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Advisory Solutions Monthly Update - March 2019 Our investment experts share their perspectives on market events, economic data and developing themes in our monthly review of the global capital markets. EQUITY HIGHLIGHTS
FIXED INCOME HIGHLIGHTS
•
Global equities continued to rise in February, led by strong gains in the U.S. equity markets. International developed markets and emerging markets also posted positive results. Small-caps continued to exhibit relative strength, with the Russell 2000 Index generating its 3rd strongest start to the year since the inception of the index in 1979. In addition, growth continued to outpace value.
•
After a challenging 2018, the environment for actively-managed equity strategies has improved year-to-date, with U.S. large-cap managers producing particularly strong relative results.
•
U.S. growth equities have outperformed value by a wide margin since the global financial crisis, driven partially by a prolonged low economic growth environment and significant outperformance from large-cap information technology, communication services and consumer discretionary companies. Stretched growth valuations could lead to improvement in value relative performance.
Stock Indexes
YTD
MSCI ACWI IMI Russell 3000 S&P 500 MSCI EAFE MSCI EM
11.15% 12.40% 11.48% 9.29% 9.01%
Bond Indexes
Barclays US Aggregate Barclays Gbl Treas xUS Hdg Barclays US TIPS Barclays US High Yield Barclays EM Aggregate
YTD
1.00% 1.09% 1.33% 6.26% 4.01%
•
Credit sensitive areas of the bond market continued to rally in February, while interest rates sensitive sectors produced negative returns. High yield was once again the top performing asset class within the opportunity set, up 1.66%. Investment grade corporate credit as well as foreign markets (both developed and emerging) produced positive returns. Conversely, U.S. government securities produced the lowest return in the opportunity set, down 0.26%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for the overall bond market, returned -0.06% in February.
•
In a reversal from the previous month, 10-year government bond yields in select foreign markets moved higher in February, led by Italian yields which rose by 18 bps. Domestic rates, as represented by the yield of the 10-year Treasury, increased by 10 bps from 2.63% to 2.73%.
•
Continuing a trend from January, Municipal/Treasury yield ratios moved lower across the curve in February, with ratios remaining below historical averages.
Other Indexes
60% LgShort-40% MktNeutral DJ Equity All REIT Bloomberg Commodity
Data as of 02.28.2019; Source: Morningstar, FactSet, Russell Investments, Barclays, U.S. Department of Treasury
YTD
2.43% 12.23% 6.51%
U.S. Treasury Yields
6-month 1-year 3-year 5-year 10-year
2.50% 2.54% 2.50% 2.52% 2.73%
30-year
3.09%
Rates/Commodities
Prime Rate LIBOR (3 Mo) Oil Price ($/barrel) Gold ($/t oz)
5.50% 2.62% $57.22 $1,316.10
YOY Real GDP Growth ($U.S.)
YoY U.S. Industrial Production and Productivity
Eurozone
Dec-18
Apr-17
Feb-18
Jul-15
May-16
Oct-13
Sep-14
Feb-12
Dec-12
Mar-11
Jul-09
May-10
Oct-07
U.S. Industrial Production (LHS)
Aug-08
Jan-06
Dec-06
Mar-05
-16.00 May-04
-12.00
-20.00 Jun-03
-8.00
-15.00 Oct-01
-4.00
-10.00
Aug-02
0.00
Jan-00
0.00 -5.00
Mar-99
Jan-18
4.00
Japan
U.S. Labor Productivity (RHS)
Labor Productivity as of 12.31.2018, Industrial Production as of 01.31.2018; Source: FactSet
Eurozone data as of 12.31.2018. U.S. and Japan data as of 12.31.2018; Source: FactSet
Core Consumer Price Index (YoY Growth)
U.S. - Unemployment Rate
4.00
12.00
3.00
10.00
2.00
Percent (%)
1.00 0.00 -1.00
8.00 6.00 4.00 2.00
Eurozone
Jan-19
Mar-18
Jun-16
May-17
Sep-14
Aug-15
Nov-13
Jan-13
Feb-12
Apr-11
May-10
Jul-09
Oct-07
U.S.
Sep-08
Dec-06
Jan-06
Mar-05
May-04
Jun-03
Aug-02
Oct-01
Nov-00
Jan-00
Mar-99
-2.00
Japan
Eurozone data as of 02.28.2019. U.S. and Japan data as of 01.31.2018; Source: FactSet; The sudden increase in Japan CPI growth in 2014 coincided with an increase in national sales tax that impacted final price levels.
0.00 Mar-99 Nov-99 Jul-00 Mar-01 Nov-01 Jul-02 Mar-03 Nov-03 Jul-04 Mar-05 Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 Nov-17 Jul-18
Percent (%)
8.00
5.00
Dec-18
Mar-17
Jul-15
May-16
Aug-14
Oct-13
Dec-12
Jan-12
Mar-11
May-10
Jun-09
Oct-07
U.S.
Aug-08
Jan-06
Nov-06
Mar-05
Apr-04
Jun-03
Aug-02
Sep-01
Jan-00
Nov-00
Percent (%)
10.00
Nov-00
8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00 -8.00 -10.00 Mar-99
Percent (%)
Global Economic Snapshot
Data as of 02.28.2019; Source: FactSet
•
GDP growth in Europe and Japan has moderated recently while U.S. growth has remained strong.
•
Year-over-year U.S. productivity growth continued to improve in the fourth quarter. Sustained productivity growth is essential to drive long-term real GDP growth. Year-over-year industrial production growth has moderated in recent months but remains solid.
•
U.S. inflation has leveled out at a little above 2% while European inflation has stabilized near 1%. Japan inflation increased in January but remains very low.
•
The unemployment rate ticked down to 3.8% in February amid solid employment growth.
Note: Please see Appendix for important definitions.
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Coincident
Leading
U.S. Economic Indicators
Initial Jobless Claims
• In the week ending March 1st, the four-week moving average of Initial Jobless Claims was 223,000 a decrease of 3,000 from the previous week's revised average of 226,000.
Manufacturing
• ISM Manufacturing registered 54.2% in February a 2.4 percentage point decrease over the previous reading. A reading below 50.0% indicates contraction. • ISM Manufacturing New Orders registered 55.5% in February a 2.7 percentage point decrease over the previous reading. • ISM Non-Manufacturing registered 59.7% in February a 3.0 percentage point increase over the previous reading.
Housing/Construction
• Building permits rose 1.4% in January and have fallen 1.5% over the past year.
Consumer Confidence
• The Consumer Confidence Index rose in February to 131.40 compared to 121.7 in January.
Nonfarm Payrolls
Industrial Production
Personal Income
Lagging
Ratio of Consumer Installment Credit to Personal Income
Source: FactSet
Inflation
• Total nonfarm payroll employment gained 20,000 in February while the unemployment rate fell to 3.8%.
• Industrial Production fell 0.58% in January and is up 3.8% over the past year.
• Real Disposable Personal Income increased 1.04% in December and is up 3.87% over the past year.
• This ratio rose 0.04% in January and remained unchanged year-over-year. Consumer borrowing tends to lag improvements in personal income by many months because people remain hesitant to take on new debt until they are sure that their improved income level is sustainable.
• CPI (All Items) remained unchanged in January and is up 1.5% over the trailing one year period. • CPI (Core) rose 0.2% in January and is up 2.1% over the trailing one year period.
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Currency
Nominal Trade-Weighted U.S. Dollar Major Currencies
Euro per U.S. Dollar 1.00
120.60
0.95
110.60
0.90 100.60
0.85 0.80
90.60
0.75
80.60
0.70 70.60
0.65
Feb-19
Jul-18
Dec-17
May-17
Oct-16
Mar-16
Aug-15
Jan-15
Jun-14
Nov-13
Apr-13
Sep-12
Feb-12
Jul-11
Dec-10
May-10
Oct-09
Mar-09
Feb-19
Jul-18
Dec-17
May-17
Oct-16
Mar-16
Aug-15
Jan-15
Jun-14
Nov-13
Apr-13
Sep-12
Feb-12
Jul-11
Dec-10
May-10
Oct-09
0.60 Mar-09
60.60
• The Trade-Weighted U.S. Dollar Index (Major Currencies) rose 0.4% through February and the index is down 1.1% year-to-date. The dollar rose 0.8% versus the Euro in February.
Data as of 02.28.2019; Source: FactSet
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Global Equity Markets Equity Market Performance As of 2.28.2019
20.00 10.00
•
Global equities continued to rise in February, led by strong gains in the U.S. equity markets. International developed markets and emerging markets also posted positive results. Small-caps continued to exhibit relative strength, with the Russell 2000 Index generating its 3rd strongest start to the year since the inception of the index in 1979. In addition, growth continued to outpace value.
•
After a challenging 2018, the environment for actively-managed equity strategies improved in January, with U.S. large-cap managers producing particularly strong relative results.
•
U.S. growth equities have outperformed value by a wide margin since the global financial crisis, driven partially by a prolonged low economic growth environment and significant outperformance from large-cap information technology, communication services and consumer discretionary companies. Stretched growth valuations could lead to improvement in value relative performance.
0.00 -10.00 -20.00
MSCI ACWI Russell IMI Top 200 Value
Russell Top 200 Growth
Russell Mid Cap Value
Russell Russell Russell MSCI MSCI MSCI MSCI EM MSCI EM Mid Cap 2000 Value 2000 World Ex World Ex World Ex IMI Value IMI Growth Growth Growth USA Value USA USA Small Growth Cap
1-Month
1-Year
Source: Morningstar, Russell Investments
Active vs. Passive As of 2.28.2019
25.00
17.18 18.03
20.00 15.00
11.50 10.75
18.49 18.75
16.27 15.25
14.46 13.81
9.59 9.83
10.00
9.00 8.70
5.00 0.00
U.S.Large Blend U.S. Mid-Cap Value
U.S. Mid-Cap Growth
U.S. Small Cap Value
U.S. Small Cap Growth
Median Fund YTD
Foreign Large Blend
Diversified Emerging Mkts
Russell or FTSE Index YTD
Source: Morningstar, Russell Investments Median return of Morningstar open-end fund category (institutional share class). Russell return of U.S. categories.
Feb-19
Sep-18
Apr-18
Nov-17
Jan-17
Jun-17
Aug-16
Oct-15
Mar-16
May-15
Jul-14
Dec-14
Feb-14
Apr-13
Sep-13
Nov-12
Jan-12
Data as of 02.28.2019; Source: Morningstar
Jun-12
Aug-11
Oct-10
Mar-11
Dec-09
Mar-09 Jul-09
Dec-07
May-08 Sep-08
8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00
May-10
Rolling 5-Year Return Differential Russell 3000 Growth minus Russell 3000 Value
5
Fixed Income Markets Bond Market Performance As of 2.28.2019
6.00
•
Credit sensitive areas of the bond market continued to rally in February, while interest rates sensitive sectors produced negative returns. High yield was once again the top performing asset class within the opportunity set, up 1.66%. Investment grade corporate credit as well as foreign markets (both developed and emerging) produced positive returns. Conversely, U.S. government securities produced the lowest return in the opportunity set, down 0.26%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for the overall bond market, returned -0.06% in February.
•
In a reversal from the previous month, 10-year government bond yields in select foreign markets moved higher in February, led by Italian yields which rose by 18 bps. Domestic rates, as represented by the yield of the 10-year Treasury, increased by 10 bps from 2.63% to 2.73%.
•
Continuing a trend from January, Municipal/Treasury yield ratios moved lower across the curve in February, with ratios remaining below historical averages.
4.00 2.00 0.00 -2.00 Barclays US Barclays US Barclays US Agg Bond Government Credit
Barclays US Barclays Barclays US MBS Global Trsy Ex Corp High US TR Hdg Yield 1 Mo
Barclays US TIPS
Barclays EM USD Agg
1 Yr
Source: Morningstar, Barclays
10-Year Government Bond Yields
8.00% 6.00% 4.00% 2.00% 0.00%
U.S.
Germany
France
Italy
07/31/18
2/28/2019
12/31/17
05/31/17
10/31/16
03/31/16
08/31/15
01/30/15
06/30/14
11/29/13
04/30/13
09/28/12
02/29/12
07/29/11
12/31/10
05/31/10
10/30/09
03/31/09
08/29/08
01/31/08
06/29/07
11/30/06
04/28/06
09/30/05
02/28/05
07/30/04
12/31/03
05/30/03
10/31/02
03/29/02
08/31/01
01/31/01
-2.00%
U.K.
Data as of 02.28.2019; Source: FactSet, U.S. Department of Treasury
Municipal/Treasury Yield Ratios Over The Last 5 Years As of 2.28.2019
Percent
180
Maximum
Current
Average
150 120
108
110
107
102
97
66
69
77
5 Year Maturity
7 Year Maturity
10 Year Maturity
90 60
57
30
2 Year Maturity
55
3 Year Maturity
Source: Thompson Reuters; Sterling Capital Management Analytics.
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10-Year TIPS Breakeven
20-Year U.S. Corporate OAS
3.50
2000
3.00
1600 1200 800 400
Percent (%)
700 600 500 400 300 200 100 0
U.S. Corporate Investment Grade (LHS)
2.00 1.50 1.00 0.00 Feb-99 Oct-99 Jun-00 Feb-01 Oct-01 Jun-02 Feb-03 Oct-03 Jun-04 Feb-05 Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10 Feb-11 Oct-11 Jun-12 Feb-13 Oct-13 Jun-14 Feb-15 Oct-15 Jun-16 Feb-17 Oct-17 Jun-18 Feb-19
U.S. Corporate High Yield (RHS)
Breakeven
Average
Data as of 02.28.2019; Source: Federal Reserve Board of Governors
Data as of 02.28.2019; Source: FactSet
EM Debt OAS
1400 1200
3.00
1000
2.00
Percent (%)
800 600 400 200
Yield Spread of Barclays U.S. Treasury Index to Global ExU.S. Treasury Index
1.00 0.00 -1.00 -2.00
May-96 Dec-96 Jul-97 Feb-98 Sep-98 Apr-99 Nov-99 Jun-00 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19
0
Blended Treasury Spread Data as of 02.28.2019; Source: Barclays
Aug-00 Mar-01 Sep-01 Apr-02 Nov-02 Jun-03 Dec-03 Jul-04 Feb-05 Sep-05 Mar-06 Oct-06 May-07 Dec-07 Jun-08 Jan-09 Aug-09 Mar-10 Sep-10 Apr-11 Nov-11 May-12 Dec-12 Jul-13 Feb-14 Aug-14 Mar-15 Oct-15 May-16 Nov-16 Jun-17 Jan-18 Aug-18 Feb-19
Basis Points
2.50
0.50
0 Feb-98 Nov-98 Aug-99 May-00 Feb-01 Nov-01 Aug-02 May-03 Feb-04 Nov-04 Aug-05 May-06 Feb-07 Nov-07 Aug-08 May-09 Feb-10 Nov-10 Aug-11 May-12 Feb-13 Nov-13 Aug-14 May-15 Feb-16 Nov-16 Aug-17 May-18 Feb-19
Basis Points
Fixed Income Spreads and TIPS Breakeven
Average
Yield Spread
Average
Data as of 02.28.2019; Source: Barclays
•
Investment grade and high yield credit spreads moved lower in February, continuing their recovery from weakness at the end of 2018.
•
Market inflation expectations as measured by TIPS breakeven rates were unchanged in February and remain below the historical average.
•
Emerging Market credit spreads continued to tighten in February, moving further below the historical average. The yield spread of U.S. to Global Treasuries was little changed in February and remains above the historical average.
Note: Please see Appendix for important definitions.
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U.S. Treasury Yield Curve
3.5% One Month Ago 3.0%
One Year Ago 3/04/2019
2.5%
Yield
2.0%
1.5%
1.0%
0.5%
0.0% 3-Month
6-Month
1-Year
2-Year
5-Year
7-Year
10-Year
30-Year
• Month-over-month, yields across the curve moved slightly higher, with the exception of the one-year note which saw its yield decrease by 3 bps. Rates throughout the rest of the yield curve were flat to marginally higher – between 1 and 4 bps.
Data as of 03.04.2019; Source: FactSet
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Global Equity Market Fundamentals Revenue to Firm Value
U.S. Cyclically Adjusted Earnings Yield 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
25% 20% 15% 10%
May-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19
5%
1881 1885 1889 1894 1898 1903 1907 1912 1916 1920 1925 1929 1934 1938 1942 1947 1951 1956 1960 1965 1969 1973 1978 1982 1987 1991 1995 2000 2004 2009 2013 2018
0%
Data as of 02.28.2019; Source: Online Data Robert Shiller “US Stock Markets 1871-Present and CAPE Ratio”
MSCI EAFE
MSCI Emerging Markets Index
Data as of 02.28.2019; Source: Russell, MSCI
Dividend Yield 6.00 5.00 4.00 3.00 2.00 1.00
Data as of 02.28.2019; Source: FactSet, Russell, Bureau of Labor Statistics, Sterling Capital Analytics
May-96 Dec-96 Jul-97 Feb-98 Sep-98 Apr-99 Nov-99 Jun-00 Jan-01 Aug-01 Mar-02 Oct-02 May-03 Dec-03 Jul-04 Feb-05 Sep-05 Apr-06 Nov-06 Jun-07 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19
0.00 Jan-89 Dec-89 Dec-90 Dec-91 Nov-92 Nov-93 Nov-94 Oct-95 Oct-96 Oct-97 Sep-98 Sep-99 Aug-00 Aug-01 Aug-02 Aug-03 Jul-04 Jul-05 Jul-06 Jun-07 Jun-08 May-09 May-10 May-11 Apr-12 Apr-13 Apr-14 Mar-15 Mar-16 Mar-17 Feb-18 Feb-19
30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00%
U.S. 3yr Real Revenue Growth Russell 3000 Non-Financials
Russell 3000
Russell 3000 Index
MSCI EAFE Index
MSCI Emerging Markets Index
Data as of 02.28.2019; Source: Russell, MSCI
•
The U.S. cyclically adjusted earnings yield moved lower in February and remains well below long-term averages. Long-term real U.S. sales growth moved higher in February.
•
Revenue to firm value ratios declined in Developed Markets in February following continued equity price increases. The Emerging Markets ratio was unchanged.
•
Dividend yields declined in February. International Equity Markets provide a significant dividend yield advantage over the U.S.
Note: Please see Appendix for important definitions.
9
Appendix
Definitions Core Consumer Price Index: Core inflation is a measure of inflation that excludes certain items, usually food and energy, that face volatile price movements. Option Adjusted Spread (OAS): A bond’s yield spread over comparable maturity government bonds, adjusted for any embedded options. Real GDP: Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices. Revenue to Firm Value: Total Index Revenues of the past 12 months divided by the sum of equity market value and the value of total debt. This is a measure of total sales generated on the total value (debt plus equity) of firms in the index. TIPS Breakeven: The inflation rate implied by the spread in yield between U.S. TIPS (Treasury Inflation Protected Securities) and nominal U.S. Government Bonds of equal maturity. U.S. 3 yr. Real Revenue Growth, Russell 3000 Non-Financials: For the Russell 3000 excluding financial firms, the percentage change in trailing 12-month inflation adjusted revenue over 12-month inflation adjusted revenue three years prior. U.S. Cyclically Adjusted Earnings Yield: The 10-year average of annual, inflation adjusted earnings divided by the current inflation adjusted price of the S&P 500 index. This measure is the inverse of the Shiller CAPE Ratio. YOY US Productivity Growth: The year-over-year growth in real U.S. output produced per hour worked for non-farm workers.
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Disclosures The opinions expressed herein are those of Sterling Capital Management and the Sterling Advisory Solutions Team, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon such information or opinions. Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other federal government agency, and are subject to investment risk, including possible loss of principal invested. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. The indexes are unmanaged and are shown for illustrative purposes only. Indexes do not represent the performance of any specific investment. An investor cannot invest directly in an index. The indexes selected by Sterling Capital Management to measure performance are representative of broad asset classes. Sterling Capital Management retains the right to change representative indexes at any time.
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