Global Diversified Returns Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.
Fundamentals Drive the Market Advancing earnings drive markets up, and negative earnings drive markets down, albeit with a reporting lag.
Earnings Per Share vs. S&P 500 Prices Since 1999, earnings have grown 180% — from $39 to $110 in 2013 — and are on track to reach even higher levels for 2014 while the price level is only 25% higher.
S&P 500 Earnings Reported third quarter 2013 earnings growth for S&P 500 companies is 3.6% year-over-year as of 12/31/13.
Broadening Manufacturing The latest U.S. manufacturing report surged again this month, allaying fears of a mid-year slowdown, while the euro zone finally moved into expansion territory.
Broadening Manufacturing The latest U.S. manufacturing report shows the highest level of manufacturing shipments and industrial production ever.
Global Consumer Global household consumption of goods and services has increased 100% in the last decade. The consumer contribution to global expansion is prodigious. Emerging markets now account for more than 50% of auto sales.
Consumer as Game Changer At about 70% of GDP, the U.S. consumer is the game changer in the economic recovery. Consumption, income and retail sales have achieved all-time highs.
Developing Markets Drive Growth World GDP accelerated in the last decade, supported by the largest emerging markets, which now out-produce the largest developed economies, where generally higher debt levels hinder economic growth.
U.S. Government Debt and Deficit Perspective Total federal public debt outstanding exceeds 100% of GDP, and the current U.S. deficit is more than 4% of GDP (excluding Social Security and Medicare). A definitive plan to improve the outlook remains elusive.
Euro Zone Even with total debt at 180% of GDP, Greece accounts for less then 3% of the Euro Zone, but Italy is a major economy with much higher total debt at 127% of GDP, and Spain has serious bank solvency concerns.
Euro Zone Real GDP Euro zone growth reversed course and has turned slightly positive after six quarters of contraction.
European Economic Issues Europe’s ongoing debt woes straining the euro zone economy; growing global export demand is a welcome offset, but more ECB stimulus may be needed to achieve sustainable growth.
China Hard Landing Despite declining industrial and electricity production and stalled export growth, with recent GDP growth reported at 7.8%, China appears to have sidestepped a “hard landing” — yet other dislocations are evident.
Commodities Prices Among the most-watched commodities, gold is regarded as a safe haven and inflation hedge, but actually sells for less today in real — inflation-adjusted — terms than in 1980.
Tectonic Shift: Trade Economic growth fuels demand for imports, aggravating the trade deficit, which hit a 10-year low in the great recession as demand dwindled. Exports have since expanded, reaching their highest level ever.
Tectonic Shift: Energy The abundance of natural gas in North America as well as the ability to extract oil from shale are changing the global energy landscape. The IEA recently forecast that the U.S. will be the world’s largest oil producer by 2020.
Tectonic Shift: Energy The abundance and low price of natural gas are instrumental in the U.S. manufacturing renaissance and have put downward pressure on the prices of other fossil fuels such as coal.
Tectonic Shift: Frontier Markets Frontier countries are emerging markets with lower capitalizations and less liquidity. Despite relatively weak returns in 2013, they offer high growth potential and are fueling global growth as they evolve and mature.
S&P 500 After two bull and two bear market cycles, the S&P 500 is now 18.1% above its 2007 peak.
Index Total Returns Fundamentals trumped global risks in 2013, and investors are now turning to equities.
Sector Total Returns Wide variations in sector returns have characterized the struggle between fundamentals and global risks — but even after accounting for the effects of volatility, enthusiasm prevailed in 2013.
Style Total Returns Small- and mid-cap styles have led the market every calendar year except 2007 and 2011.
Stock vs. Bond Valuation Stocks look historically attractive based on their earnings yield (E/P) vs. the yield-to-maturity of 10-year Treasuries.
Operating Profits and Operating Margins Corporate profits (excluding financials) have improved steadily along with operating margins, which typically collapse in recessions and surge in recoveries.
Dividend Yields Disregarding the 2008 spike, stock dividend yields remain generally above levels seen since 1996 — and historically attractive relative to bond yields.
Performance by Market Capitalization Mid-cap stocks have had the best U.S. equity 10-year return record.
Fundamental Characteristics by Market Capitalization Size matters in terms of growth and valuation. Smaller stocks have higher growth rates, and in terms of the price/earnings ratio, higher valuation.
Equity Volatility (VIX) Projected market volatility spikes in times of crisis then drops into the normal range as fear, uncertainty and doubt subside — apparently the prevailing sentiment today.
Bond and Loan Returns Although long-term U.S. Treasuries were winners in crisis periods, over time, risk relates to return in a rational way, and riskier bonds have been the leaders.
Global Yields Investors seeking income may benefit from the rich opportunities for higher yield available from global bonds.
Fed Funds Target Rates and U.S. Treasury Yields Despite a rise in the ten-year U.S. Treasury yield, the Fed funds rate and Treasury yields are historically low, and the Fed has indicated it intends to keep rates low until explicit employment and/or inflation levels are reached.
Municipal Bond Yields ÷ Treasury Yields Municipal yields are well above Treasury yields; defaults have been minimal, but pressures to cut spending and balance budgets have been intense.
Corporate Spreads and Ted Spread Credit spreads have declined since the 2008 crisis, yet still offer good opportunity; TED spreads are at the low end of the normal range despite debt and deficit concerns.
Mortgage Spreads and Loan Delinquency The Fed’s mortgage bond buying program has helped keep mortgage rates (and spreads) low despite high home loan delinquencies, which should decline as the housing recovery accelerates — assuming rates remain low.
U.S. Debt Reduction U.S. private debt, down since the housing bubble burst, will constrain growth less than in recent years, offsetting lower government deficits. Low interest rates and improving growth should foster increases in corporate leverage.
Monetary Policy Outlook The major central banks will continue highly accommodative monetary policies, led by outright increases in money creation in the U.S. and Japan, which will likely not be matched in Europe.
Spread Sectors Outlook The ongoing search for yield in a low-rate environment will keep credit markets well supported, but 2013 will be more a year of earning yield rather than spread compression as many sectors now look fairly valued.
World Market Returns by Region — USD Emerging market equity (EME) has often been a top performer but lagged in 2011-2012. Japan, Europe Excluding the U.K. and the U.S. are leading this year, while emerging market equity is a laggard.
Global Returns — Local and USD Emerging markets have struggled amid the global growth slowdown while Japan has enjoyed stellar — though volatile — returns after embarking on a massive government stimulus program.
Country Returns — USD (YTD) Sovereign debt and deficit fears remain the dominant headline risks, but developed stock markets around the world have been mostly positive as global fears subsided to some degree. Many emerging markets have faltered.
U.S. and International Stocks vs. Bonds Both global bonds and international stocks have marginally outperformed their U.S. counterparts over the last ten years but with somewhat higher volatility.
Major Currencies The U.S. dollar declined to 34% below its 1985 peak compared to a trade-weighted basket of world currencies, but this trend has reversed in 2013.
International Economics China and India are growing rapidly, and China is second only to the U.S. in total output, while Germany’s exportdriven economy is the runaway euro zone leader.
Global Stock Fundamentals Emerging market equities appear to offer comparable profitability and better balance sheet strength with valuations at or below those of S&P 500 and EAFE stocks.
Consumer Confidence U.S. consumer confidence hit a five-year high but is still off historic high levels. Consumer confidence is typically backward-looking and has often been a contrary indicator for subsequent stock market returns.
Savings Rates and Household Net Worth Lower personal savings rates and household net worth tend to increase the burden that future savings must bear to achieve retirement security; stronger stock and housing markets have driven household net worth steadily upwards.
Employment Payrolls Total payrolls, including all non-farm employment, have inched upward from the low figures of 2012, but not enough to meaningfully reduce unemployment rates.
Unemployment Rate High unemployment has reluctantly recovered as growth resumed; recent reports and news of job growth and payrolls have shown a modestly favorable trend.
S&P Case-Shiller Home Price Index Home values are still 21% below 2006 levels but the 20 City Composite Index has shown signs of a sustainable recovery after encouraging year-over-year double digit price increases.
Home Sales and Housing Starts While the sector still lags other U.S. industries, positive recent evidence shows that housing has turned the corner; nevertheless, outstanding supply may remain a hurdle for some time.
U.S. Leading Indicators U.S. Leading Indicators have been consistently positive — in fact, for 20 of the last 24 months.
Durable and Non-Durable Goods Orders New durable goods orders have rebounded unevenly after plummeting to very low levels in September of last year.
Real GDP (Q/Q) The U.S. has recovered the output level it lost in the recession and has now reached new highs. Expansions historically last about five years.
Inflation — CPI Core and headline inflation remain under control; recent figures show that commodities prices have followed a choppy path downward for over a year.
Federal Budget Deficit Troubling projected budget deficits are driven by large mandatory entitlement programs, defense spending and interest payments, making it difficult to reduce government spending.
Oil Price and Intensity Energy prices rise and fall based on political turmoil, and gasoline prices follow suit, but the amount of oil consumed per unit of GDP in the U.S. (oil intensity) has steadily declined for many years.
Long-Run Correlation (since 1995) Return correlations below 1.0 indicate ways to combine investments and reduce overall risk; negative or near zero correlations offer the best diversification benefits.
Mutual Fund Flows Fed tapering talk has hurt bond flows but equity flows have turned positive as equity markets have hit all time highs.
Alternative Investment Returns
Global REIT Dividend Yields Global REITS have consistently provided higher dividend yields than large cap stocks across all economic climates and market events — and better liquidity than most alternative investments.
Global Asset Allocation — Effective Diversification A broadly diversified global strategy produced better performance — with lower risk — than a common mix of U.S. large-cap and EAFE equities plus corporate bonds.
Benefits of Portfolio Rebalancing Over 35 years, regular rebalancing increased returns and reduced risk compared to a buy and hold approach, which allows allocations to drift away from the intended targets.
Cash on the Sidelines and Equity Fund Flows vs. Stock Prices The excess of M2 over M1 money supply data shows record levels of cash on the sidelines, while flows into and out of equity mutual funds exhibit extreme swings that highlight investors’ reactions to stock market performance.
Expectations for Future Retirement Income To fund retirements lasting many years, today’s workers expect to rely more on personal sources of retirement income, such as their savings plan and IRA, than is presently the case for those over 65.
Retirement Plan Funding, Sponsorship, Participation Declining funding and sponsorship of pension plans is shifting the burden of retirement savings to participants in defined contribution plans.
Savings Needed for Retirement Among workers who reported, total savings and investments — not including their personal residence or defined benefit plans — are far below what they will need to retire.
Asset Class Returns Asset class returns vary widely over time, making allocation decisions difficult and successful market timing virtually impossible. An equally weighted global asset allocation approach (“Global AA”) is shown for illustration.
Asset Allocation by Participant Age As participants age, declining equity and increasing fixed income allocations make reported allocations appear to be rational — if not optimal.
Fund Flows in DC Plans Fund flows show the tendency of investors to remain risk averse long after market downturns in ways that may undermine their long-term wealth accumulation goals.
This commentary has been prepared by ING Investment Management U.S. for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) changes in laws and regulations and (4) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors.
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