Category: Market Themes

Michael Arone – Uncommon Sense

Good Afternoon,

Attached is the most recent “Uncommon Sense” piece by Michael Arone of SSGA. In it, he discusses two different events before year end that will affect market returns for the end of 2018 and beyond.

1.) G20 Summit: Can President Trump and Xi put aside differences and outline a U.S.-China trade deal? Despite much politically charged rhetoric it is in the best interest of both parties to make progress toward a deal they can sell to their constituents.

2.) December Fed Meeting: It is almost certain that the Fed will raise rates by 25 bps in December, but what type of rhetoric will surround the decision? If the Fed indicates that we are nearing a neutral range, it is likely that there will be less rate hikes in 2019, opening the door for a small year-end rally.

It is interesting that two events, so close to one another on the calendar, can have longer term implications as we look toward 2019 and beyond.

Thanks,

Pete

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

November-2018-Uncommon-Sense.pdf

International Market Valuations

Following up on John Morris’s question this morning, below are the relative valuations of the EAFE and EM indices compared to the U.S. As we mentioned, the valuations for both asset classes continue to fall. We obviously do not allocate solely based on valuation, but it is important to note to clients that it makes sense to remain invested in these areas.

EAFE vs. US

EM vs. US

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

SSGA Chart Pack – Active Managers and Term Premiums

Good Afternoon,

I have attached the most recent “Chart Pack” put together by SSGA. I included three charts that stood out to me.

Active Managers – return dispersion contracting relative to 2017; higher correlations and less dispersion make it harder to outperform

Growth vs. Value – outperformance of growth approaching level seen in 2000 during Dotcom Bubble

U.S. Treasury Curve – The Fed keeps lifting the short end of the curve while negative term premiums weigh on long end

Here is a link to an article from the NY Fed discussing term premiums if anybody is interested in digging a bit deeper:

http://libertystreeteconomics.newyorkfed.org/2014/05/treasury-term-premia-1961-present.html

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

By the Numbers – educating the young and the old

Good Morning,

Attached is the updated “By the Numbers” piece from MFS. The statistics that I highlighted this week deal with the client education of Millennials and individuals approaching retirement.

“A greater percentage of Millennials have all of their pre-tax retirement money invested in cash and bonds (20%) than those that have all of their pre-tax retirement money invested in stocks (19%). 2,593 Millennials (ages 20-36 in 2017) were surveyed in the 4th quarter 2017” (source: Transamerica Retirement Survey).

“A 65-year old American male in 2018 is expected to live another 19.2 years (to 84.2 years old), an increase of 5 years in the last 40 years. A 65-year old American female in 2018 is expected to live another 21.6 years (to 86.6 years old), an increase of 3 years in the last 40 years” (source: Social Security Administration).

I found these facts interesting because they are quite relevant to one another despite their differing subjects. This suggests that the long term investment horizon of younger generations is expanding and the ability to take on risk early in your working years is ample. Our ability to educate clients on the long term path to retirement savings will be a value add throughout a client’s investable time horizon.

Thanks,

Pete

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

BTN 10-8-18.pdf

By the Numbers

Attached is the weekly “By the Numbers” piece put out by MFS. Below are two facts that stress the need for prospect/client engagement and understanding about the historical volatility of equity markets.

As of the end of 2017, 19% of Millennials and 12% of Baby Boomers had no money (either pre-tax or post-tax) invested in the stock market. Millennials were born between 1981-97 and were ages 20-36 in 2017, while the Baby Boomers were born between 1946-64 and were ages 53-71 in 2017 (source: Vanguard).

Over a painful 6-months from September 2008 through February 2009 (i.e., 9/01/08 to 2/28/09), the S&P 500 lost 41.8% (total return), including a drop of 16.8% in just the month of October 2008. The index bottomed less than 2 weeks later on 3/09/09 and began a bull market on 3/10/09 that continues to this day (Source: BTN Research).

It’s actually surprising to me that the gap in stock market investment between Millennials and Baby Boomers is not wider given the feeling of unease many in my generation have concerning financial market following the crisis.

Peter Malone, CFA

Research Analyst

Direct: 617.226.0030

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

BTN 9-17-18.pdf

A quick note on Emerging Markets

Hi,

Emerging markets are in a bear market. Since their peak on 1/26/18, emerging market index is down 20% in price.

EM have faced several headwinds:

· Reduced global liquidity / Rising US rates / Rising US Dollar

· Trade tariffs

· Higher energy prices

Attached is a good FT article providing some perspective.

We have been underweight EM stocks with ~4% in growth portfolios. Does this drop present a buying opportunity???

As the attached article argues, the opportunity depends on the severity of China’s current slowdown as China has been slowing credit growth. Historically, differenciating financial crisis into short-lived ones versus long-lived ones depends on debt. If debt needs to be restructred or forgiven, the recovery period is a long one as the costs of the debt needs to be allocated. We are closely watching to see if economic growth continues to slows in China or if China has to restructure their debts. China is a highly indebted nation with over 300% debt to GDP. Recently, China has slowed credit growth in their shadow banking network, which has been painful. There have been many news articles of investment companies going bankrupt and investors losing all of their investment. China has had periods of credit tightening in the past which have been followed by periods of stimulus. Signs indicate that we are still in the tightening phase.

Thanks,

John

John R. Ingram CFA

Managing Director

Asset Allocation and Research

Direct: 617.226.0021

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

Shaky emerging markets watch the US and China _ Financial Times.pdf