marine corps association & foundation...quarter, at 2.3%. forecasts for full year 2019 are...
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A Holistic Approach Centered Around You
www.bankwithunited.com/wealth-management
Charleston 500 Virginia Street E., Suite 310, Charleston, WV 25301
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Washington 1700 K Street NW, Suite 750, Washington, DC 20006
Marine Corps Association & Foundation
February 2020
Marine Corps Association & Foundation Mission Statement
“To be the preeminent association and foundation for all Marines and friends of theCorps dedicated to leader development, recognition of professional excellence andexpanding awareness of the rich traditions, history, and spirit of the United StatesMarine Corps.”
Table of Contents
Section 1 Market Outlook……………………………………………………………………………………………….4
Section 2 Portfolio Discussion…………………………………………………....……..............................16
Section 3 Appendix…………………………………………………………………....……..............................20
Portfolio Holdings.…………………………………………………………………......…................21
3
Market & Economic Outlook
4
Equities YTD 1 Year 3 Year
S&P 500 31.5% 31.5% 15.3%
Russell 2500 (Small/Mid) 27.7% 27.7% 10.3%
MSCI ACWI ex-US (Int'l) 22.1% 22.1% 10.4%
MSCI Emerging Markets 18.6% 18.6% 11.9%
Fixed Income YTD 1 Year 3 Year
BBarc Municipal Bond Index 7.5% 7.5% 4.7%
BBarc Aggregate Bond Index 8.7% 8.7% 4.0%
Market Performance1 as of 12/31/2019
Market & Economic Review
51Multi-year returns are annualized.Chart Data Source: Bloomberg
0%
5%
10%
15%
20%
25%
30%
35%
YTD 1 Year 3 Year
S&P 500 Russell 2500 (Small/Mid)
MSCI ACWI ex-US (Int'l) MSCI Emerging Markets
BBarc Municipal Bond Index BBarc Aggregate Bond Index
• The S&P 500 Index experienced strong performancethroughout 2019. The index reached new highs late inDecember, showing promise for 2020.
• International Developed and Emerging Markets continueto lag the major U.S. indexes. Market volatility, bothdomestic and internationally, remained calm in thefourth quarter of 2019 due to questions about the paceof global growth, coupled with easing trade tensionsamongst major economies.
• The Federal Reserve cut interest rates in July, September,and October each time by 25 basis points. These cuts arethe first since 2008 – on the back of weaker globalgrowth, trade uncertainty and muted inflation. TheFOMC is not unified in its outlook on the economy anddirection of interest rates and three members dissentedin the most recent 25 basis point cut in September.
• While economic fundamentals remain relatively positiveand corporate earnings growth rates begin to slow, weanticipate volatility to continue in both fixed income andequities.
U.S. GDP Outlook Remains Positive Despite Slower Growth
6Chart Source: U.S. Bureau of Economic Analysis, Northern Trust
• U.S. Real GDP for the third quarter of 2019 grew at a rate of 2.1%, beating estimates by 20 basis points. TheFederal Reserve Bank of Atlanta estimates fourth quarter GDP to be 20 basis points higher than the linkedquarter, at 2.3%. Forecasts for full year 2019 are rangebound and less optimistic, with consensus somewherebetween 2.1% - 2.6%.
• While certain economic measures have begun to cool, the economy is fundamentally sound and theconsumer remains strong. The job market is still performing well, inflation is steady, and a patient Fed willbe reserved in raising interest rates for an extended period. These factors are likely to support continuedgrowth.
0.4%
1.5%
2.3%
1.9% 1.8% 1.8%
3.0%2.8%
2.3% 2.2%
4.2%
3.4%
2.2%
3.1%
2.0% 2.1%2.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18 Q1'19 Q2'19 Q3'19 Q4'19E
U.S. GDP: Quarter-over-Quarter Growth
Recent Manufacturing Data Provides Reason for Caution
7
• Global Purchasing Managers’ Index (PMI) surveys signaled that manufacturing slowed into contraction from May throughNovember. December’s reading of 47.2% indicates continued contraction.
• While manufacturing has contracted, ISM Services beat economists' expectations and grew at 2.04% from November toDecember. ISM Services account for two thirds of U.S. GDP.
• The direction of the trend in the PMI tends to precede changes in major estimates of economic activity and output,such as the GDP, Industrial Production, and Employment. Monitoring this activity allows us to position our portfoliosto be able to take advantage of opportunities in the market.
The Fed’s Rate Cuts in 2019 Added Fuel to Market Returns
8Chart Source: LPL Resources, Bloomberg, U.S. Federal Reserve, European Central Bank, Bank of Japan 09/18/19
• The Federal Reserve cut rates three times in 2019, totaling a decrease of 75 basis points.
• In September, the Federal Reserve slightly increased its U.S. Economic growth forecast for 2019, increasing to 2.2%from 2.1%.
• With the rate cut in October, we expect markets to follow the central banks lead in the absence of meaningfulnews on trade. As a result, we expect stocks and bonds to remain supported throughout 2020.
S&P 500 Earnings Slowed in 2019, but Remained Above Expectations
9Chart Source: J.P. Morgan, FactSet
• The Q3 2019 earnings decline for the S&P 500 of (2.2%) marks the first time the index has reported threestraight quarters of year-over-year declines in earnings since Q4 2015 to Q2 2016.
• Slowing earnings coupled with in-line economic growth is typical of the end of an economic cycle. However,with downward expectations, fears of an earnings recession have not yet materialized.
• For Q4 2019, we expect earnings to grow at a rate of 2.5%, complemented by revenue growth of 2.6%.Furthermore, we expect earnings to grow at a rate of 4.3% in Q1 2020, with revenue growth of 4.6%. Weremain cautiously optimistic in 2020.
8.5%
14.8%
26.6%24.9%
26.0%
13.3%
-0.3%-0.4%
-2.2%2.5%
4.3%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
3Q'17 4Q'17 1Q'18 2Q'18 3Q'18 4Q'18 1Q'19 2Q'19 3Q'19 4Q'19E 1Q'20E
S&P 500 Year-Over-Year Corporate Earnings Growth
Revenue Earnings
10
Dividend Growth Stocks: Still Core to Long-Term Success
• In contrast to companies that did not pay,only maintained, cut or eliminated theirdividends, companies that grew orinitiated a dividend have experienced thehighest returns relative to other stockswith significantly less price volatility.
• Dividend growth companies are provenwealth creators, providing income,growth of income and the potential forcapital appreciation.
• The projected 2020 income from thedividend growth component of ourstrategy is +2.8%, helping to offset anypossible market declines.
• Companies with high dividend growthoften contribute to resilient portfolioperformance during periods of marketstress. These companies are the core ofour client portfolios.
Source: Hartford FundsChart Sources: 1 Morningstar; 2 Ned Davis Research
Based on an analysis of S&P 500 stocks from 12/1960 – 01/2018
Dividends’ Contribution to Total Return by Decade
Based on an analysis of S&P 500 stocks from 1/31/72 – 12/31/18
Average Annual Returns and Volatility by Dividend Policy2
International Markets Provide Long-Term Growth Opportunity and Diversification Benefits
11
• GDP and EPS growth rates are forecasted to be largely positive across international developed and emergingmarkets over the coming years.
• Emerging Market valuations are attractive and likely supported by stimulus-led growth pickup in China.European stocks appear undervalued amidst dovish ECB, weaker Euro, and potential for economic rebound.
• While U.S. Manufacturing is in a period of contraction (a reading below 50), manufacturing and services inEmerging Markets and Developing Economies (EMDS) have been in a period of expansion (a reading over 50)since October of 2016.
Data Source: World Bank
Projected Global GDP Growth Rates Emerging Markets and Developing Economies Manufacturing and Services
46
47
48
49
50
51
52
53
54
No
v-15
Jan-
16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-16
Jan-
17
Mar
-17
May
-17
Jul-
17
Sep
-17
No
v-17
Jan-
18
Mar
-18
May
-18
Jul-
18
Sep
-18
No
v-18
Jan-
19
Mar
-19
May
-19
Jul-
19
Sep
-19
No
v-19
Services Manufacturing
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E
World Advanced Economies Emerging Markets and Developing Economies
We Expect Continued Market Volatility as Investors React to Headline News
12Chart Source: U.S. Bureau of Economic Analysis, Neuberger Berman
10-Yr VIX Avg.
• The Volatility Index (VIX), a measure of expected volatility in the S&P 500, stabilized through 2019, sitting belowits 10-year average of 17.8.
• Historically and statistically, the market sees three 5% pullbacks and two 10% corrections annually. Through2019, the market had only one pullback greater than 5% (6.8%), which occurred in the month of May. Thisvolatility was followed up by the best annual performance we have seen since 2013.
• The overarching theme to this volatility is that investors are concerned about slowing growth in the U.S. andabroad as well as the impact of tariff clashes between the U.S. and China.
Bonds Provide Income and Reduce Portfolio Volatility
13
• During short-term equity declines over 5%, intermediate-term bonds were flat or rose in 9 of 10 periods; bonds were flat or rose during all six declines of 10% or greater.
• Despite muted performance expectations going forward, fixed income still serves as an important portfolioballast and income generator within portfolios.
Data Source: Bloomberg
-16.0%
-18.8%
-9.9%
-7.5%
-5.8%
-7.4%
-10.5%
-11.8%
-10.1%
-19.7%
-11.8%
3.0%4.2%
2.2%1.2%
-3.1%
2.1%
0.3%
2.5%
0.0%
1.5% 1.4%
-25%
-20%
-15%
-10%
-5%
0%
5%
4/23/10 -7/2/10
7/7/11 -10/3/11
4/2/12 - 6/1/12 9/14/12 -11/14/12
5/21/13 -6/24/13
9/18/14 -10/15/14
8/17/15 -9/28/15
12/29/15 -2/11/16
1/26/18 -4/2/18
9/21/18 -12/24/18
Average
Bond Performance when Stocks fall >5% (2010-Present)
S&P 500
Barcap Aggregate Bond
Optimized Portfolio Asset Allocation is the Key to Long-Term Success
14
Chart Source: J.P. Morgan – as of 12/31/2019Note: Asset allocation consists of the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in theMSCI EAFE, 5% in the MSCI EME, 25% in the Bloomberg Barclays US Aggregate, 5% in the Bloomberg Barclays 1-3mTreasury, 5% in the Bloomberg Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index, and 5% inthe NAREIT Equity REIT Index.
• 2019 witnessed a strong recovery in both US and Global Equities.
• A tailored, diversified approach to investing remains key to long-term returns.
U.S. Equity • U.S. stocks still present some upside return potential as corporate earnings are expectedto rebound slightly.
• Trade and tariffs will continue to be worked out—benefiting U.S. companies with strongglobal presence.
✓ Neutral – Overweight
International Equity
• Global GDP will continue to expand but modestly slower than 2019.• Emerging Markets valuations continue to be attractive and likely will benefit if China’s
economy picks up; the declining trade frictions will be a positive.• The U.S. dollar has likely peaked, and emerging markets will benefit as the it moderates
against local currencies.• We believe that Developed International small cap companies will benefit the most in
2020 from strengthening economies, decreasing global-political pressures and the stableif not weakening U.S. dollar
✓ Neutral Weight
Fixed Income • Reaching for yield after the Fed’s rate cuts in 2019 will push valuations.• Investment-grade bonds remain the core to portfolios. And there may be opportunities
for value increase during equity market pullbacks, corrections and prolonged volatility.✓ Neutral Weight
Potential Risks • Geopolitical events, especially in Iran, a reignited trade war, and a narrowing return inequity markets.
• Increased stock price volatility may exasperate consumer caution and the flight to fixedincome.
• Extra diligence and focus on risk management will be key to preserving and growinginvestment assets.
2020 Outlook: Slowing Global Growth & a Refocus on Quality and Risk Management
15
Opportunity: Developed Small Cap Stocks
Opportunity: Quality is key
?
Opportunity: High Quality, Dividend Growth
16
Portfolio DiscussionOverall Objective: Maximize return over time via tactical portfolio adjustments in line
with the investment objective. We will maintain allocations within MCA&F’s IPS targets of 50% Equity, 50% Fixed Income.
Performance Overview – 2019 (as of 12/31/2019)
17
Investment Earnings: $120,895.25
Investment Objective: MCA&F IPS
Asset Allocation vs. Strategic Targets (as of 12/31/2019)
18
Investment Objective: MCA&F IPS
MCA&F IPS Targets
Equities 27-57%
Fixed Income 23-53%
Alternatives 0-20%
2020 Portfolio Positioning Outlook
19
Investment Objective: MCA&F IPS
Overall Objective: Maximize return over time via tactical portfolio adjustments in line with the investmentobjective. We will maintain allocations within MCA&F’s IPS targets of 50% Equity, 50% Fixed Income.
• In 2020, we will continue to maintain an all-weather, well-diversified asset allocation with an emphasis on risk-management.
• Equity: We will continue our focus on best-in-class equity managers for your portfolio. Your current managersbalance growth and value investment styles, that are also high quality, and dividend paying.
• Fixed Income: With slower global growth and a low inflationary environment in the U.S. expected in 2020, weplan to maintain intermediate duration fixed incomes. We will continue our investment in funds that emphasisstrong credit quality and higher income generation.
20
Appendix
21
Portfolio Holdings
Portfolio Holdings (as of 12/31/2019)
22
Portfolio Holdings Continued (as of 12/31/2019)
23
Disclosure
Information contained in this report is from sources believed to be reliable. United Bank cannot guarantee the accuracy orcompleteness of such information and assumes no liability for damages resulting from or arising out of the use of such information.Additionally, because United Bank does not render legal or tax advice, this report should not be regarded as such. United Bank mayhave received inaccurate initial cost basis information (information on securities acquired prior to the date United Bank was engaged)on certain investments. Accordingly, realized and unrealized gains and losses may not be accurate. Unless stated otherwise, anyperformance data quoted represents past performance. Past performance is not indicative of future returns. No representation orwarranty is made that any returns indicated will be achieved. Certain assumptions may have been made in this analysis which haveresulted in any returns detailed herein. Transaction costs (such as commissions) are not included in the calculation of returns. Changesto the assumptions may have a material impact on any returns detailed. Potential investors should be aware that certain legal,accounting and tax restrictions, margin requirements, commissions and other transaction costs and changes to the assumptions setforth herein may significantly affect the economic consequences of the transactions discussed herein.
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