1. Is May’s big drop in the pace of job growth a cause for concern?

Even with a 35,000 employee strike at Verizon weighing on overall job gains, May’s 38,000 increase in non-farm payrolls was surprisingly weak.

Still, payroll employment is notoriously volatile and there have been several instances in recent years where job gains have dropped below 100,000 only to rebound strongly the next month.

It’s true that the pace of monthly job gains has slowed since late last year. However, the strength we saw then was quite remarkable and, we believe, unsustainable. The labor market and demographics are moving to a point where even a sub-100,000/month average growth will be sufficient as a trend pace.

More generally, we believe it is difficult to make a compelling case that the labor market is in any imminent danger, particularly when the level of initial jobless claims are  at a 43-year low and job openings are at a record high.

At the same time, slack continues to tighten and wage growth continues to firm, signaling a labor market approaching capacity.

2.What expectations should investors have for portfolio returns?

After a long positive period for equities, we believe we are now in the later phases of this bull market and investors should reset expectations for more moderate returns.

While we would not consider equity valuations expensive, they do appear full and fair, and further stock gains will likely be driven by earnings growth rather than multiple expansion.

Our outlook for modest economic and earnings growth supports a total return for equities of 5%-6% over the next 12 months.

Combined with expected returns for traditional fixed income of between 2%-3%, and 5%-7% for opportunistic fixed income, a balanced portfolio can therefore be expected to earn approximately 4%-5% (see chart).

While not as impressive as the double digit gains experienced earlier in the cycle, we believe these nominal returns should still be viewed slightly more favorably than they otherwise would be in a higher inflation environment.


3.What does the slowdown underway in emerging economies mean for U.S. corporate profits?

We believe the era of multinational foreign profits leading the profit cycle is over.

The boost from strong global growth, particularly in EM, helped overall U.S. earnings grow significantly faster than nominal U.S. GDP in the 1990s/2000s.

With China joining the WTO in 2001, the move toward global outsourcing and a decline in the dollar, foreign profits of U.S. companies more than doubled from less than 2% of U.S. GDP to more than 4% from 2001-2007.

Now, U.S. foreign profits are declining and the slowing pace of emerging market growth will likely be a significant headwind for multinational earnings.

4.Did the weak May labor report alter your outlook for a Fed tightening?

Yes. There was a small chance that they would tighten at their June meeting. We now view that as a zero chance of tightening.

The pace of job growth has slowed in the second quarter.

Right now, it is not known if this represents a slowing economy, quirks in seasonal adjustments, or tighter labor conditions.

The Fed will wait until their late-July meeting before deciding if they should raise interest rates. This will allow them to observe another labor report and find out the results of the BREXIT vote, which could potentially disturb the financial markets.

5.Will economic growth rebound in the second quarter?

Although the disappointing start to the year added to the sense of unease over the strength of the current expansion, early indications are that growth is rebounding at a solid rate in the second quarter and we continue to believe the risk of recession remains low.

Better retail sales, home building, and industrial production data, along with a turn-around in forward-looking business activity indices, all suggest domestic demand is again gaining traction.

Most encouraging is what appears to be a pickup in real consumer spending, which is on track to increase at a 3% annual rate in the second quarter, versus about 2% in the first quarter.

Looking ahead, we expect the drag from energy investment and the stronger dollar to continue to weigh on the economy.

However, low gas prices, solid job growth, and improving income gains should help the consumer continue to carry the economy forward.

6.What has caused oil prices to trade above $50 per barrel?

Oil (WTI) prices have almost doubled since hitting a low of $26.21 back in mid-February.

There have been some supply disruptions - the most since 2011 - with the wildfires in Canada, pipeline bombings in Nigeria, and electrical outages in Venezuela.

In the U.S., production has fallen about 500,000 barrels per day.

There is a general feeling in the market that prices hit their cycle lows earlier this year and that prices will not rally much more from these levels due to continued weak global growth outlook and a correction of the disruptions.

7.Why are we overweight U.S. equites?

We remain confident on the longer-term outlook for U.S. equites, as there is little evidence of an impending downturn in U.S. economic activity, which is often a necessary condition for a severe decline in equity prices.

Moreover, after several disappointing quarters, U.S. earnings growth is expected to turn positive again in the second half of this year.

Diminishing headwinds of lower oil prices and the strong dollar, along with modestly improving domestic demand, support our view of a 4-5% improvement in S&P 500 earnings over the next 12 months.

Dividend & Income stocks are also benefitting from the slow but steady U.S. economic environment, which is supporting attractive dividend yields and dividend growth of 3-6%.

 Even the more modest total return expectations for 2016 for U.S. equites of 5-6% still look attractive relative to the historically low yield offered in traditional fixed income.

8.Why are we overweight HY Taxable/HY Muni?

We believe both high yield taxable and high yield municipal bonds can provide diversification benefits as well as potential return enhancements to core strategies.

High Yield Municipal:

  • Tax-adjusted yields are hard to beat for high tax-bracket investors.
  • While credit spreads are at cyclical tights, we don’t see an end to the credit cycle in the near future.
  • Puerto Rico’s pending restructuring is priced into the market.
  • Demand for municipals is likely to remain robust and supply light. This will provide continued strong technical underpinnings to the market.

 High Yield Taxable:

  • Despite low or negative yields in many global bond markets, yields on U.S. and EM HY Corporates and Leveraged Loans range from 6-10%.
  • Corporate credit quality outside commodity related issuers remains healthy with default rates still below long term norms, leverage metrics are within reasonable historic levels, and firms have continued accessibility to the capital markets.
  • Favorable technical underpinnings due to reduced new issuance, particularly in the EM sector.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing.  These risks include, but are not limited to, stock market, manager, or investment style.  Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.

There are inherent risks with fixed income investing.  These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond.  When interest rates rise, bond prices fall.

High yield bonds offer a higher yield and carry a greater risk of loss of principal and interest and an increased risk of default or downgrade than investment grade securities.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities.  Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT), and taxable gains are also possible.

Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance.  These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.

Investments in commodities can be very volatile and direct investment in these markets can be very risky, especially for inexperienced investors.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal.

As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The Barclays Capital U.S. Intermediate Government/Credit Bond Index measures the performance of U.S. Dollar denominated U.S. Treasuries, government-related and investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Barclays U.S. High Yield Bond Index covers the universe of fixed rate, non-investment grade debt, including corporate and non-corporate sectors. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets are excluded, but Canadian and global bonds (SEC registered) of issuers in non-emerging market countries are included. Original issue zero coupon bonds, step-up coupon structures, and 144-As are also included.  Please note an investor cannot invest directly in an index.

The Barclays U.S. High Yield Loan Index is an unmanaged index that provides broad and comprehensive total return metrics of the universe of U.S.-dollar denominated syndicated term loans. The index is shown as a broad measure of market performance. Performance between a fund and an index will differ. You cannot invest directly in an index.

The JP Morgan Corporate Emerging Market Bond Index (CEMBI) Broad High Yield is the below investment-grade portion of the CEMBI Broad index.  The CEMBI tracks total returns of US dollar-denominated debt instruments issued by corporate entities in Emerging Markets countries.