wp&bc state of the markets 2014-05-06...kerry balenthiran page 34 capital markets outlook state...

STATE OF THE MARKETSImplications for Pension Plan Sponsors

May 6, 2014

Implications for Pension Plan Sponsors

Randy Glasbergen

Bulls versus bears

Implications for Pension Plan SponsorsDow Jones Industrial Index


John Ehrhardt, Zorast Wadia, Alan Perry, Milliman 2014 Pension Funding Study | April 2, 2014

Investment return on plan assets



Plan assets and liabilities



Asset allocation—equities


Towers Watson Insider | January 2014

Funded status of Fortune 1000 Pensions


Investment Company Institute, Retirement Assets Total $23.0T in Q4 2013 | March 26, 2014

US total retirement market

THE BULL MARKET CASEState of the Markets

The Bull Market Case

Market Watch, Layoff data point to stronger job growth | April 18, 2014

Jobless claims hover by lowest level since 2007



Continuing claims lowest since recession’s start



Labor market has most job openings in 6 years



Quitting, hiring still below pre‐recession levels


Federal Reserve Bank of St. Louis | 2014

Average hourly earnings

Shaded areas indicate US recessions



Delinquency rate on loans



Household debt payments as % of disposable income



Source: www.nerdwallet.com

Personal saving versus debt service



CPI for all urban consumers





Changes in volatility


JPMorgan, Guide to the Markets | Q2 2014

Total leverage


www.multpl.com | December 31, 2013

S&P 500 Earnings Growth Rate


JPMorgan, Worldview | Q1 2014

Nominal GDP in UK, US and Eurozone

THE BEAR MARKET CASEState of the Markets

FIEDLER’S FORECASTING RULES: RULE #13

“When you know absolutely nothing about the topic, make your forecast by asking a carefully selected probability sample of 300 others who don’t know

the answer either.”

—Edgar R. Fiedler

Edgar R. Fiedler, Across the Board | June 1977

The Bear Market Case

JPMorgan, Guide to the Markets | Q2 2014

Interest rates and inflation


CNN/Money | April 18, 2014

Ned Davis Research looked at 15 stock market highs since 1962 and says the peak in new highs for individual stocks precedes the peak in the overall markets by 9 to 11 months.

The number of 52 week highs


Henry H. McVey, KKR, The Twin Roles of Real Assets| April 8, 2012

US debt as % of GDP

GDP = Gross Domestic Product; GSE = Government Sponsored Enterprises.Source: BEA, Federal Reserve, Morgan Stanley Research and “The Statistical History of the United States” by Ben Wattenberg. Data through 4Q2011.



Public debt as % of GDP



Research Affiliates, LLC, Capital Markets Expectations | Q1 2014

Public debt and unfunded obligations as % of GDP



Corporate profits as % of GDP


Hussman Funds, The Coming Retreat in Corporate Earnings | December 16, 2013www.hussmanfunds.com

Profit margins


Sellwood Consulting LLC | May 1, 2014, based on data from www.multpl.com

Price to earnings versus Shiller CAPE



Forward stock returns set to be less than past

The Balenthiran Cycle


Kerry Balenthiran

CAPITAL MARKETS OUTLOOKState of the Markets


“If the facts don’t conform to the theory, they must be disposed of.”

—Edgar R. Fiedler


Capital Markets Outlook

Sellwood Consulting LLC, Realism in Forecasting | February 28, 2013, based on data from the 2012 Survey of Horizon Capital Market Assumptions

Realism in forecasting



Future long‐term bond returns closely follow entry period


Our building block approach is consistent across most fixed categories:Current real yield (or nominal yield spread) and duration (or spread duration) +0.4%+ Reversion effect of real yield (halfway to long‐term mean, over 10 years) +0.1%+ Assumed default rate, adjusted for an assumed recovery rate ‐0.1%+ Assumed (expected) US inflation +2.3%

Fixed income market returns

TreasuryBondReturn

YieldSpreadReturn

Inflation

Default/Recovery NegativeReturn

FixedIncomeSecurityReturn

2.7%


“Forecasting is very difficult, especially if it’s about the future.”

—Edgar R. Fiedler




Over extended periods, markets grow with the economy



…but on a one‐year basis there appears to be no correlation

Capital Markets OutlookEquity market returns

Our building block approach:US inflation +2.2%+ Current dividend yield +1.9%+ Expected real earnings growth +1.7%+ Reversion effect of P/E ‐2.0%+ Capitalization premium N/A

Equity risk premium/DCF approach:Implied equity risk premium and historical avg. premium +4.3%+ Long‐term historical average +1.9%

5.4%


“The moment you forecast you know you’re going to be wrong, you just don’t know when and in which

direction.”

—Edgar R. Fiedler


About Sellwood Consulting LLCSellwood Consulting LLC is an SEC‐registered investment advisor providing non‐discretionary, conflict‐free investment consulting services to institutional clients andplan sponsors. Our firm is structured to provide industry‐leading investment advice,the highest levels of client service, and uncompromising ethics.

Contact UsSellwood Consulting LLC

6650 SW Redwood Lane, Suite 370Portland, Oregon 97224(503) 596‐2880 Main

www.sellwoodconsulting.com

Charlie [email protected]

wp&bc state of the markets 2014-05-06...kerry balenthiran page 34 capital markets outlook state...

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