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ED CLISSOLD, CFA Chief U.S Navigating a Mature Bull Market ED CLISSOLD, CFA Chief U.S. Strategist Ned Davis Research Group Generate Alpha. Identify Risk. September 2018 Choose Ned Davis Research. TABLE OF CONTENTS NDR Approach . .1 Fundamental. 2-5 Macro . .6-12 Sentiment . 13-15 Technical . .16-20 Bottom Line. 21-22 NDR House Views . .23 NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. i NED DAVIS RESEARCH GROUP APPROACH EXPECTATIONS: How the market Macro SHOULD BE acting ndamenta Fu l Idea TIMING: How the market IS acting Technical S entiment NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 1 FUNDAMENTAL Unprecedented upward earnings revisions. Weekly Data 2011-07-19 to 2018-09-13 Consensus Estimates for S&P 500 Operating Earnings per Share by Calendar Year 182.5 Calendar Year 2012: 03/28/2013 = 96.83 182.5 180.0 Calendar Year 2013: 03/31/2014 = 107.30 180.0 177.5 Calendar Year 2014: 03/31/2015 = 113.03 177.5 175.0 Calendar Year 2015: 03/31/2016 = 100.45 175.0 Calendar Year 2016: 03/31/2017 = 106.26 172.5 Calendar Year 2017: 04/05/2018 = 124.51 172.5 170.0 Calendar Year 2018: 09/13/2018 = 157.74 170.0 167.5 Calendar Year 2019: 09/13/2018 = 177.03 167.5 165.0 165.0 162.5 $145 TO $157 = +8% REVISION 162.5 160.0 160.0 157.5 2018 157.5 155.0 155.0 152.5 152.5 150.0 150.0 147.5 147.5 145.0 145.0 142.5 142.5 140.0 140.0 137.5 137.5 135.0 135.0 132.5 132.5 130.0 130.0 127.5 127.5 125.0 125.0 122.5 122.5 120.0 120.0 117.5 117.5 115.0 115.0 112.5 112.5 110.0 110.0 107.5 107.5 105.0 105.0 102.5 102.5 100.0 100.0 97.5 97.5 95.0 Source: Standard & Poor's 95.0 Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 2011 2012 2013 2014 2015 2016 2017 2018 S677 © Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/ NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 2 FUNDAMENTAL How much are peak earnings worth? S&P 500 INDEX VS. YEAR/YEAR EPS % GROWTH EPS Growth: % GPA CONSENSUS >20% 2.6 FOR 4Q18 5 to 20% 6.8 -20 to +5% 12.1 RECESSION <=-20% -13.6 TERRITORY Based on GAAP earnings per share. 3/31/1927-3/31/2018 Source: S&P Dow Jones Indices. Ned Davis Research Group S663 NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 3 FUNDAMENTAL Paying full price for strong earnings. S&P 500 Price to GAAP Earnings Monthly Data 1929-02-28 to 2018-08-31 (Log Scale) S&P 500 Price to GAAP Earnings (08/31/2018): 23.7 134.4 134.4 119.0 119.0 105.3 105.3 93.1 93.1 82.2 82.2 72.5 72.5 63.9 63.9 56.2 56.2 49.3 49.3 43.2 43.2 37.8 37.8 32.9 32.9 28.6 28.6 24.7 24.7 21.3 21.3 18.2 18.2 15.5 15.5 13.1 13.1 10.9 10.9 8.9 8.9 7.2 7.2 5.7 5.7 Source: S&P Dow Jones Indices, Standard & Poor's Valuation designations based on quintiles up to that point in history. 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Extremely Overvalued Moderately Overvalued Fairly Valued Moderately Undervalued Extremely Undervalued SMF_24.RPT © Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/ NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 4 NED DAVIS RESEARCH 3600 VIEW OF U.S. STOCK MARKET SEPTEMBER 2018 Category Conclusion Comment Good EPS growth, but Fundamentals Neutral mostly priced in Macro Sentiment Technicals Bottom Line NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 5 MACRO Stocks cheap relative to bonds. S&P 500 GAAP Earnings Yield less 10-Year Treasury Yield Monthly Data 1966-03-31 to 2018-08-31 (Log Scale) 6.9 S&P 500 GAAP Earnings Yield less 10-Year Treasury Yield (08/31/2018): 1.4 6.9 6.2 6.2 5.5 5.5 4.9 4.9 4.3 4.3 3.7 3.7 3.1 3.1 2.5 2.5 2.0 2.0 1.5 1.5 1.1 1.1 0.6 0.6 0.2 0.2 -0.2 -0.2 -0.6 -0.6 -0.9 -0.9 -1.2 -1.2 -1.6 -1.6 -1.8 -1.8 -2.1 -2.1 -2.4 -2.4 -2.6 -2.6 -2.9 -2.9 -3.1 -3.1 -3.3 -3.3 -3.5 -3.5 -3.7 -3.7 -3.9 -3.9 -4.0 -4.0 -4.2 -4.2 -4.3 -4.3 -4.5 -4.5 -4.6 -4.6 -4.7 -4.7 -4.8 Source: S&P Dow Jones Indices, Standard & Poor's Valuation designations based on quintiles up to that point in history. -4.8 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Extremely Overvalued Moderately Overvalued Fairly Valued Moderately Undervalued Extremely Undervalued SMF_24.RPT © Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/ NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 6 MACRO When will higher rates bite? Daily 1/02/1963 - 9/14/2018 (Log Scale) Stock/Bond Rolling One-Year Correlation 2800 2800 2010 2010 S&P 500 Index 1442 1442 1035 1035 743 743 533 533 383 383 275 275 197 197 141 141 101 101 73 73 52 Source: S&P Dow Jones Indices 52 15 15 14 10-Year Treasury Note Yield (%) 14 13 13 12 12 11 11 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 Source: Federal Reserve Board Rolling One-Year Correlation: Stock Prices And Bond Yields 0.8 0.8 Daily % Change in S&P 500 & 10-Year Treasury Yield Move In Same Direction 0.6 0.6 0.4 DEFLATION FEARS 0.4 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.4 -0.4 -0.6 INFLATION -0.6 -0.8 CONCERNS Stock Prices And Bond Yields -0.8 Move In Opposite Directions 9/14/2018 = 0.28 (S0947) 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 � Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/. NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 7 MACRO Concerns about yield curve being too flat or too steep overblown. S&P 500 Index vs. 10-2 Treasury Yield Curve Weekly Data 1976-06-04 to 2018-09-14 S&P 500 Index (2018-09-14 = 2,904.98) 2,512 2,512 1,585 1,585 1,000 1,000 631 631 398 398 251 251 158 158 100 100 Source: S&P Dow Jones Indices Yield Curve - 10-Year Minus Two-Year Treasury Yield(2018-09-14 = 0.22) 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 -1.0 -1.0 -1.5 -1.5 -2.0 -2.0 -2.5 Shaded Areas Designate National Bureau of Economic Research Recession Source: Federal Reserve Board -2.5 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 S&P 500 Index Performance Full History: 1976-06-04 to 2018-09-14 Yield Curve - 10-Year Minus Two-Year Treasury % Gain/ % of Yield Annum Time Above 1.5 5.81 28.01 0.0 - 1.5 11.04 57.58 Below 0.0 2.61 14.42 Buy/Hold = 8.31% Gain/Annum S894 NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 8 MACRO Deflationary forces have not disappeared. NED DAVIS RESEARCH GROUP Please see important disclosures at the end of this report. 9 MACRO Recession risks low, limiting downside risk to equities. RECESSION WATCH REPORT RECESSION AND NON-RECESSION CYCLICAL BEAR MARKETS Median Lead Time of Months Since Recession Non-Recession Key Peak/ Recent Peak/ Metric Bears Bears Recession Current Trough to Trough in Indicator Level Level Recession Current Cycle NDR Recession Probability Model1 50 1.2 11 2 % Change -29.7 -18.0 Breadth of Philly Fed State Leading Indexes2 70 98 13 3 NDR Economic Timing Model2 0 22 9 0 # Months 17.7 6.8 NDR Composite Leading Index2 -2.6 3.2 9 0 LITTLE EVIDENCE Ned Davis Research, Inc.
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