Stocks Have Been a Clear Winner Over Time
Historically, it would have been a challenging endeavor to build wealth without the contribution of equities. In the table below, large- or small-cap stocks were the top performing asset classes among those shown in six different decades since the 1930s. By comparison, gold topped the rankings twice and corporate bonds did so once. Past performance is not a guarantee of future results.
For Six of the Last Nine Decades, Stocks Have Been the Top Performing Asset Class1 (Based on Total Real Annualized Returns by Decade)
Headwinds and Tailwinds
Today’s slow economic growth and geopolitical uncertainties are likely to limit the rewards of taking unnecessary risks. However, it is hard to argue these investment challenges are any greater than those of the aforementioned periods that saw stock market crashes, panics, hot and cold wars, bouts of inflation, the Great Depression, the Great Recession, and several not-so-great recessions, too.
Domestically, we believe U.S. stocks appear to offer a mid single-digit long term return profile potential driven by profit growth and dividends, rather than expanding price-to-earnings multiples. The analyst community currently expects earnings growth to return in Q4 2016, with S&P 500 earnings per share coming in at 5.8% above prior year levels. A continuation of improving earnings is also expected in 2017.
Within the U.S. equity market, an unclear global outlook coupled with a strengthening U.S. economy and a stronger dollar presents an interesting case for small- and mid-cap U.S. stocks. In general, these stocks rely more on domestic sales than U.S. large caps, so they are more insulated from currency movements and slow foreign economic growth. Additionally, while exposure to small caps can add volatility to a portfolio, investors have historically benefited from their long-term performance, as displayed in the previous chart. Past performance is not indicative of future results.
International Equity Markets are Attractively Valued
Internationally, global developed equity markets appear to depict attractive valuations, as shown in the chart below. Monetary policies at the European Central Bank (ECB) and Bank of Japan (BOJ) are also supportive. But post-Brexit uncertainty and soft economic growth and other concerns pose headwinds. Global economic challenges like these will provide both opportunities and risks over time. If suitable, a partial currency hedge may help manage some of the risk-factors that could impact a portfolio with developed international equity exposure.
International Equities are Attractively Priced2
The emerging markets are still the growth envy of the world even if expectations have been reduced in recent years. As of September 30, the MSCI Emerging Markets Index was up 16% for the year, as many factors have turned positive for the space: commodity prices have stabilized, currencies and trade balances have adjusted, and the risk of a sharp rise in the U.S. dollar has waned amid a more cautious Federal Reserve Board than earlier this year.
In conclusion, when constructing portfolios designed to help with the goal of building long-term wealth, canvassing the equity market remains a logical step.
1. Sources: Schiller Stock Market Data, Morningstar, Ibbotson, World Gold Council, New York Life/MainStay Investments, 6/30/2016. (1) Annualized total returns are CAGRs based on monthly returns, which are compounded over the given decade and annualized. (2) Data in the 1920s are based on data compiled by Robert J. Schiller and are equal to the given index price plus the full dividend payment re-invested monthly. (3) Gold data is provided by the World Gold Council database and is annual data—price appreciation. (4) Data is calculated and annualized through 6/30/16. There is no assurance that the investment objectives will be met.
2. Source: Thomson Reuters Datastream, New York Life Investments, 8/31/16. There is no assurance that the investment objectives will be met.
Active management is an investment strategy involving ongoing buying and selling actions by the manager. Active managers purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active management typically charges higher fees than passive management.
Brent/West Texas Intermediate crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.
Brexit is an abbreviation for “British exit,” which refers to the June 23, 2016, referendum whereby British citizens voted to exit the European Union.
CME Group Inc. is an American futures company and one of the largest options and futures exchanges.
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are most often used as inputs in the production of other goods or services.
Correlation is a statistic that measures the degree to which two securities move in relation to each other.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Build America Bonds (BABs) are taxable municipal bonds that feature tax credits and/or federal subsidies for bondholders and state and local government bond issuers.
Earnings-per-share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. Earnings-per-share serves as an indicator of a company’s profitability.
The EBITDA/EV Multiple is a financial ratio that measures a company’s return on investment (ROI).
A master limited partnership (MLP) is a type of business organization that exists in the form of a publicly traded limited partnership. There are two classes of partners in a master limited partnership: limited partners and general partners. Limited partners are investors that purchase units in the MLP that provide the capital for the MLP’s operation and that receive periodic income distributions from the MLP’s cash flow, whereas the general partners are responsible for managing the day to day operation of the MLP and that receive compensation based on the performance of the MLP’s business venture.
The Organization of Petroleum Exporting Countries (OPEC) is an organization founded in 1960 to coordinate the petroleum policies of its members, and consists of the world’s major oil exporting nations.
The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
The price/earnings to growth ratio (PEG ratio) is a stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.
Proposition 53 was a California ballot proposition on the October 7, 2003, special recall election ballot, which failed to get passed.
A real estate investment trust (REIT) is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields. Investment in REITs carries with it many of the risks associated with direct ownership of real estate, including decline in property values, extended vacancies, increases in property taxes, and changes in interest rates.
The S&P 500 Forward Price-to-Earnings (P/E) Ratio uses estimated net earnings over next 12 months. Estimates are typically derived as the mean of those published by the analysts at S&P.
A share repurchase is a program by which a company buys back its own shares from the marketplace, usually because management thinks the shares are undervalued, reducing the number of outstanding shares.
Standard deviation is a measure of the dispersion of a set of data from its mean.
The S&P 500 Energy Sector is a category of stocks that relate to producing or supplying energy. This sector includes companies involved in the exploration and development of oil or gas reserves, oil and gas drilling, or integrated power firms.
Sovereign debt refers to bonds issued by a national government in a foreign currency, in order to finance the issuing country’s growth.
Valuation is the process of determining the current worth of an asset or company.
The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index tracks prices of futures contracts on physical commodities on the commodity markets.
The IA SBBI U.S. Large Stock Total Return Index was created by Ibbotson as a broad based, capitalization-weighted index which measures the total return performance of U.S. equities.
The IA SBBI U.S. Corporate Total Return Index was created by Ibbotson as a market value weighted index which measures the performance of long-term U.S. corporate bonds.
The IQ Global Resources Index uses momentum and valuation factors to identify global companies that operate in commodity-specific market segments and whose equity securities trade in developed markets, including the U.S.
The MSCI EAFE Index serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia.
The MSCI Emerging Markets Index is a float adjusted market capitalization index that consists of indices in 23 emerging economies designed to measure equity market performance in global emerging markets.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of June 2007 the MSCI World Index consisted of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector.
The S&P 500® Index is an unmanaged index and is widely regarded as the standard for measuring large-cap U.S. stock market performance.
The S&P GSCI Index (formerly the Goldman Sachs Commodity Index) serves as a benchmark for investment in the commodity markets and as a measure of commodity performance over time.
Past performance is no guarantee of future results. An investment cannot be made directly in an index.
Before You Invest
All investments are subject to market risk, including possible loss of principal.
Bonds are subject to interest rate risk and can lose principal value when interest-rates rise. Bonds are also subject to credit risk, which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner.
Diversification cannot assure a profit or protect against loss in a declining market.
Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.
High-yield securities (junk bonds) have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. There is no assurance that investment objectives will be met. It is possible to lose money while investing in securities.
Municipal bond interest is exempt from federal income tax and, in many states, interest from municipal bonds issued in an investor’s state of residence is exempt from state income tax.
Small- and mid-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks due to their limited product lines, markets, and financial markets.
Stocks are considered to be at greater risk during times of extremely high valuations than at times of low or moderate valuations. The other risks associated with investing in stocks are economic risk, inflation, and market value risk. There are also additional risks associated with investing in small, international, and high-yield stocks. Dividends are not guaranteed.
Treasury securities are backed by the full faith and credit of the U.S. government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.
The information contained herein is general in nature and provided solely for educational and informational purposes. New York Life does not provide legal, accounting, or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting, and tax advisors. Use of a financial professional does not guarantee investment success. Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.
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