Eric C. Elbell, CFA, CAIA - ajg.com · Eric C. Elbell, CFA, CAIA Area Senior Vice President ... spiked to its highest level since ... U.S. Equities • Stocks jumped

© 2018 GALLAGHER FIDUCIARY ADVISORS, LLC | AJG.COM

Eric C. Elbell, CFA, CAIA

Area Senior Vice President

Kyongdo Min, CPA, CFA

Area Vice President

April 11, 2018


1

• Headline events that impacted markets during the quarter

• How different capital markets performed during the quarter

• Gallagher’s asset class outlooks and strategy considerations

heading into Q2 2018

Agenda

We will address three key topics:


Headline Events


3

Stocks’ Winning Streak is Halted

• U.S. stocks registered their first

quarterly decline since Q3 of

2015

– 10.1% correction from Jan. 29th –

Feb. 8th

• Contributing factors:

– February - rising interest rates,

inflation fears, technical trading

factors

– March – trade tensions,

technology stocks

Source: FactSet

-6.4%

+7.0%

+1.4%+2.5%

+3.9%

+3.8%+6.1%

+3.1%+4.5%

+6.6%

-0.8%


4

Market Volatility Awakens

• The CBOE Volatility Index

spiked to its highest level since

August, 2015

• This ended an extended period

of market calm

– Q4 2017 average VIX of 10.3 was

the lowest since 1989

• Number of daily moves of +/- 1%

for the S&P 500:

– 2017: 8

– Q1 2018: 23

Source: FactSet, JP Morgan


5

Trade Tensions Simmer

• In early March, President Trump

imposed tariffs on imported steel

(25%) and aluminum (10%)

• The U.S. also announced a 25%

tariff on $50 billion of Chinese

imports; China retaliated by

announcing tariffs on 106 U.S.

products

• The economic impact of these

measures is to be determined

– Multiple countries/regions

representing 70% of U.S. steel

imports were temporarily

exempted


6

Q1 2018 - U.S. Economic Review

Strengths

• Industrial indicators

• GDP

• Jobs reports

• Sentiment surveys

• Corporate earnings

Opportunities

• Corporate tax reform benefits– Capital spending

– Hiring

– M&A

– Stock buybacks

• Infrastructure stimulus (?)

Weaknesses

• High level of household debt

• Weak productivity

• Disappointing retail sales

Threats

• Rising short-term interest rates

• Reversal of central bank liquidity

measures

• Accelerating inflation

• Trade tensions


Q1 2018

Global Capital Markets Review


8

Source: MSCI, Standard & Poor’s, Russell, Bloomberg, FTSE Russell

Global Capital Markets’ Performance

Q1 2018

3/31/2018

Index 3 Mo 1 Yr 3 Yrs 5 Yrs 10 Yrs

Global Equity

MSCI All-Country World ($, net) -1.0% 14.8% 8.1% 9.2% 5.6%

U.S. Equity

S&P 500 -0.8% 14.0% 10.8% 13.3% 9.5%

Russell 2000 -0.1% 11.8% 8.4% 11.5% 9.8%

Non-U.S. Equity

MSCI EAFE ($, net) -1.5% 14.8% 5.6% 6.5% 2.7%

MSCI Emerging Markets ($, net) 1.4% 24.9% 8.8% 5.0% 3.0%

Fixed Income

Bloomberg Barclays U.S. Aggregate -1.5% 1.2% 1.2% 1.8% 3.6%

Real Assets

Bloomberg Commodity -0.4% 3.7% -3.2% -8.3% -7.7%

FTSE NAREIT Equity Composite -8.2% -4.5% 1.1% 5.9% 6.4%


9

U.S. Equities

• Stocks jumped out the gate in 2018,

as the S&P 500 gained 7.6% from

Jan. 1st through Jan. 26th

• Over the next nine trading days,

however, the S&P 500 suffered a

10.1% correction

• Stocks then rebounded 8.2%

through early March

• The quarter ended on a weak note,

as the S&P 500 declined more than

5% from March 9th through quarter-

end

U.S. equities experienced a choppy quarter

Source: FactSet

+7.6%

-10.1%

+8.2%

-5.2%


10

U.S. Equities – Performance by Size

and Style

Source: FactSet

Both large caps and small caps posted losses; growth stocks again

outperformed value stocks

• Small cap stocks modestly

outperformed large caps in Q1

– Large caps still hold the edge over

the one-year period

• Growth stocks posted a gain in Q1

on the strength of technology

stocks

– Growth stocks have vastly

outdistanced value stocks over the

one-year period

-0.7%

-0.1%

-2.8%

1.5%

14.0%

11.8%

6.8%

21.1%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Russell 1000

Russell 2000

Russell 3000 Value

Russell 3000 Growth

U.S. Equities: Performance by Size and Style

1Q 2018 One Year


11

U.S. Equities – Performance by Sector

Only two sectors were positive in Q1

• Only two sectors posted

gains in Q1:

– technology

– consumer discretionary

• The consumer

discretionary sector’s

gains were keyed by

Amazon and Netflix –

“quasi”-tech stocks

• As interest rates rose,

higher dividend-paying

stocks lagged

– consumer staples

– real estate

– telecom

– utilities

1.9%

-4.9%

1.7%

10.5%

27.7%

14.0%

11.3%

18.0%

-0.2%

-0.9%

16.9%

-3.3%

-7.5%

-5.0%

-5.5%

3.5%

-1.6%

-1.2%

-1.0%

-5.9%

-7.1%

3.1%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

Utilities

Telecom Services

Real Estate

Materials

Info. Technology

Industrials

Health Care

Financials

Energy

Cons. Staples

Cons. Discretionary

Returns

S&P 500 Index: Sector Performance

1Q 2018

One Year

Source: Standard and Poor's


12

U.S. Equities – Technology

While positive for the quarter, tech stocks dragged down the market in March

• The S&P 500 Information

Technology sector fell

3.9% in March, vs. a 2.5%

loss for the broad S&P

500 Index

• From March 13th through

quarter-end, the tech

sector lost 7.5%, vs. the

S&P 500’s 5.2% loss

Source: FactSet


13

U.S. Equities – Technology

Even the FAANGs were not immune in March …

Q1 2018 March 2018

Mar 13 –

Mar 29

S&P 500 Tech Index 3.5% -3.9% -7.5%

Facebook -9.5% -10.4% -13.5%

Apple -0.5% -5.8% -7.7%

Amazon 23.8% -4.3% -9.5%

Netflix 53.9% 1.4% -8.1%

Alphabet -1.5% -6.1% -11.1%Source: FactSet


14

U.S. Equities - Valuation

Source: FactSet

U.S. equity valuations receded in Q1, but remain somewhat elevated


15

U.S. Equities - Valuation

Source: FactSet

Long-term U.S. equity valuations also remain extended


16

International Equities

Source: FactSet

Major international markets also struggled in Q1


17

International Equities – Performance by

Region

• Emerging markets eked out a gain in

Q1, furthering their recent string of

outperformance

– Double-digit gains were seen in Brazil,

Egypt, Pakistan and Peru

• Asia Pacific stocks were flat, besting

European stocks

– China and Japan, which together

represent approximately 55% of the Asia

Pacific Index, were each modestly positive

Source: FactSet

Emerging markets and Asia continued to outperform

-1.5%

1.4%

-1.8%

0.0%

14.8%

24.9%

14.7%

20.3%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

MSCI EAFE

MSCI Emerging Markets

MSCI AC Europe

MSCI AC Asia Pacific

International Equity Returns

1Q 2018 One Year In U.S. $ terms


18

International Equities – Currency Effects

• The U.S. dollar declined versus other

currencies again in Q1 2018

Index Returns

1Q

2018 One Year

MSCI EAFE – Local -4.3% 5.3%

MSCI EAFE– USD -1.5% 14.8%

Currency Impact +2.8% +9.5%

MSCI Em. Markets – Local 0.7% 22.1%

MSCI Em. Markets – USD 1.4% 24.9%

Currency Impact +0.7% +2.8%

Positive foreign currency conversion effects continued to

boost returns to U.S. investors

Source: FactSet


19

International Equities – Valuation

Source: FactSet

Valuations in developed markets remain more reasonable

than in the U.S.

Favors developed int’l markets

Favors U.S. markets


20

International Equities – Valuation

Source: FactSet

Valuations in emerging markets have advanced, but still

appear reasonable

Favors emerging markets

Favors developed markets


21

Fixed Income – Yields

Source: FactSet

Yields rose in Q1

• The 10-year U.S. Treasury yield

spiked in the first half of Q1

• The yield curve shifted upwards

across all maturities


22

Fixed Income – Yields

Source: FactSet

Short-term rates have increased measurably from post-crisis

lows


23

Fixed Income – Rate Path

Policymakers expect 2-3 more rate hikes in 2018

FRB Governors’ Expectations – Fed Funds Target Rate (%)

Source: Federal Open Market Committee; March 21, 2018

Current target

range: 1.50-

1.75%


24

Fixed Income – Yield Curve

Source: FactSet

The U.S. Treasury yield curve has flattened significantly in

recent years


25

Fixed Income - Spreads

Source: FactSet

Corporate bond spreads ticked up in Q1 but remain near

multi-year lows


26

Fixed Income – Performance by Sector

and DurationBonds posted losses across the board in Q1

Source: FactSet

• All sectors recorded losses • Long duration bonds underperformed

given the rise in yields

-1.5%

-1.2%

-2.3%

-0.9%

-1.2%

-0.8%

1.2%

0.4%

2.7%

3.8%

0.8%

0.9%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

BBC U.S. Aggregate

BBC U.S. Treasury

BBC IG Corporate

BBC High Yield

BBC MBS

BBC TIPS

Fixed Income: Performance by Sector

1Q 2018 One Year

-0.2%

-1.0%

-3.6%

0.2%

0.4%

5.1%

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

BBC Short Duration Gov/Credit

BBC Inter. Duration Gov/Credit

BBC Long Gov/Credit

Fixed Income: Performance by Duration

1Q 2018 One Year


27

Fixed Income – Interest Rate Sensitivity

Source: FactSet

Fixed income assets are more sensitive today to interest

rate changes


28

Fixed Income – Global Yields

Source: FactSet

Yields rose in most areas of the globe in Q1


29

Real Assets

Source: FactSet

Real assets recorded losses in Q1

• REITs suffered as interest rates rose-8.2%

-0.4%

-4.5%

3.7%

-12.0% -8.0% -4.0% 0.0% 4.0% 8.0%

FTSE NAREIT Equity REITs

Bloomberg Commodity

Real Assets Returns

1Q 2018 One Year

• Commodities also experienced volatility in Q1,

and finished slightly in the red


30

Real Assets – Energy

Source: FactSet

Oil and natural gas price trends offset in Q1

• Crude oil prices continued to grind

upward on global demand and

sustained OPEC production cuts

• Natural gas prices dropped significantly

in February due to excess supplies


31

Real Assets – Metals

Source: FactSet

Metals prices were mixed in Q1

• Gold remained largely range-bound

between $1,300 and $1,350

• Declining copper and iron ore

prices led the Industrial Metals

index lower


32

Real Assets - Inflation

Source: FactSet

Inflation expectations continued to increase in Q1


33

Other Assets – Bitcoin

Bitcoin is down nearly 60% from its highs in December, 2017

Bitcoin/USD Spot Rate

Source: Thomson Reuters


Asset Class Outlooks and

Strategy Considerations3/31/2018


35

Economic and Market Backdrop

Q1 2018

On the one hand …

• Global economic growth and corporate earnings

are presently strong

• U.S. fiscal policy is supportive

… on the other hand

• The bull market in U.S. stocks is nine years old;

valuations remain extended

• Market volatility has returned

• Global central bank policies are transitioning

towards tightening

• Federal Reserve policy and (potentially) higher

inflation could put further upward pressure on

interest rates

• Corporate bond credit spreads remain low


36

Short-to-Intermediate Term Asset Class

Outlooks

1Q 2018

Each quarter, Gallagher’s

Research Committee develops

short-to-intermediate term

outlooks for asset classes based

on current market characteristics

and valuation metrics. These

views, intended to complement

our long-term (10-year) Capital

Market Assumptions, may

support current portfolio

positioning decisions made

within a long-term strategic asset

allocation framework.

The unique investment and

operational characteristics of

each institution should be

carefully considered before

implementing any change in

portfolio or investment strategy

based on these views.


37

Strategy Considerations

Q1 2018

• U.S. stocks • Rebalance to a neutral asset class weight and across style/size factors

• Consider strategies expected to limit broad market exposure or exhibit more defensive characteristics (long/short equity, low beta defensive strategies)

• Increase active management exposure

• Bonds• Consider strategies that have greater flexibility and/or can protect against rising interest

rates (unconstrained strategies, bank loans)

Manage portfolio beta exposures

• International equities

Capitalize on relative values

• Multi-asset strategies

• Private markets

Consider non-traditional, less-correlated assets


Thank you!


39

Disclosures

• An index, such as but not limited to the S&P 500, is a portfolio of specific securities, the performance of which is often used as a

benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot

invest directly into an index. Past performance does not guarantee future results. The index returns are all “Total Return” with

dividends reinvested which means the returns include not only the change in price for the securities in the index, but any income

generated by those securities. All data for any index prior to its launch date is an historical estimation using available data.

• The information provided by Information Providers, even if generally applicable, cannot possibly take into account all of the

various factors that may affect you, your company, or your particular situation. Your attorney and accountant should be consulted

for legal and tax implications. Gallagher Fiduciary Advisors does not provide legal or tax advice.

• Investment advisory, named and independent fiduciary services are offered through Gallagher Fiduciary Advisors, LLC, an SEC

Registered Investment Adviser. This document contains confidential and proprietary information that belongs to Gallagher

Fiduciary Advisors, LLC and is protected by copyright, trade secret and other State and Federal laws. Any copying,

redistribution, or retransmission of any of the contents without the written consent of Gallagher Fiduciary Advisors, LLC is

expressly prohibited. Gallagher Fiduciary Advisors, LLC is a single-member, limited-liability company, with Gallagher Benefit

Services, Inc. as its single member. Neither Arthur J. Gallagher & Co., Gallagher Fiduciary Advisors, LLC nor their affiliates

provide accounting, legal or tax advice. Gallagher Fiduciary Advisors, LLC does not express an investment opinion regarding any

specific commodity, sector or individual security.

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Eric C. Elbell, CFA, CAIA - ajg.com · Eric C. Elbell, CFA, CAIA Area Senior Vice President ... spiked to its highest level since ... U.S. Equities • Stocks jumped