fluctuation, the potential for diplomatic and potential instability, regulatory and liquidity risks, foreign taxation and differences in auditing and other financial standards. Securities in emerging markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Fixed income securities are subject to availability and market fluctuation. These securities may be worth less than the original cost upon redemption. Certain high-yield/high-risk bonds carry particular market risks and may experience greater volatility in market value than investment-grade corporate bonds. Government bonds and Treasury bill are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in some instances, the alternative minimum tax. The fund s yield, share price, and total return change daily and are based on changes in interest rates, market conditions, other economic and political news, and on the quality and maturity of its investments. In general, bond prices rise when interest rates fall, and vice versa. This effect is usually more pronounced for longer-term securities. You may have a gain or loss when you sell your shares High yield bonds, also known as junk bonds, are subject to greater risk of loss of principal and interest, including default risk, than higher-rated bonds. Investors should not place undue reliance on yield as a factor to be considered in selecting a high yield investment. These securities are rated below investment grade. Real Estate Investment Trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Individuals can invest in REITs either by purchasing their shares directly on an open exchange or by investing in a mutual fund that specializes in public real estate. P/E (Price-to-Earnings Ratio) is a valuation ratio of a company s current share price compare to its per-share earnings. It is also known as the price multiple or earnings multiple. Beta measures the risk potential of a stock or an investment portfolio expressed as a ratio of the stock's or portfolio's volatility to the volatility of the market as a whole. Standard deviation is an indicator of the portfolio s total return volatility. The larger the portfolio s standard deviation, the greater the portfolio s volatility. Spread sectors include all non-treasury fixed income investments. These investments typically have an interest rate that is different from the prevailing rate on Treasury securities. The difference in interest rates is known as the spread. Duration is a measure of the sensitivity of bond prices to interest rate changes. Investments are subject to market risks including the potential loss of principal invested. An investment cannot be made directly into an index This report is not an offer to buy or sell or solicitation of an offer to buy or sell any securities mentioned. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Your individual allocation may be different than the HDVAS sample strategic model due to your unique individual circumstances. ETF Performance information sourced directly from Vanguard and ishares sponsors. Fund and Index Performance sourced from Morningstar Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar not its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Returns represent past performance, are not a guarantee of future performance. Morningstar Performance Data Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results 24

25 Index Definitions Russell Investment Group is a Washington, USA, corporation which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of the Northwestern Mutual Life Insurance Company. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower expected growth values. 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 Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher expected growth values. The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 Index companies with higher price-to-book ratios and higher forecasted growth values. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI s express written consent. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data recommends, endorses, approves or otherwise expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies and none of the data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI EAFE Index is an unmanaged market capitalization-weighted index of equity securities of companies domiciled in various countries. The Index is designed to represent the performance of developed stock markets outside the United States and Canada and excludes certain market segments unavailable to U.S. based investors. USD indicates performance calculated assuming foreign holdings values are converted from currency of domicile to US Dollar. LCL indicates performance calculated assuming foreign holdings values are not converted to US Dollar. The MSCI EAFE Value Index is a market capitalization-weighted index that monitors the performance of value stocks from Europe, Australasia, and the Far East. The MSCI EAFE Growth Index is a market capitalization-weighted index that monitors the performance of growth stocks from Europe, Australasia, and the Far East. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. USD indicates performance calculated assuming foreign holdings values are converted from currency of domicile to US Dollar. LCL indicates performance calculated assuming foreign holdings values are not converted to US Dollar. The MSCI Japan measures the performance of Japanese equities. The MSCI All Country Europe measures the performance of equities domiciled in developed and emerging European countries. Barclay s Capital U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. The Barclays U.S. Aggregate Bond index measures the performance of investment grade bonds in the U.S. fixed income universe. It includes U.S Treasury issues, agency issues, corporate bond issues and mortgage-backed issues. It is unmanaged, includes reinvestment of dividends, does not reflect the impact of transaction, manager or performance fees and is unavailable for investment. 25

26 Index Definitions Continued The Barclays Global Aggregate Bond Index measures the performance of investment grade fixed rate debt globally. The major components are the U.S. Aggregate, the Pan-European Aggregate, and the Asian- Pacific Aggregate. Additionally, the index contains various other investment grade fixed rate instruments not already included in the sub-components. The Barclays U.S. 1-3 Year Aggregate is a subset of the Barclays U.S. Aggregate index, representing securities with 1 to 3 years remaining until maturity. The Barclays U.S. Credit Index comprises the U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. The Barclays Treasury Bond Index is a capitalization weighted index measuring the performance of U.S. Treasury bonds. The Barclays U.S. High Yield Loan index measures the performance of loans rated below investment grade in the U.S. The Barclays Municipal index measures the performance of tax exempt bonds in the U.S. The Barclays Municipal Intermediate 5-10 Year index measures the performance of investment grade municipal securities with 5 to 10 years remaining until maturity. The Barclays High Yield Municipal index measures the performance of below investment grade municipal securities with at least 1 year remaining until maturity. The Barclays US Corporate High Yield Index tracks the performance of domestic non-investment grade corporate bonds. The Citi World Government Bond Index (WGBI) measures the performance of 23 government bonds markets including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, Norway, Poland, Portugal, Singapore, Spain, Switzerland, Sweden, the United Kingdom and the U.S. The Bloomberg Commodity index is comprised of future contracts on physical commodities which trade here in the U.S. and certain foreign markets. It measures the performance of investment in a broad basket of commodity futures contracts. The index is composed of futures contracts on 19 physical commodities. No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33% of the index as of the annual re-weightings of the components. No single commodity may constitute less than 2% of the index. The Dow Jones Industrial Average (DJIA) is a price weighted index of 30 U.S blue-chip companies. The DJIA covers all industries with the exception of transportation and utilities. The Dow Jones Select REIT index represents equity real estate investment trusts (REITs) and REIT-like securities traded in the U.S. The Dow Jones Global Select REIT index represents equity real estate investment trusts (REITs) and REIT like securities traded globally. The FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real estate companies and real estate investment trusts (REITs) worldwide. The Standard and Poor s 500 is a capitalization weighted index of 500 leading companies in leading industries of the U.S. economy. It covers approximately 75% of the total capitalization of U.S. equities. The NASDAQ Index is a market capitalization weighted index of common equities listed on the NASDAQ stock exchange. The NASDAQ 100 Index is composed of the 100 largest and most actively traded securities listed on the NASDAQ stock exchange, excluding those securities in the financial sector. The Case Shiller Composite 20 City Home Price Index measures price changes in residential sales within the 20 largest metropolitan areas in the United States. National Association of Realtors Home Affordability Index measures whether a family earning the median income as reported by the U.S. Census Bureau could qualify for a mortgage on a property at the median price and at the prevailing interest rate, assuming 20% down payment. 26

27 HD Vest Financial Services is the holding company for the group of companies providing financial services under the HD Vest name. Securities offered through HD Vest Investment Services SM, Member SIPC Advisory services offered through HD Vest Advisory Services SM 6333 N. State Highway 161, Fourth Floor, Irving, TX