© 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
© 2018 GALLAGHER FIDUCIARY ADVISORS, LLC | AJG.COM
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• 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:
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Headline Events
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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%
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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
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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 $50 billion of Chinese
imports; China retaliated by
announcing tariffs on 106 U.S.
products
• The economic impact of these
measures is to be determined
– Multiple countries/regions
representing 70% of U.S. steel
imports were temporarily
exempted
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Q1 2018 - U.S. Economic Review
Strengths
• Industrial indicators
• GDP
• Jobs reports
• Sentiment surveys
• Corporate earnings
Opportunities
• Corporate tax reform benefits– Capital spending
– Hiring
– M&A
– Stock buybacks
• Infrastructure stimulus (?)
Weaknesses
• High level of household debt
• Weak productivity
• Disappointing retail sales
Threats
• Rising short-term interest rates
• Reversal of central bank liquidity
measures
• Accelerating inflation
• Trade tensions
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Q1 2018
Global Capital Markets Review
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Source: MSCI, Standard & Poor’s, Russell, Bloomberg, FTSE Russell
Global Capital Markets’ Performance
Q1 2018
3/31/2018
Index 3 Mo 1 Yr 3 Yrs 5 Yrs 10 Yrs
Global Equity
MSCI All-Country World ($, 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%
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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%
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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
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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
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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
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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
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U.S. Equities - Valuation
Source: FactSet
U.S. equity valuations receded in Q1, but remain somewhat elevated
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U.S. Equities - Valuation
Source: FactSet
Long-term U.S. equity valuations also remain extended
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International Equities
Source: FactSet
Major international markets also struggled in Q1
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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
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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
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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
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International Equities – Valuation
Source: FactSet
Valuations in emerging markets have advanced, but still
appear reasonable
Favors emerging markets
Favors developed markets
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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
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Fixed Income – Yields
Source: FactSet
Short-term rates have increased measurably from post-crisis
lows
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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%
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Fixed Income – Yield Curve
Source: FactSet
The U.S. Treasury yield curve has flattened significantly in
recent years
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Fixed Income - Spreads
Source: FactSet
Corporate bond spreads ticked up in Q1 but remain near
multi-year lows
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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
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Fixed Income – Interest Rate Sensitivity
Source: FactSet
Fixed income assets are more sensitive today to interest
rate changes
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Fixed Income – Global Yields
Source: FactSet
Yields rose in most areas of the globe in Q1
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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
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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
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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
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Real Assets - Inflation
Source: FactSet
Inflation expectations continued to increase in Q1
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Other Assets – Bitcoin
Bitcoin is down nearly 60% from its highs in December, 2017
Bitcoin/USD Spot Rate
Source: Thomson Reuters
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Asset Class Outlooks and
Strategy Considerations3/31/2018
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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
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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.
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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
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Thank you!
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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.
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for legal and tax implications. Gallagher Fiduciary Advisors does not provide legal or tax advice.
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