Inside the Markets Conference Call April 3, 2014 Presented by: Hefren-Tillotson Asset Management Meticulous Wealth Management Since 1948 Hefren-Tillotson, Inc. 308 Seventh Ave Pittsburgh, PA 15222 Ph: 412.434.0990 Fx: 412.261.4348 hefren.com Member SIPC and FINRA ADDITIONAL INFORMATION ON THE SECURITIES MENTIONED IN THIS REPORT IS AVAILABLE UPON REQUEST - This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the Firm s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned. Hefren-Tillotson, Inc. and/or its officers and employees may from time to time acquire, hold, or sell a position in the securities mentioned herein. Upon request, Hefren-Tillotson will be pleased to disclose specific information on such positions or transactions.
Inside the Markets Conference Call Details Date & Time: Dial-in Numbers: Domestic: 888-317-6003 International: 412-317-6061 Elite Entry Access #: 1627806 Thursday, April 3rd at 12:00pm (Please call five minutes prior to the noon start time.) A telephone playback will be available through November 6, 2013 by dialing: Domestic: 877-344-7529 International: 412-317-0088 Conference #: 10041367 Webcast Link to Access Presentation Materials & Submit Questions (No Audio): https://services.choruscall.com/links/htillotson140325.html Save the Date! Our next call will be held on Thursday June 19 th at 12:00pm 04/3/2014 Page 2 of 17
Equity Market Review S&P 500 Citigroup Economic Surprise Index Taper Positive Surprises QE3 QE1 QE2 Operation Twist Negative Surprises Source: Bloomberg, Hefren-Tillotson 04/3/2014 Page 3 of 17
Equity Market Review Scary Chart Before Scary Chart -- After DJIA 1928-1929 DJIA Current Period Source: Bloomberg, Hefren-Tillotson, Business Insider Here is how a popular chart appeared in many financial news outlets. Here is how the chart appears on a percentage-gain basis and after indexing the two periods to 100. 04/3/2014 Page 4 of 17
International Equity Market Review Market Comparison (Indexed to 100) Anatomy of Instability U.S. Stocks (S&P 500) Foreign Developed Stocks (MSCI EAFE) Emerging Markets (MSCI EM) Federal Reserve Easy Money Emerging Markets Currencies Up Interest Rates Down China Source: Bloomberg, Hefren-Tillotson, Excludes Dividends Trade Deficits Budget Deficits Increased Spending Reduced Exports 04/3/2014 Page 5 of 17
Fixed Income Markets Yield Comparison (%) Income Options 11.00 % 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 High Yield Corporate Bonds 10-Year Treasury Yield Investment Grade Bonds High Yield Corporates Strategic Income Funds Bank Loans Equities Tax-Free Bonds 1.00 0.00 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 6 of 17
Fixed Income Markets Yield Comparisons (%) --- Taxable vs. Tax-Free Bond Buyer Index Municipal Bond Yield 30-Year Treasury Yield Barclays High Yield Muni Yield Barclays High Yield Corp Yield Source: Hefren-Tillotson, Bloomberg Source: Hefren-Tillotson 04/3/2014 Page 7 of 17
Currency/Commodity Markets U.S. Dollar Index DJUBS-Commodity Index Source: Bloomberg, Hefren-Tillotson 04/3/2014 Page 8 of 17
Growth Outlook is Brightening for the U.S. Improved Household Balance Sheets Booming Energy Production 13.5 Household Debt Service Ratio 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Minimum debt service payment on mortgage debt and consumer credit as a % of disposable income Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 9 of 17
Growth Outlook is Brightening for the U.S. Shrinking Deficits Manufacturing Comeback Trade Weighted Dollar vs. Federal Budget Deficits/Surpluses Trade Weighted Dollar 150 130 110 90 70 2.0 0.0-2.0-4.0-6.0-8.0-10.0 Federal Budget Deficit/Surplus as % of GDP. 50-12.0 1968 1975 1982 1989 1996 2003 2010 US Dollar Index Federal Budget Deficit/Surplus as % of GDP Technology-driven Innovation Auto, Housing & Job Market Recovery Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 10 of 17
Leading Indicators Highlight Global Divergences Leading Economic Indicators 11 9 Emerging Markets growth accelerated in the 2000s 7 5 3 1-1 -3-5 Growth momentum transitioned to the Developed World in 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Developed Markets Emerging Markets Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 11 of 17
Risk of U.S. Recession a Low Probability 8.0% Yield Curve vs. GDP Growth 8% 6.0% 6% 4.0% 4% 2.0% 2% 0.0% 0% -2.0% -2% -4.0% -6.0% A flat yield curve (short-term rates at or above long-term rates) has signaled every post-war recession. The yield curve points to stronger growth. 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013-4% -6% Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 12 of 17
P/Es have Expanded to Reflect Improved Outlook 10000 S&P 500 vs Cyclically Adjusted P/E Ratio 40 35 S&P 500 Index 1000 100 B 30 25 20 15 Price/Earnings Ratio A 10 10 5 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 S&P 500 Index Cyclically Adjusted P/E Average P/E S i 4 S i 5 Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 13 of 17
Correction or Pause Typical at Current Stage of Bull Yrs 1-5: 20%/Anum Yrs 1-5: 13%/Anum Yrs 1-5: 28%/Anum Yrs 1-5: 22%/Anum Supporting Data 1. Record Margin Debt 2. 610 days without 10% correction vs. 331 day average 3. 1259 days without 20% correction vs. 1105 day average 4. Optimistic sentiment 5. Mean reversion tendencies Source: Ned Davis Research 04/3/2014 Page 14 of 17
Sharper Intra-Year Correction Not Unusual Calendar Year Returns Largest Intra-Year Decline For 2013 the magnitude of gains combined with modest intra-year declines were unusual Source: Strategas Research Partners 04/3/2014 Page 15 of 17
View Setbacks Opportunistically 8 S&P 500 Earnings Yield less 10yr Treasury Yield 6 4 2 Stock valuations are still attractive relative to bonds Stocks Cheap vs Bonds 0-2 -4 Stocks Expensive vs Bonds -6 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Hefren-Tillotson, Bloomberg 04/3/2014 Page 16 of 17
Better Environment for Active Management Correlations surged during the credit crisis and are now receding, which should have positive implications for active management in the years ahead. Source: Ned Davis Research 04/3/2014 Page 17 of 17