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Capital Market Outlook
Capital Market Outlook is a weekly publication that offers Bank of America
Merrill Lynch clients insight into economic trends and current market
conditions. Contact your client manager to discuss ways to navigate
today’s environment and position your company for success.
The low productivity growth component of the secular stagnation story does not stand up to scrutiny.
Technological progress is accelerating and it is the key to productivity growth. Faster innovation means faster
productivity growth. The idea that productivity growth is slowing contradicts the tight linkage between
technological progress and productivity. In addition, low labor force growth makes capital relatively cheap
compared to labor. This tends to raise labor productivity by applying more capital per worker to evolving
production processes.
This, for example, was the case in the 1950s, when the small labor force cohort born during the Great
Depression combined with higher productivity to keep gross domestic product (GDP) growth strong. Conversely,
in the 1970s young baby boomers flooded into the workforce, making labor relatively cheap and productivity
low. Given this inverse pattern of labor force growth and productivity, it’s hard to see any basis for the secular
stagnation thesis other than suicidal public policies. The strong signals emanating from the U.S. labor market in
2014 suggest that predictions of secular stagnation are unwarranted by the facts on the ground, especially if the
U.S. can enact a pro‐growth immigration policy in the next few years. Without more immigrants, the labor force
is likely to be too tight by 2017 for growth to continue without significant wage inflation.
CAPITAL MARKET OUTLOOK 7
Economic Reports in Brief Jonathan Kozy, Senior Research Analyst
Highlights: Fourth‐quarter real GDP growth is still tracking around 3.0%. Consumer spending grew at a healthy
rate in the fourth quarter, even as retail sales data came in below expectations in December. Lower gasoline
prices hurt retail sales figures but are helping consumers, on balance, along with stronger equity markets and
improving labor market dynamics. Improving consumer confidence was evident in the University of Michigan’s
preliminary measure of consumer sentiment for January, which rose to an 11‐year high. As mentioned, small
business confidence is also improving and firms appear more likely to hire and raise wages. The data are
consistent with a number of labor market indicators, including those from the JOLTS, which show a rising trend
in job openings and rising “quits,” a positive dynamic. The latter is a component of the Federal Reserve’s (Fed’s)
Labor Market Conditions Index (LMCI), which firmed in December. On the inflation front, headline figures are
under pressure from falling energy prices, but we suspect “core” measures will return to the 1.5%‐to‐2.0% trend
we have seen the last few years as wage growth gains traction.
Small Business Optimism: Small business confidence rose to its highest level since October 2006. The underlying dynamics in the current reading were very positive. Firms appear to be poised to put money to work, as a number of employment components improved, and firms are planning on raising wages, on balance. The net percent of firms planning capital expenditures over the next three to six months also rose.
Exhibit 9: Small Business Dynamics Improving.
Source: NFIB/Haver Analytics.
Data as of January 13, 2015.
Employment Data: The outlook for the labor market continues to look very positive. The Conference Board’s
Employment Trends Index (ETI), a leading indicator, rose 0.5% in December, reaching a record high. Six of its
eight components made positive contributions for the month. Additionally, the change in the Fed’s LMCI came
in at a solid 6.1 in December, the best reading since May 2014. The index was created to assess changes in labor
market conditions and is derived from 19 indicators. New claims for unemployment compensation, a
component of the ETI, continue to run near or below the troughs of previous cycles. The level of claims suggests
that the labor market is getting close to full employment. For the week ending January 10 claims rose 19,000 to
316,000, and the four‐week moving average rose 6,750 to 298,000.
Retail Sales: Retail sales data came in below expectations for the last month of the quarter, but the quarterly
growth rate is still in line with the 3.0% – 3.5% trend in real consumer spending on goods we have seen over the
last few years. Overall, retail sales were down 0.9% in December following a downwardly revised 0.4% gain in
November (previously 0.7%). Lower gasoline prices weighed on gasoline station sales, which were down 6.5%
for the month, the seventh consecutive monthly decline. Nonstore retail sales, which include internet shopping,
were also lower for the month (‐0.3%). For consumer spending “tracking” purposes, “core” retail sales, which
exclude automobiles, building supplies and gasoline stations, dropped 0.2% for the month and are running at a
3.8% annual rate over the last three months.
Manufacturing Survey Data: Regional manufacturing survey data were mixed, but generally positive. The
headline Empire State manufacturing survey data rebounded from ‐1.23 to 9.95. The expectations survey data
were also up with the general business conditions index reaching its highest level since January 2012. The
Philadelphia Fed Business Outlook Survey, a sentiment measure, dropped for the second straight month to 6.3,
Current LastNovember
2004
March
2009
Small business optimism index 100.4 98.1 107.7 81.0
% of firms expecting higher real sales in 6 mos., net 20.0 14.0 35.0 ‐31.0
% of firms planning to increase employment, net 15.0 11.0 19.0 ‐10.0
% of firms planning capital expenditures in 3‐6 mos., net 29.0 25.0 30.0 16.0
% of firms expecting the economy to improve, net 12.0 13.0 47.0 ‐22.0
% of firms planning to raise worker compensation, net 17.0 15.0 16.0 0.0
Single most important problem: govt. requirements, % 22.0 22.0 10.0 12.0
Single most important problem: taxes, % reporting 27.0 23.0 17.0 22.0
CAPITAL MARKET OUTLOOK 8
but the future activity index rose. On balance, manufacturing survey data are bullish for the economic outlook
in 2015.
Budget Deficit: The federal government reported a surplus of $1.9 billion in December. The surplus was below
the Bloomberg consensus forecast for a surplus of $3.0 billion. Net receipts were up 17.6% year‐over‐year as
individual income tax receipts and corporate income tax receipts jumped 16.4% and 35.0%, respectively.
Outlays were up 43.8% year‐over‐year, but calendar effects likely pushed payments into December, so the
figure may be misleading on a year‐over‐year basis. On a 12‐month rolling basis, the deficit widened to ‐$487.4
billion (below 3% of GDP) and is down from ‐$572.6 billion in December 2014. Looking ahead, we expect the
positive trend in receipts to continue as the economy continues to gain momentum heading into 2015, and
while outlays may rise, debt‐to‐GDP should be stable, if not improving.
Consumer Confidence: The preliminary reading of the University of Michigan’s Index of Consumer Sentiment
rose 4.6 points in January to 98.2, an 11‐year high. The index of current economic conditions was up 3.5 points
to 108.3, while the expectations component rose 5.2 points higher to 91.6.
Consumer Prices: Headline inflation remains under pressure from lower energy prices, but “core” measures and
labor costs that drive the underlying trend still suggest inflation will track in the 1.5%‐to‐2.0% range. Headline
inflation fell 0.4% in December and is up 0.8% over the last year. The “core” measure was up 1.6% over the last
year and should move gradually closer to the Fed’s 2.0% target as the year progresses.
Exhibit 10: Inflation Likely to Return to 1.5%‐to‐2.0% Trend in 2015.
Source: BLS/Haver Analytics.
Data as of January 16, 2015.
Industrial Production: Industrial production fell 0.1% in December following its biggest monthly gain since 2010
in November. For the quarter, industrial production grew at a 5.2% rate. For the month, manufacturing output
was up 0.3% while utility output dropped 7.3%, likely as a result of warmer weather.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
01 02 03 04 05 06 07 08 09 10 11 12 13 14
CPI-U: All Items Less Food and Energy(Seasonally Adjusted, 1982-84=100)
12-Month % Change Annualized
6-Month % Change Annualized
CAPITAL MARKET OUTLOOK 9
Market Strategy Ehiwario Efeyini, Senior Vice President and Senior Analyst
THE OUTLOOK FROM THE INSIDE—WHAT COMPANIES ARE SAYING
As we enter a new earnings season, what are the industry trends that investors should be watching? To help
shed light on this, we examined viewpoints and data from the latest quarterly earnings statements of a group of
leading companies.1 Our aims were twofold: first, to assess the traction that the major trends we are
monitoring at the theme, sector and country levels are getting; and second, to gain insight into which new ones
might be emerging as future return drivers. Our main findings were the following:
1. E‐commerce leading the way in global consumer markets
2. Metals markets may be past the worst, but downward price pressures remain
3. Telecommunications sector still facing many challenges, but longer‐term prospects could be brighter
4. Transportation sector may have the most to gain from low oil prices
5. Cybersecurity remains a major area of future growth
1. E‐commerce leading the way in global consumer markets
What companies are saying:
“As you can see, more and more Chinese consumers are shopping via mobile device…what we are doing right
now is to help more overseas merchants sell their products and services via our online marketplace to Chinese
consumers.” (Alibaba)
“We continue to invest in interconnected retail…and our supply chain team opened our Perris, California direct
fulfillment center, the second of three planned direct fulfillment centers. These automated facilities will support
our online growth.” (Home Depot)
Increasing wireless internet penetration and the rise of the emerging market consumer are two key trends
under our mega themes of “Innovation” and “People,” and the growing global e‐commerce market is being
driven in large part by both. Around the world, the number of people with access to the internet has ballooned
over recent years, almost tripling from roughly 1 billion in 2005 to over 2.7 billion in 2013. And the growing
uptake is not just a rich world phenomenon. Indeed, in absolute terms, the number of internet users in
developing countries overtook the number of developed‐country users in 2008. And of the more than 2.7 billion
internet users globally today, just under 1.8 billion (roughly 65%) are to be found in the emerging world. But
there is still a large divide between rich and poor countries. While less than a quarter of people in industrialized
economies are offline, close to a staggering 70% of emerging market inhabitants are currently not internet
users. Mobile is expected to drive much of the growth in their future usage, with the International Data
Corporation projecting a 48% rise in emerging world smartphone sales between 2014 and 2017—more than
double the developed world increase. China is leading the way. The constant hand‐wringing over its slowing
headline growth rate belies the fact that China is today still 1) the world’s fastest‐growing major economy,
2) the world’s largest smartphone market and 3) the world’s largest e‐commerce market. And the rest of Asia is
following. The Asia‐Pacific region as a whole is expected to overtake North America in total e‐commerce sales
this year (Exhibit 11); and a recent consumer survey by market research firm Nielsen2 found that over half of
online shoppers in the region favored their mobile devices for online shopping (versus around 30% in North
America and Europe). The most popular product categories for online purchase were airline tickets, hotel
reservations, clothing and electronics.
1 All quotations are taken directly from latest company earnings call transcripts, sourced from Bloomberg as of December 31, 2014.
2 “E‐commerce: Evolution or revolution in the fast‐moving consumer goods world?” (August 2014).
CAPITAL MARKET OUTLOOK 10
Exhibit 11: Asia‐Pacific to Overtake North America in E‐Commerce Sales this Year.
(Global e‐commerce sales, USD billions)
Past performance is no guarantee of future results.
Includes products and services ordered and leisure and unmanaged business travel sales booked using the internet via any device, regardless of the method of payment or fulfillment.
Source: eMarketer.
Data as of 2014.
Growing incomes and rising smartphone penetration should continue to support emerging market e‐commerce,
benefiting retailers with a strong online presence. But this is not just an emerging world trend. It is also worth
noting that even in the mature developed markets, e‐commerce is expected to grow by around 35% over the
next three years—well in excess of mobile device sales. Next‐day or even same‐day delivery is increasingly
becoming a means of differentiation between online retailers, and, as e‐commerce continues to account for a
rising share of total developed world retail sales, real estate demand for warehousing, distribution and other
customer fulfillment facilities should grow relative to the traditional brick‐and‐mortar segment.
2. Metals markets may be past the worst, but downward price pressures remain
What companies are saying:
“We do see the new suppliers affecting some markets at the moment. For example, expansions from iron ore
producers in Australia and Brazil have been the main driver of lower iron ore prices this year… In Copper, the
market has moved into surplus on the back of supply from new mines.” (Rio Tinto)
“Even though iron ore production reached a record, sales volume remained stable, and our flagship area, ferrous
minerals, suffered most from the reduction in sales prices.” (Vale)
Oversupply and sharp price declines in the oil market over recent months have been grabbing the headlines,
but a similar process has been unfolding in other commodity markets for years. In particular, key industrial
metals such as iron ore and copper have been under sustained pressure since peaking in early 2011. And though
their prices have fallen gradually relative to the dramatic plunge in oil, they have nonetheless fallen just as far
over the past four years (Exhibit 12).
430 484 539 598658 721
326374
418459
499535349
459
568
675
780
881
128
155
175
190
205
219
0
500
1000
1500
2000
2500
2013 2014f 2015f 2016f 2017f 2018f
Rest of WorldAsia-Pacific
Western Europe
North America
Asia-Pacificto overtake North America in e-commerce sales this year
Global e-commerce salesUSD (billions)
1,233
1,471
1,700
1,922
2,143
2,356
CAPITAL MARKET OUTLOOK 11
Exhibit 12: Iron Ore and Copper Prices have Fallen Just as far as Oil over the Past Four Years.
(Commodity prices index, January 1, 2011=100)
Past performance is no guarantee of future results.
Iron ore is 62% ferrous content.
Source: Bloomberg.
Data as of January 14, 2015.
Demand has clearly played a large role. China remains the dominant consumer of metals (commanding a 40%‐
plus share of the global market) and its shift in economic growth away from fixed investment has seen metal
demand slow sharply. But crucially, the global supply response has so far been limited, and the drop in oil prices
has contributed to this by lowering breakeven production costs in what is a highly energy‐intensive industry.
Higher‐cost producers in the iron ore market (particularly in China itself) have been forced to curtail their
output as prices fall. But the dominant low‐cost suppliers (primarily in Australia and Brazil) have meanwhile
continued to expand production from existing mines while remaining profitable, driving the supply glut that
continues to undermine prices. At the same time, new production capacity in copper is set to come online in
Peru (the world’s third‐largest producer) over the next 12 months as a major new mining project in the south of
the country nears completion—many industry analysts are expecting another year of global production surplus
in 2015. However, in both markets the global balance does appear to be shifting. Recent announcements from
Australian copper majors have forecast production declines for this year (including at the world’s largest copper
mine in Chile), while more than 20 iron ore mining projects have reportedly been canceled or suspended over
the past six months. Indeed, having been on a similar downtrend since 2011, balances in other base metals such
as aluminum, nickel and zinc have already tightened; and despite correcting in the second half of the year
alongside the drop in energy, prices for all three of these metals rose in 2014. But while price declines should
moderate from here, we expect that iron ore and copper prices will still be vulnerable to further downside while
China’s industrial activity remains in a structural downtrend, and especially as long as output surpluses persist
for each. Of all the commodity groups, therefore, industrial metals remain our least‐favored.
3. Telecommunications sector still facing many challenges, but longer‐term prospects could be brighter
What companies are saying:
“During the quarter, we converted 55,000 customers from copper to fiber, bringing our year‐to‐date total to
around 200,000. This network evolution initiative is enabling us to systematically upgrade the network and
provide higher quality of service to customers… We are deploying capital to proactively stay ahead of demand
and our capital investments continue to focus on adding capacity to optimize our 4G LTE network, primarily by
increasing network density and deploying spectrum.” (Verizon)
“We are also building for the future through our global platforms and video delivery and machine‐to‐machine.
New revenue streams from machine‐to‐machine and telematics are beginning to emerge. In the third quarter,
these revenues were approximately $150 million and totaled more than $400 million through nine months, an
increase of more than 40% year‐to‐date…So it’s more than just about a smartphone customer.” (Verizon)
On top of the short‐term risk from a potential rise in interest rates, the telecommunications sector continues to
face a range of headwinds over the medium term. On the demand side, the most glaring have been a mature
developed market subscriber base, declining voice usage and increasing competition from instant messaging
applications. But supply‐side network service challenges also abound. The fundamental challenge stems from
surging data usage around the world, particularly for mobile communication. Over the next three years, for
example, growth in mobile data usage is projected to outstrip the increase in smartphone users by more than
• We expect equities to outperform fixed income: Our research indicates that we are in the midcycle phase of the business cycle. Equities have traditionally outperformed significantly in the recovery phase and continue to outperform, albeit at a slower pace, in the midcycle. We do not believe the concern over growth is one that becomes reality, and, clearly, we are not in the late‐stage cycle, which is typically characterized by a period of rising rates and tight monetary policy. In addition, relative valuations still favor stocks over bonds. Therefore, we remain overweight equities and underweight fixed income, but we expect a more volatile backdrop.
• Within equities, and relative to other asset classes, we continue to expect U.S. equities to outperform and remain overweight: We continue to expect the U.S. economy to lead global growth, and U.S. equities should outperform accordingly, particularly given the strengthening of the U.S. dollar.
• We are underweight EM equities: Volatility is picking up as risk is being repriced. Valuations are attractive, in our view, and the impact from monetary policy normalization in the U.S. should fade. We remain selective in emerging markets with a preference for Mexico and South Korea, and we are committed to owning what the emerging market consumer needs and buys. Countries with large deficits will be most vulnerable to monetary normalization, especially where investors have seen little encouragement on the reform front. Russia and Brazil continue to remain under pressure and weigh down the indexes.
• We are slightly overweight international developed equities versus our strategic allocation but on a hedged basis: An improving global economic backdrop should provide enough tailwinds to support Europe, in addition to Japan continuing aggressive steps to end deflation. The ECB is still behind the curve, but we expect a QE program to be developed early in 2015, which should support an improved equity environment in Europe. As a result, we remain market weight in Europe. Given our strong dollar view, hedging international exposure, particularly in Europe and Japan, is important at this point in the cycle.
• Sectors: We remain overweight financials as we expect the sector to benefit from a steep yield curve, a firming dollar, improving credit quality and stronger loan growth as the U.S. economic expansion broadens. We also retain our overweight in IT, healthcare and believe energy is at historically low relative valuation levels. We remain neutral weight in materials and industrials, as well as in the consumer sectors. We retain our underweights in utilities and telecommunications.
• We remain underweight fixed income, but we still find opportunities selectively in credit: We recommend that investors maintain a neutral to slightly short duration. We continue to prefer credit over Treasuries, with an emphasis on corporate bonds, municipals, and commercial mortgage‐backed securities (CMBS). However, in the currently higher volatility market, some allocation to Treasuries for liquidity and safety is advised. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds. Within fixed income, we are maintaining our neutral weight to municipal and corporate high yield and leveraged loans. We also recommend a more active management approach to improve potential returns in an eventual rising rate environment. A barbell strategy of owning bonds with both longer and shorter maturities should perform better than a laddered or bulleted strategy.
• We are tactically underweight commodities: The asset class has not drifted upward following the path of better‐than‐expected growth, as we anticipated when we originally closed out our underweight in the third quarter of 2014. We expect all of the crosscurrents in the commodities space to continue in 2015 with the asset class likely to remain range‐bound at best in 2015. Given current prices, we prefer energy and agriculture‐based commodities versus metals. We will continue to examine our position as we move through the year.
• We are neutral hedge funds: The opportunity set is widening as monetary policy divergence unfolds, globally and volatility has increased.
• We are neutral private equity.
• We remain neutral in real estate as an asset class: Outperformance by real estate investment trusts (REITs) over the last few years has stretched valuations.
CAPITAL MARKET OUTLOOK 19
• The dollar: Reduced trade and fiscal deficit are part of the new U.S. expansion, which is also supportive of the greenback. Faster relative growth in the U.S. is attracting bigger foreign capital inflows. We expect this positive self‐reinforcing dynamic for a stronger U.S. currency to continue over the next few years. We see the yen moving into the 125‐to‐150 range and the euro approaching parity over the next several years.
• “A Transforming World” investment themes (Earth, people, innovation, markets, government): We continue to emphasize the manufacturing renaissance, cybersecurity, personalized medicine, obesity, the emerging market middle‐class consumer, long‐term North American energy and the natural resource revolution within these categories.
CAPITAL MARKET OUTLOOK 20
Appendix
ECONOMIC AND MARKET FORECASTS (AS OF JANUARY 16, 2015)
Q1 2014 Q2 2014 Q3 2014 2012 2013 2014 E 2015 E
Real global GDP (% y/y annualized) 3.4 3.3 3.0 – 3.5 3.5 – 4.0
Real U.S. GDP (% q/q annualized) ‐2.1 4.6 3.9 2.3 2.2 2.0 – 2.5 3.5 – 4.5
$/€, end period 1.38 1.37 1.26 1.32 1.37 1.21 1.10 – 1.20
¥/$, end period 103 101 110 87 105 120 120 – 130
Oil ($/barrel), end period 102 106 91 92 98 53 55 – 85
Percent calendar‐year average over calendar‐year average annualized unless stated. E = Estimate.*Latest 12‐month average over previous 12‐month average. Past performance is no guarantee of future results. Economic or financial forecasts are inherently limited and should not be relied on as indicators of future investment performance. Source: U.S. Trust® Investment Strategy Committee.
CAPITAL MARKET OUTLOOK 21
ASSET ALLOCATION TABLE (AS OF DECEMBER 8, 2014)
ASSET CLASS ALLOCATION WEIGHTING*
Cash Positioning We have a small cash position awaiting deployment when opportunities arise.
Valuation Low yields. Negative real yields.
Equities Positioning We are overweight equities. The midcycle stage of an expansion suggests the equity bull market will continue in 2015, but in a more volatile backdrop.
Emphasis We expect the U.S. and international developed markets to outperform other asset classes.
We are overweight financials, information technology, energy and healthcare.
Valuation Valuations favor equities over fixed income.
U.S. Large Caps Positioning We are overweight large caps based on their exposure to global growth.
Emphasis Emphasis on mega cap growth segment.
Valuation Attractive relative valuation.
U.S. Mid Caps Positioning We are overweight mid caps.
Emphasis Beneficiaries of strengthening U.S. economy led by housing.
Valuation Overvalued relative to large cap.
U.S. Small Caps Positioning We are overweight small caps.
Emphasis Beneficiaries of strengthening U.S. economy led by housing.
Valuation Overvalued relative to large cap.
International Developed
Positioning Japanese equities should enjoy tailwinds from faster global growth. On balance, Europe is likely to remain in a relatively slow growth mode that stymies equity valuations compared to those in the U.S. and Japan.
Emphasis We favor Japanese equities over European equities, where we are neutral weight.
Valuation Attractively valued.
Emerging Markets Positioning We are underweight emerging markets.
Emphasis Asia should continue to outperform on a regional basis. On a country‐specific basis, we favor Mexico and South Korea.
Valuation Valuations are attractive.
Fixed Income Positioning We remain underweight fixed income, as it is less attractive compared to asset classes such as equities.
Emphasis We recommend that investors maintain a neutral to slightly short duration. We continue to prefer credit over Treasuries, with an emphasis on corporate bonds, municipals, and commercial mortgage‐backed securities (CMBS). However, in the currently higher volatility market, some allocation to Treasuries for liquidity and safety is advised. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds. Within fixed income, we are maintaining our neutral weight to municipal and corporate high yield and leveraged loans. We also recommend a more active management approach to improve potential returns in an eventual rising rate environment. A barbell strategy of owning bonds with both longer and shorter maturities should perform better than a laddered or bulleted strategy.
Valuation Expensive overall.
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CAPITAL MARKET OUTLOOK 22
CAPITAL MARKET OUTLOOK 23
ASSET CLASS ALLOCATION WEIGHTING*
U.S. Investment‐Grade
Positioning We are underweight mostly due to a significant underweight in Treasuries.
Emphasis Active management.
We continue to prefer corporate bonds over Treasuries. We would also emphasize high‐quality municipals and commercial mortgage‐backed securities.
Valuation Yields near all‐time lows on investment‐grade bonds.
Treasuries are expensive and vulnerable to rising rates.
International Positioning We are underweight.
Emphasis Be selective. Given the strength of the U.S. dollar, we are avoiding non‐North American sovereign bonds.
Valuation North American currencies should perform in line with strength in the U.S. economy.
High Yield Positioning We are neutral.
Emphasis We are maintaining our neutral weight to corporate and municipal high yield, and leveraged loans, given current fundamentals and yield over Treasuries.
Valuation Fair value.
Commodities Positioning We are underweight commodities.
Emphasis We favor energy‐related commodities and soft commodities over metals.
Hedge Funds Positioning We are neutral hedge funds, as we prefer more directional asset classes.
Emphasis We favor distressed‐oriented credit, global macro/CTA and equity long/short strategies.
Private Equity Positioning We advise using a staged approach gaining vintage‐year and global diversification over time.
Emphasis From a sector perspective, we are optimistic on healthcare, energy and infrastructure.
Real Estate Positioning We are neutral real estate as valuations are unattractive.
Emphasis We prefer opportunistic and value sectors.
*Tactical qualitative investment strategy weightings are relative in nature versus the strategic weightings for a fully diversified portfolio. Weightings are based on the relative attractiveness of each asset class. Tactical strategy weightings are for a 12‐ to 36‐month time horizon.
Because economic and market conditions change, recommended allocations may vary in the future. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. All sector and asset allocation recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance.
Not all recommendations will be suitable for all investors.
Alternative investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential, but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity and your tolerance for risk.
Source: U.S. Trust Investment Strategy Committee.
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CAPITAL MARKET OUTLOOK 24
U.S. EQUITY INDEXES (TOTAL RETURN, PERCENT CHANGE)
INTERNATIONAL MARKETS (TOTAL RETURN, PERCENT CHANGE)
CLOSE
1/16/2015 LAST WEEK MTD YTD
LAST 12 MONTHS
MSCI AC World 185.24 ‐0.49 ‐1.76 ‐1.76 2.69
MSCI EAFE 4,779.29 0.73 ‐1.84 ‐1.84 ‐6.70
MSCI Europe 5,483.38 1.40 ‐2.22 ‐2.22 ‐8.64
MSCI Pacific 4,810.66 ‐0.53 ‐1.13 ‐1.13 ‐3.07
MSCI EM 402.11 ‐0.40 0.15 0.15 0.75
MSCI AC Asia ex Japan 374.44 0.45 0.95 0.95 8.07
CURRENCY SPOT RETURN PERFORMANCE AGAINST THE U.S. DOLLAR (PERCENT CHANGE)
CURRENCY CLOSE
1/16/2015 LAST WEEK MTD YTD
LAST 12 MONTHS
90‐DAY BOND YLD.
Australian Dollar 0.82 0.23 0.59 0.59 ‐6.78 2.41
Brazilian Real 2.62 0.40 1.35 1.35 ‐9.95 12.29
Canadian Dollar 1.20 ‐0.98 ‐3.03 ‐3.03 ‐8.80 0.92
Swiss Franc 0.86 18.12 15.79 15.79 5.37 0.00
Euro 1.16 ‐2.32 ‐4.39 ‐4.39 ‐15.07 ‐0.15
British Pound 1.52 ‐0.07 ‐2.74 ‐2.74 ‐7.36 0.48
Japanese Yen 117.51 0.84 1.93 1.93 ‐11.20 ‐0.04
South Korean Won 1,077.23 1.16 1.28 1.28 ‐1.29 1.97
Singapore Dollar 1.33 0.47 ‐0.12 ‐0.12 ‐4.19 0.61
U.S. GOVERNMENT BONDS (GENERIC, CHANGE IN YIELD)
YIELD
1/16/2015 LAST WEEK YTD
LAST 12 MONTHS
90‐day T‐bill 0.03 0.01 ‐0.01 ‐0.01
Two‐year Treasury 0.49 ‐0.10 ‐0.18 0.08
Five‐year Treasury 1.29 ‐0.16 ‐0.36 ‐0.37
10‐year Treasury 1.83 ‐0.15 ‐0.34 ‐1.03
10‐year TIPS (real) 0.23 ‐0.09 ‐0.24 ‐0.34
BOND INDEXES (BARCLAYS CAPITAL, TOTAL RETURN, PERCENT CHANGE)
YIELD TO WORST 1/16/2015
LAST WEEK MTD YTD
LAST 12MONTHS
Corporate & gov’t. 1.88 0.64 1.73 1.73 7.00
Broad corporate 2.90 0.51 1.76 1.76 8.17
Non‐investment‐grade
6.61 ‐0.31 ‐0.08 ‐0.08 1.39
Treasury bills 0.05 0.01 0.02 0.02 0.06
Treasury notes and bonds
1.17 0.76 1.84 1.84 6.34
Agencies 1.17 0.47 1.13 1.13 4.37
Mortgages 2.43 0.09 0.48 0.48 5.73
Municipals 1.85 0.67 1.41 1.41 9.10
Global gov’t., ex‐U.S.
0.89 0.48 0.26 0.26 ‐2.75
U.S. Aggregate 2.04 0.48 1.35 1.35 6.57
Global Emerging Markets
5.32 ‐0.02 ‐0.60 ‐0.60 1.94
Global Aggregate ex‐USD
0.96 0.34 ‐0.29 ‐0.29 ‐3.36
COMMODITIES (PRICE RETURN, PERCENT CHANGE)
BLOOMBERG COMMODITY INDEX & THE UNDERLYING COMMODITIES
LAST WEEK YTD
LAST 12 MONTHS
Silver 8.11 13.79 ‐12.28
Gold 5.00 7.85 2.60
Natural Gas 4.75 6.60 ‐27.79
Sugar 2.82 5.58 ‐10.04
Aluminum 2.15 ‐0.31 ‐2.54
RBOB Gasoline 2.03 ‐7.55 ‐44.13
Crude Oil 0.29 ‐8.51 ‐43.14
Bloomberg Commodity Index* ‐0.30 ‐0.98 ‐17.42
Soybean Oil ‐0.86 3.89 ‐15.79
Brent Crude ‐1.86 ‐12.39 ‐47.52
NY Harbor ULSD ‐1.94 ‐9.94 ‐42.11
Cotton ‐2.52 ‐1.73 ‐26.24
Zinc ‐2.60 ‐3.66 0.11
Lean Hogs ‐2.97 ‐6.72 ‐5.16
Corn ‐3.31 ‐2.52 ‐16.28
Nickel ‐3.42 ‐2.49 ‐0.59
KCBT Wheat ‐3.91 ‐7.90 ‐11.84
Live Cattle ‐4.06 ‐5.82 13.30
Copper ‐4.99 ‐7.38 ‐21.16
Coffee ‐5.03 2.64 30.88
Wheat ‐5.50 ‐9.67 ‐13.65
Soybeans ‐5.75 ‐3.10 ‐12.41
Soy Meal ‐6.56 ‐6.16 ‐6.05
(*Total‐return index)
Past performance is no guarantee of future results.
Sources: Bloomberg; FactSet; U.S. Trust® Market Strategy Team. Securities indexes assume reinvestment of all distributions and interest payments. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index.
CAPITAL MARKET OUTLOOK 25
INDEX DEFINITIONS Securities indexes assume reinvestment of all distributions and interest payments. Indexes are unmanaged and do not take into account fees or expenses. It is not possible to invest directly in an index.
The Barclays Bond Indexes are used as performance benchmarks in each respective category of U.S. debt issuances.
The Barclays Capital U.S. Aggregate Index is an unhedged market capitalization‐weighted index of the total U.S. investment‐grade bond market.
The Barclays Capital U.S. Corporate High‐Yield Bond Index is an unmanaged, market value‐weighted index, which covers the U.S. non‐investment‐grade fixed‐rate debt market. The index is composed of U.S. dollar‐denominated corporate debt in industrial, utility and finance sectors with a minimum $150 million par amount outstanding and a maturity greater than 1 year.
The Bloomberg Commodity Index is composed of futures contracts on 22 physical commodities. It reflects the return on fully collateralized future positions. It is quoted in U.S. dollars.
The Bloomberg International Debt Index represents open‐end, international debt funds domiciled in the U.S.
The BofA Merrill Lynch U.S. 3‐Month Treasury Bill Index consists of a single issue purchased at the beginning of the month and held for a full month. At the end of the month, that issue is sold and rolled into a newly selected issue. The issue selected at each month‐end rebalancing is the outstanding Treasury bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month‐end rebalancing date. While the index will often hold the Treasury bill issued at the most recent three‐month auction, it is also possible for a seasoned six‐month bill to be selected.
The BofA Merrill Lynch 10‐to‐15‐Year U.S. Treasury Index is a subset of The BofA Merrill Lynch U.S. Treasury Index including all securities with a remaining term to final maturity greater than or equal to 10 years and less than 15 years.
The BOVESPA is a total‐return index weighted by traded volume and comprises most liquid stocks traded on the Sao Paulo Stock Exchange.
The Chicago Board Options Exchange CBOE Volatility Index (VIX) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities of eight OEX calls and puts—the nearest in and out of the money call and put options from the first‐ and second‐month expirations.
The Commodity Research Bureau (CRB) Commodity Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. The commodities used are in most cases either raw materials or products close to the initial production stage which, as a result of daily trading in fairly large volume of standardization qualities, are particularly sensitive to factors affecting current and future economic forces and conditions.
The Commodity Research Bureau (CRB) Food Index is a measure of price movements of basic foodstuffs whose markets are presumed to be among the first to be influenced by changes in economic conditions.
The Conference Board Leading Economic Index (LEI)—Leading Indexes generally signal activity/output in the coming three to six months. Relevant indicators include manufacturers’ new orders, average weekly hours, vendor performance, initial unemployment insurance claims, building permits, money supply (M2), consumer expectations, stock market prices, and interest rate spreads.
The Dow Jones Industrial Average Index, the most widely used indicator of the overall condition of the stock market, is a price‐weighted average of 30 actively traded blue‐chip stocks as selected by the editors of The Wall Street Journal.
The Dow Jones U.S. Select Aerospace & Defense Index measures manufacturers, assemblers and distributors of aircraft and aircraft parts primarily used in commercial or private air transport, and producers of components and equipment for the defense industry, including military aircraft, radar equipment and weapons. The index is weighted by float‐adjusted market capitalization.
The Euro STOXX 50 (price) Index is a free‐float market capitalization‐weighted index of 50 European blue‐chip stocks from those countries participating in the European Monetary Union.
The FactSet World Aggregate Indexes are time‐series composite indexes based on proprietary country, region, sector and industry classification.
Indexes are all based in dollars.
The J.P. Morgan Emerging Markets Bond Index (EMBI) Global tracks total returns for traded external debt instruments in the emerging markets.
The Morgan Stanley Capital International (MSCI) Australia Index is a broad‐based index that tracks the performance of Australian stocks.
The Morgan Stanley Capital International (MSCI) Canada Index is a broad‐based index that tracks the performance of Canadian stocks.
The Morgan Stanley Capital International (MSCI) Emerging Asia Index is a capitalization‐weighted index that monitors the performance of stocks from the emerging Asia region.
The Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index is a capitalization‐weighted index that tracks the total return of common stocks in 21 developed‐market countries within Europe, Australasia and the Far East.
The Morgan Stanley Capital International (MSCI) Europe Index is a broad‐based index that tracks the performance of European stocks.
The Morgan Stanley Capital International (MSCI) Pacific Index is a free‐float‐adjusted market capitalization‐weighted index designed to measure the equity market performance of developed markets in the Pacific region.
The MSCI AC (All‐Country) Asia ex Japan Index is a free‐float‐adjusted market capitalization‐weighted index that is designed to measure the equity market performance of Asia, excluding Japan.
The MSCI ACWI (All‐Country World Index) Index is a free‐float‐adjusted market capitalization‐weighted index that is designed to measure the equity market performance of developed and emerging markets.
The MSCI Emerging Markets Index is a free‐float‐adjusted market capitalization index that is designed to measure the equity market performance of emerging markets. As of May 30, 2011, the MSCI Emerging Markets Index consists of the following 21 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
The Mumbai Sensex—The Mumbai Stock Exchange Sensitive Index is a cap‐weighted index.
CAPITAL MARKET OUTLOOK 26
The Nasdaq Composite Index is a market capitalization price‐only index that tracks the performance of domestic common stocks traded on the regular Nasdaq market as well as National Market System‐traded foreign common stocks and American Depositary Receipts.
The OITP (Other Important Trading Partners) Index is a weighted average of the foreign exchange values of the U.S. dollar against a subset of currencies in the broad index that do not circulate widely outside the country of issue. The weights are derived by rescaling the currencies’ respective weights in the broad index so that they sum to 1 in each subindex.
The Philadelphia Federal Reserve Bank Business Outlook Index—The survey panel consists of 150 manufacturing companies in Federal Reserve District III (consisting of southeastern Pennsylvania, southern New Jersey and Delaware). The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease.
The Reuters/Jeffries CRB Index is an arithmetic average of commodity futures prices with monthly rebalancing.
The Russian Trading System Index (RTSI) is a capitalization‐weighted index that is calculated in U.S. dollars.
The Russell 1000® Growth Index measures the performance of those Russell 1000 Index companies with higher price‐to‐book ratios and higher forecasted growth values.
The Russell 1000® Index consists of the largest 1,000 companies in the Russell 3000 Index. This index represents the universe of large‐ capitalization stocks with a base value of 130.00 as of December 31, 1986.
The Russell 2000® Index is composed of the smallest 2,000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The index was developed with a base value of 135.00 as of December 31, 1986.
The Russell 1000® Value Index measures the performance of those Russell 1000 Index companies with lower price‐to‐book ratios and lower forecasted growth values.
The Russell 2000® Growth Index measures the performance of those Russell 2000 Index companies with higher price‐to‐book ratios and higher forecasted growth values.
The Russell 2000® Value Index tracks the performance of those Russell 2000 Index companies with lower price‐to‐book ratios and lower forecasted growth values.
The Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
The Russell MidCap Growth Index measures the performance of those Russell Midcap companies with higher price‐to‐book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index.
The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.
The Russell MidCap Value Index measures the performance of those Russell Midcap companies with lower price‐to‐book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value Index.
The Shanghai Stock Exchange Composite Index is a capitalization‐weighted index.
The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large‐capitalization U.S. stocks.
The Standard & Poor’s (S&P) 500 Financials Index is a capitalization‐weighted index that tracks the financials sector of the S&P 500, as denoted by the Global Industry Classification Standard (GICS).
CAPITAL MARKET OUTLOOK 27
This report is provided for informational purposes only and was not issued in connection with any proposed offering of securities. It was issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. The information in this report was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions herein are those of U.S. Trust, Bank of America Private Wealth Management, are made as of the date of this material, and are subject to change without notice. There is no guarantee the views and opinions expressed in this communication will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and its affiliates. All exhibits are based on historical data for the time period indicated and are intended for illustrative purposes only.
This publication is designed to provide general information about economics, asset classes and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are dependent upon each individual’s facts and circumstances. Always consult with your independent attorney, tax advisor and investment manager for final recommendations and before changing or implementing any financial strategy.
Other Important Information
Past performance is no guarantee of future results.
All sector and asset allocation recommendations must be considered in the context of an individual investor’s goals, time horizon and risk tolerance. Not all recommendations will be suitable for all investors.
Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.
Investing in fixed income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments.
Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.
Stocks of small cap and mid cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.
There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors.
Energy and natural resources stocks have been volatile. They may be affected by rising interest rates and inflation, and can also be affected by factors such as natural events (for example, earthquakes or fires) and international politics.
Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risks related to renting properties, such as rental defaults.
An investment in a hedge fund involves a substantially more complicated set of risk factors than traditional investments in stocks or bonds, including the risks of using derivatives, leverage, and short sales, which can magnify potential losses or gains. Restrictions exist on the ability to redeem units in a hedge fund. Hedge funds are speculative and involve a high degree of risk.
Treasury bills are less volatile than longer‐term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government.
Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time.
Breakdown reflects ratings from Standard & Poor’s, Moody’s and/or Fitch Ratings. For additional information on ratings, please see www.standardandpoors.com, www.moodys.com, and/or www.fitchratings.com.
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