Navigating a World In Challenges & Opportunitiesicrjc/AAIIPHX/3-17SlidesMain.pdf · Navigating a World In Transition: ... markets is subject to certain risks including market, interest

Navigating a World In Transition:Challenges & OpportunitiesChallenges & Opportunities

Joyce Morningstar, PhD, AIF®y g

Disclaimer

This general educational presentation is not intended to be tax, legal, or investment advice.This material contains the current opinions of the author Joyce Morningstar PhD but notThis material contains the current opinions of the author, Joyce Morningstar, PhD, but not necessarily those of Dynamic Wealth Advisors and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security strategy orconsidered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Past performance is not a guarantee or a reliable indicator of future results Investing in thePast performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long‐term especiallyfor all investors and each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission.

Why People Invest in the FutureMonthly growth of wealth ($1), 1926–2016

$20,544 US Small Cap Index

$100,000

Small Cap Index

$6,031 USLarge Cap Index

$1,000

$10,000

$134 Long‐TermGovernment BondsIndex

$21 Treasury Bills

$100

$13 Inflation (CPI)

$1

$10

In US dollars Indices are not available for direct investment Their performance does not reflect the expenses associated with the management of an actual portfolio Past performance is no guarantee of future

$01926 1936 1946 1956 1966 1976 1986 1996 2006 2016

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. US Small Cap Index is the CRSP 6–10 Index; US Large Cap Index is the S&P 500 Index; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, The S&P data is provided by Standard & Poor’s Index Services Group. Bonds, T-bills, and inflation data provided by Morningstar.Information is for educational purposes and should not be used as investment advice. Investing involves risks such as fluctuating value and potential loss of principal value. Diversification does not eliminate the risk of loss. There is no guarantee any strategy will be successful.

Uncertainty Can Feels Uncomfortable

Information is for educational purposes and should not be used as investment advice. Investing involves risks such as fluctuating value and potential loss of principal value. Diversification does not eliminate the risk of loss. There is no guarantee any strategy will be successful.

US Stock Market Under Different Administrations

Growth of a Dollar Invested in the S&P 500: January 1926–June 2016

P t f i t t f f t lt I di t il bl f di t i t t th f th i f d t fl t th i t d Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services Group.


Crises Come and GoGrowth of a dollar MSCI World Index (net dividends) 1970 2016Growth of a dollar—MSCI World Index (net dividends), 1970–2016

Eurozone debt crisis

Subprime mortgage

crisisDotcom stock crash

9/11

Income tax rates rise

Dow drops 23% on Black Monday

BusinessWeek: “The Death of Equities”

Brexit

$100

$43

Euro zone debt crisis

S&P 500 down 46%

Dotcom stock crash

9/11 terrorist attack

Y2K Scare

Income tax rates rate

Savings



G ld hi

Arab oil embargo

$50 $489/11 terrorist attacksY2K

Scare

Savings and loan crisisGold hits Oil prices

Arab oil embargo

$10

US home prices hit bottom

Fiscal cliff i

Subprime mortgage

Hurricanes Katrina and Rita

Iraq war b i

attack

Russian financial

crisisAsianIraq

i d

Savings and loan crisis

US inflation at 13.5%

Gold hits record high

S&P 500 down 43%

Oil prices quadruple

embargo

1$5


Fiscal cliff i

S&P 500


I

Russian financial

crisis

AsianIraq i d


record high

S&P 500 down 43%

quadruple

$1

worriesmortgage crisis

beginscurrency crisis

invades Kuwait

1970 1980 1990 2000 2010 2013

1 worriesdown 46%

Iraq war begins

currency crisis

invades Kuwait

down 43%

$0

$1

1970 1980 1990 2000 2010 2016

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2017, all rights reserved.


The Market’s Response to CrisisThe Market s Response to CrisisPerformance of a Normal Balanced Strategy: 60% Stocks, 40% BondsCumulative Total Return

84%

After 1 year After 3 years After 5 years

61%

51% 50%54%

84%

21% 19%

37%

14%

25%

41%

50%43%

-1%

2%

-4%

7%

14%

-3%

9%

O t b 1987 A t 1989 S t b 1998 M h 2000 S t b 2001 S t b 2008

In US dollars. Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, Fama/French US Small Value Research Index, Fama/French US Large Value Research Index; 15% each Fama/French International Value Index, Dimensional International Small Cap Value Index; 40% BofA Merrill Lynch One-Year US Treasury Note Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2017 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Fama/French indices

October 1987:Stock Market Crash

August 1989:US Savings and

Loan Crisis

September 1998:Asian ContagionRussian CrisisLTCM Collapse

March 2000:Dot-Com Crash

September 2001:Terrorist Attack

September 2008:Bankruptcy of

Lehman Brothers

provided by Ken French. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. International Small Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped at 50%; rebalanced semiannually. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.

Dangerous Lure of Investment Pornography

“The Death of Equities”Business Week, 08/13/1979Business Week, 08/13/1979

“The Crash of ’98 – Canthe US Economy Hold Up?”

FORTUNE, 09/28/1998

“Retire Rich – A Simple

“How to Reach $1 Million”

Plan to Have it All”FORTUNE, 08/16/1999

How to Reach $1 MillionMoney, 08/2012

I f ti i f d ti l d h ld t b d i t t d i I ti i l i k h fl t ti lInformation is for educational purposes and should not be used as investment advice. Investing involves risks such as fluctuating value and potential loss of principal value. Diversification does not eliminate the risk of loss. There is no guarantee any strategy will be successful.

Stock Valuations Are Above Their Long Term Averages

Source: Capital Group. Data from U.S. Bureau of Economic Analysis, U.S. Commerce Department, MSCI, RIMES, Thomson Reuters Datastream as of 12/31/16. Cyclically adjusted P/E ratios are for the MSCI USA sector indexes and are the index price divided by the average of the previous 10 years of inflation‐adjusted earnings for the 10 years ended 12/31/16. Average hourly earnings and unemployment rate as of 12/31/16. Household debt service ratio represents ratio of debt to household net worth as of 9/30/16. Capital goods orders include nonmilitary capital goods excluding aircraft as of 11/30/16.

What Drives Market Returns?

Drivers of Bond Returns

Bond total return based on yield to maturity and capital gains or losses due to change in interest rate.

Change in interest rates is determined by many factors including:S l f d d d f dit• Supply of and demand for credit

• Actions by central banks• Changes in credit risks for both governments and corporations• Changes in investor appetite for riskg pp

Source: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: Dimson‐Marsh‐StautonGl b l d b


Global Returns database.

US Bond Returns – Past 30 Years vs Long Term Averageg g

S Ki Gl b l I i “ i i i hi Wh I d L h i i ” A il 2016 i hSource: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: Dimson‐Marsh‐Stauton Global Returns database.


Drivers of Stock Returns

• Stock total return based on dividends and capital gains and losses

• Capital gains and losses due to changes in a company’s earningschanges in a company s earnings growth and PE ratio

• Earning growth based on change in a company’s revenue and profit marginsmargins

• Changes in PE ratio reflect changes in investors’ expectations of future earnings growth, return on equity, inflation and the cost of equityinflation, and the cost of equity

Source: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: i h S Gl b l d b


Dimson‐Marsh‐Stauton Global Returns database.

US Stock Returns – Past 30 Years vs Long Term Average

Source: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: Dimson‐Marsh‐Stauton Global Returns database.


Returns Have Been Above the Long Term Averages

Source: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: Dimson‐Marsh‐Stauton Global Returns database.Marsh Stauton Global Returns database.


What About the Next 20 Years?

One point of viewMcKinsey Global InstituteApril 2016

Source: McKinsey Global Institute report “Diminishing Returns: Why Investors May Need to Lower Their Expectations”, April 2016. Data: Dimson‐Marsh‐Stauton Global Returns database.

Information is for educational purposes and should not be used as investment advice. Investing involves risks such as fluctuating value and potential loss of principal value Diversification does not eliminate the risk of loss There is no guarantee any strategy will be successful

What About Interest Rates?Rates could remain low for some time

Source: Capital Group. Data: Federal Reserve, Robert Shiller, Thomson Reuters Datastream. Data for 1876–1961 represents average monthly U.S. long‐term government bond yields compiled by Robert Shiller. Data for 1962–2015 represents 10–year Treasury yields, as of December 31 each year within the period. Data for 2016 is as of November 30.


Current Economic Outlook& Some of the Factors Affecting Projections

Economic Projections Are Very Uncertain

• Wide range in GDP projections due to uncertainty in policy stance of the Trump administration • GDP could be higher if larger than projected economic stimulus in the US or China. • GDP could be lower if:

• Government policies shift towards protectionism• Tighter than expected government monetary policies, which impact weak balance sheets in

parts of Europe and some emerging market economies• Greater geopolitical tensions• Slowdown in China is worse than projectedSlowdown in China is worse than projected

Source: International Monetary Fund “World Economic Outlook Update”, January 2017


IMF’s Economic Growth Projections

Act Est. ProjectedAct Est. ProjectedGross Domestic Product 2015 2016 2017 2018Emerging Mkt & Developing Economies 4.1 4.1 4.5 4.8Commonwealth of Independent States -2.8 -0.1 1.5 1.8

Russia -3.7 -0.6 1.1 1.2Excluding Russia -0.5 1.1 2.5 3.3

2015 2016 2017 2018World GDP 3.2 3.1 3.4 3.6Advanced Economies 2.1 1.6 1.9 2Emerg Mkt & Developing 4.1 4.1 4.5 4.8

Emerging and Developing Asia 6.7 6.3 6.4 6.3China 6.9 6.7 6.5 6India 7.6 6.6 7.2 7.7Indonesia, Malaysia, Phililppines, Thailand,

Vietman 4.8 4.8 4.9 5.2Emerging and Developing Europe 3 7 2 9 3 1 3 2

Act Est. ProjectedGross Domestic Product 2015 2016 2017 2018Advanced Economies 2.1 1.6 1.9 2

Emerging and Developing Europe 3.7 2.9 3.1 3.2Latin America & the Caribbean 0.1 -0.7 1.2 2.1

Brazil -3.8 -3.5 0.2 1.5Mexico 2.6 2.2 1.7 2

Middle East, North Africa, Afghanistan, & Pakistan 2.5 3.8 3.1 3.5

United States 2.6 1.6 2.3 2.5Euro Area 2 1.7 1.6 1.6

Germany 1.5 1.7 1.5 1.5France 1.3 1.3 1.3 1.6Italy 0.7 0.9 0.7 0.8Spain 3.2 3.2 2.3 2.1

Saudi Arabia 4.1 1.4 0.4 2.3Sub-Saharan Africa 3.4 1.6 2.8 3.7

Nigeria 2.7 -1.5 0.8 2.3South Africa 1.3 0.3 0.8 1.6

Spain 3.2 3.2 2.3 2.1Japan 1.2 0.9 0.8 0.5United Kingdom 2.2 2 1.5 1.4Canada 0.9 1.3 1.9 2Other Advanced Economies 2 1.9 2.2 2.4

S I i l d “W ld i O l k U d ” J 201Source: International Monetary Fund “World Economic Outlook Update”, January 2017


Government Debt Remains High Around the World

Source: Capital Group


Lower Government Budgets Deficits


Global Competitiveness Scorecard - 2016

Although the US remains t tit ia strong competitor in

the global marketplace, growing debt could undermine that position

Source: George W Bush Institute

p


So Here’s the Plan …


And the One of the Impacts …


US Fiscal SituationBudget Deficits & Debt

Fiscal and Political UncertaintiesAround the World

Relative Size of Global Stock MarketsDecember 2016December 2016

Data provided by Bloomberg. Market cap data is free-float adjusted. meets minimum liquidity and listing requirements. Many nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are only available to mainland China investors.


Source: “ After the G Zero: Overcoming Fragmentation” , November 2016 study by Eurasia Group for the IMF

What Other Countries Will Decide to Exit the EU?



Global Trade Agreements & Financial Institutions

• ADB: Asian Development Bank, western-based international development bank• AIIB: Asian Infrastructure Bank, Chinese-backed international development bank• NBD: New Development Bank, BRICS-backed international development bank (Brazil, Russia, India, China, S. Africa )• BRICS CRA: Contingent Reserve Agreement, mutual financial assistance among emerging market countries –g g g g g

competes with the IMF• CPS: China International Payment Systems, competes with NY Fed Reserve as global clearing house• TPP: TransPacific Trade Partnership, trade agreement between 12 AsiaPacific countries• RECP: Regional Comprehensive Economic Partnership, trade agreement being negotiated between the 10 ASEAN

(Association of South-East Asian Nations) governments and their six FTA partners: Australia, China, India, Japan, New Z l d S th KZealand, South Korea

• TTIP: TransAtlantic Trade & Investment Partnership, agreement between the US and the EU



Uncertainty Is Not a New PhenomenonGrowth of a dollar MSCI World Index (net dividends) 1970 2016Growth of a dollar—MSCI World Index (net dividends), 1970–2016

Eurozone debt crisis

Subprime mortgage

crisisDotcom stock crash

9/11

Income tax rates rise



Brexit

$100

$43

Euro zone debt crisis

S&P 500 down 46%

Dotcom stock crash

9/11 terrorist attack

Y2K Scare

Income tax rates rate

Savings



G ld hi

Arab oil embargo

$50 $489/11 terrorist attacksY2K

Scare

Savings and loan crisisGold hits Oil prices

Arab oil embargo

$10


Fiscal cliff i

Subprime mortgage


Iraq war b i

attack

Russian financial

crisisAsianIraq

i d

Savings and loan crisis


Gold hits record high

S&P 500 down 43%

Oil prices quadruple

embargo

1$5


Fiscal cliff i

S&P 500


I

Russian financial

crisis

AsianIraq i d


record high

S&P 500 down 43%

quadruple

$1

worriesmortgage crisis

beginscurrency crisis

invades Kuwait

1970 1980 1990 2000 2010 2013

1 worriesdown 46%

Iraq war begins

currency crisis

invades Kuwait

down 43%

$0

$1

1970 1980 1990 2000 2010 2016

In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2017, all rights reserved.

Disciplined investors look beyond today’s concerns to the long-term growth potential of markets.

Changes in Relative Size of Global Stock MarketsJanuary 1990–December 2015

Weights

Number of Countries

Number of Stocks Total Value December 31, 2015

Change fromPrevious Year

01/90–12/15Average

SUS 1 3,021 22.10 Trillion 53.16% 0.10% 45.44%Developed Markets ex US 22 3,442 15.44 Trillion 37.14% 0.40% 48.35%Emerging Markets 23 2,719 4.03 Trillion 9.70% -0.50% 6.22%Total 46 9,182 41.57 Trillion 100.00%

100%Emerging Markets

60%

80%

International Developed

Emerging Markets

20%

40%

0%

20%

1990

1990

1991

1992

1992

1993

1994

1994

1995

1996

1996

1997

1998

1998

1999

2000

2000

2001

2002

2002

2003

2004

2004

2005

2006

2006

2007

2008

2008

2009

2010

2010

2011

2012

2012

2013

2014

2014

2015

US

In US dollars. The Russell 3000 Index is used as the proxy for the US market. The proxies for the developed ex US and emerging markets are the respective developed country and emerging country portions from the MSCI All Country World IMI ex USA Index. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio


Global Exposure to Higher Expected Returns10 Year Rolling Returns: January 1980 December 201610-Year Rolling Returns: January 1980–December 2016

Balanced Strategy Index outperformed the S&P 500 Index 84.0% of overlapping 10‐year periods.

30% 60% Global stocks & 40% bonds

S&P 500 Index

20%

25%

10%

15%

0%

5%

-5%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

In US dollars. Sources: Dimensional for Dimensional Index data. Dimensional Equity Balanced Strategy Index vs. S&P 500: There are 444 overlapping 10-year periods. See "Dimensional Equity Balanced Strategy Index Description" slide in the Appendix for more information. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. The S&P data is provided by Standard & Poor's Index Services Group.


Navigating a World In Challenges & Opportunitiesicrjc/AAIIPHX/3-17SlidesMain.pdf · Navigating a World In Transition: ... markets is subject to certain risks including market, interest

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