QUARTERLY MARET OUTLOO: Third Quarter in Review - · PDF filequarterly maret utl: first quarter 2018 8

RES-10486D-A EXP 31 JUL 2018 © 2018 EDWARD D. JONES & CO., L.P. ALL RIGHTS RESERVED.

www.edwardjones.com Member SIPC

QUARTERLY MARKET OUTLOOK: SECOND QUARTER 2018

After two years of relatively calm stock markets, volatility returned in the first quarter of 2018. Global stocks briefly tumbled more than 10% into correction territory but then rebounded quickly. As a result, most equity asset classes were down slightly at the end of the quarter but had double-digit returns over the past year, outperforming bonds. And while the decline in the dollar helped international stocks outperform U.S. stocks over the year, they underperformed in the first quarter. Although bond returns were low, they helped stabilize portfolios as volatility and interest rates both rose.

Improving global economic and earnings growth – Almost every country is growing at a faster pace than a year ago, and prospects for global growth are improving. Companies are also indicating double-digit earnings growth can continue. These improving fundamentals are the main supports for rising stocks over time, and that’s why we continue to recommend staying invested and adding stocks during pullbacks if appropriate.

Volatility returned abruptly – In the first quarter, stocks dropped due to fears of higher inflation and rising interest rates, concerns about higher tariffs and trade wars, and technology troubles. Each pullback was followed by a quick rebound. We think markets should continue to be unsettled as the Federal Reserve slowly raises interest rates, technology concerns continue and investors react to changing fiscal, trade and other economic policies globally.

Realistic expectations – U.S. stocks and bonds are still relatively expensive, leading us to expect below-average portfolio returns over the next decade. Better valuations and higher expected earnings growth suggest international developed-market equity investments are an opportunity. And including a wider variety of asset classes may help address higher market volatility, since each plays a different role in your portfolio.

Cash U.S.Investment-grade Bonds

High-yieldBonds

Int’lBonds

U.S.Large-cap

Stocks

RealEstate

DevelopedInt’l Large-cap Stocks

U.S.Mid-capStocks

U.S.Small-cap

Stocks

Int’lSmall-cap

Stocks

Emerging-marketStocks

Commodities

Asset Class Performance

30%

20%

10%

0%

-10%

1-Year Return 3-Year Return

Less Volatile More Volatile

Source: Morningstar Direct, 3/31/2018. Cash represented by the Barclays U.S. Treasury Bellwethers 3Mon Index. U.S. investment-grade bonds represented by the Barclays U.S. Aggregate Bond Index. High-yield bonds represented by the Barclays U.S. HY 2% Issuer Cap Index. International bonds represented by the Barclays Global Aggregate Ex U.S. Index. U.S. large-cap stocks represented by the S&P 500 Index. REITs represented by the FTSE NAREIT All Equity REITs Index. Developed international large-cap stocks represented by the MSCI EAFE NR Index. U.S. mid-cap stocks represented by the Russell Mid Cap Index. U.S. small-cap stocks represented by the Russell 2000 Index. International small- and mid-cap stocks represented by the MSCI EAFE Small-cap Index. Emerging-market stocks represented by the MSCI EM Index. Commodities represented by the S&P GSCI Index. Past performance does not guarantee future results. An index is unman-aged and is not available for direct investment.

Action for InvestorsIf this year’s higher volatility has made you uncomfortable, you may need to rebalance by adding fixed income, returning your portfolio to the right mix of stocks and bonds based on your comfort with volatility and long-term financial goals. Make sure your portfolio has all the asset classes in appropriate amounts.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events. Diversification does not guarantee a profit or protect against loss in declining markets. Past performance is not a guarantee of future results.

First Quarter in Review




Prospects for economic growth should improve in 2018 and 2019 as higher government spending adds to the boost from tax cuts. The economy has added more than 200,000 jobs per month, business investment is rebounding, and interest rates remain relatively low. More sources of growth mean the economy should be strong enough to absorb higher uncertainty from possible trade disruptions.

Moderately faster growth – Solid job growth combined with the individual tax cuts should help power consumer spending higher. Housing and vehicle sales are benefiting from still-low interest rates, and corporate tax cuts are encouraging an ongoing rebound in business investment.

In addition, the economy will get a boost from fiscal stimulus over the next two years due to the provisions in the recent federal budget agreement. But that spending raises the deficit, and the Congressional Budget Office projects the deficit will exceed $1 trillion per year starting in 2020. Higher deficits and their related faster growth are good news short-term, but may accelerate the timing of the next downturn. They’ll also need to be addressed in the future with some combination of higher taxes and fewer benefits.

Recession ahead? Although bull markets and economic expansions don’t die of old age, they all end eventually. We don’t think a downturn is approaching, but if you’re hesitating because you believe one is near, consider the results of investing at the end of 2007, just before the Great Recession and financial crisis. As the chart shows, long-term investing worked. Stock returns (S&P 500) averaged 8.5% per year over the following 10 years, and bond returns were 4% per year. A well-diversified portfolio including international investments and our other recommended asset classes had an annual return of 6.1% per year. Don’t let today’s concerns stop you from working toward your long-term financial goals.

Source: Morningstar Direct; 1/1/2008 – 12/31/2017. The hypothetical portfolios consist of: 1) 100% stocks represented by the S&P 500 Total Return Index. 2) Balanced Toward Growth Portfolio Objective consists of the following: Barclays Gbl Agg Ex U.S. Index (3%), Barclays U.S. Agg Bond Index (25%), Barclays U.S. HY 2% Issuer Cap Index (5%), Barclays U.S. Trsy Bellwethers 3Mon Index (2%), FTSE NAREIT All Equity REITs Index (4%), MSCI EAFE Index (13%), MSCI EM Index (4%), Russell 2000 Index (3%), Russell Mid Cap Index (7%), S&P 500 Index (30%), S&P Developed Ex US Small Index (3%), S&P GSCI Index (1%). 3) 100% bonds represented by the Barclays U.S. Aggregate Bond Index. The hypothetical portfolios are for illustrative purposes only. Results may vary for an individual portfolio with similar holdings. Performance does not include payment of any expenses, fees or sales charges, which would lower the performance results. Indexes are unmanaged and are not available for direct investment. Investing in stocks involves risk. The value of your shares will fluctuate, and you may lose principal. The prices of bonds can fluctuate, and an investor may lose principal value if the investment is sold prior to maturity.

Action for InvestorsStocks have generally done well

when economic growth im-

proves. Additional fiscal stimulus

and still-expansionary monetary

conditions are brightening the

outlook, and global conditions

are favorable. Staying invested in

a well-diversified portfolio helps

keep you on track through both

good and bad economic times.

Past performance is not a guarantee of future results. Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal.

Economic Outlook

Average Annual Returns for Di�erent Portfolio Allocations

+8.5%

+4.0%

+6.1%

$250

$200

$150

$100

$50’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17

100% U.S. Stocks Balanced Toward Growth Portfolio Objective 100% U.S. Bonds

Declines in the U.S. Stock Market Over the Last 10 Years

Decade Dip (5% or more)

Correction (10% or more)

Bear (20% or more)

2008–2017 33 8 1




Higher stock market volatility doesn’t mean the end of the bull market, which we believe will be helped by slightly faster U.S. economic growth and strong earnings growth. With many possible triggers for volatility, it’s not easy to predict which ones will prompt pullbacks, but they’re likely to continue.

Double-digit large-cap earnings growth – We expect double-digit earnings growth for the S&P 500 in 2018 due to improving economic growth and the impact of U.S. corporate tax cuts. As the chart shows, stocks have followed rising earnings over time. And earnings for small- and mid-cap stocks are likely to increase slightly faster as they benefit more from the tax cuts and domestic growth. In addition, their valuations are more attractive. Consider adding small- and mid-cap stocks if appropriate.

Will technology keep leading? The technology sector represents nearly 25% of the S&P 500 and has led its performance over the past five years. Recent concerns have raised the importance of better privacy safeguards for user data and potentially tighter regulations over time. In our view, the concerns could continue to weigh on the sector in the near term, but we believe long-term growth trends, such as cloud computing and data analytics, should continue to drive solid fundamental profit growth for many technology companies. Even with still-strong prospects, we recommend reducing any individual stock positions to no more than 5% of your equity portfolio, with no more than 20% in any one sector.

“Buy the dips” – We typically experience three or four 5% drops, known as dips, and one 10% drop, called a correction, on average every year. The pullback in the first quarter was the first correction in two years, and volatility has remained high. Since the fundamentals are positive, we recommend using pullbacks as opportunities to buy equities at lower prices if appropriate.

Action for InvestorsImprove the diversification

of your equity portfolio by

reducing overconcentration in

any individual stock or sector,

and rebalance if needed by

adding bonds so you have

an appropriate mix of stocks

and bonds for your comfort

with volatility and long-term

financial goals.

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Small- and mid-cap stocks tend to be more volatile than large company stocks. Diversification does not guarantee a profit or protect against loss in declining markets.

Equity Outlook

S&P 500 vs. Earnings per Share

$175

$150

$125

$100

$75

$50

$25

$0

3,500

3,000

2,500

2,000

1,500

1,000

500

0

’89 ’91 ’93 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 ’15 ’17 ’19

Earnings per Share Estimated Earnings per Share S&P 500 Price

Source: S&P; 3/31/2018. Estimated earnings are based on Capital IQ consensus estimates. The S&P 500 is an unmanaged index and is not available for direct investment.




The Federal Reserve generally responds to economic conditions, not short-term market volatility. As a result, we expect it to continue raising short-term interest rates quarterly in addition to slowly shrinking its bond holdings, reducing the amount of support from monetary policy. If economic growth improves, as we expect, and consumer price inflation remains around 2%, we think short- and long-term interest rates will rise modestly in 2018.

Inflation remains tame – Although faster wage growth could push inflation slightly higher, we think rapidly rising inflation is unlikely. We don’t think the forces that have kept inflation low – fierce competition, disruptive technologies and competitors, and new suppliers around the world – have diminished. In our view, inflation is one of the biggest risks to the outlook because sharply higher inflation could prompt the Fed to raise short-term rates more quickly.

Rate hikes continue – As long as inflation remains near 2% and the economy grows moderately, we expect the Fed to follow its current plan, raising short-term interest rates quarterly. The Fed’s projected path toward higher rates is slow and cautious compared to past tightening cycles, as the chart shows. As the Fed reduces the size of its balance sheet and short-term rates rise, we also expect modestly higher long-term rates, which is still a favorable environment for U.S. investment-grade bonds. However, we don’t view the long-term outlook as favorable for high-yield bonds or international fixed-income investments. Consider reducing your allocations to these investments if appropriate. Although high-yield bonds have higher rates, the additional yield is below average and in our view not enough to compensate for their higher risks.

15%

12%

9%

6%

3%

0%’82 ’85 ’88 ’91 ’94 ’97 ’00 ’03 ’06 ’09 ’12 ’15 ’18

10-year Treasury Yield 3-month Treasury Bill Yield

Recessionary Periods

Slowly Rising Interest Rates10-year Treasury Yield vs. 3-month Treasury Bill Yield

Action for InvestorsWe recommend adding bonds and cash to help reduce your portfolio’s sensitivity to market volatility. Add investment-grade bonds in a variety of maturities and sectors. In addition, keep a little extra in cash to cover spending needs and take advantage of pullbacks if appropriate.

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Fixed-income Outlook

Source: FactSet, 3/31/2018.




The global economy is improving, with almost every country reporting better growth now than a year ago. Developed-market earnings are expected to grow faster than those in the U.S., and their stock valuations aren’t as high, making them attractive investments in our view. And after several years when the performance of international stocks lagged U.S. investments, they outperformed over the past year.

Performance rotates – International developed-market equity investments have outperformed U.S. stocks following past periods of underperformance, and we think their better performance is likely to continue. In addition, rotating performance is one of the reasons international equities improve your portfolio’s diversification. As the right column shows, a better-diversified portfolio that includes a combination of U.S. and international stocks as well as fixed income had the highest chance of positive returns in almost every time period. The chances of positive investment returns often increase when you stay invested over longer periods of time and also own a better-diversified portfolio.

Emerging markets – After almost two years of strong performance, the outlook for emerging markets is slightly less bright. They have historically been more sensitive to slower economic growth in China and higher U.S. interest rates, and worries about tariffs and trade disruptions could have a greater impact on them. We recommend keeping a small allocation.

Lower dollar – Concerns about trade disruptions and the growing budget deficit have pushed the dollar down slightly compared to many foreign currencies. In addition, better international growth can be positive for foreign currencies. The slightly lower dollar has been one of the reasons for higher international investment returns, and we don’t expect the dollar to rise significantly.

Source: Morningstar Direct, 1/1/1976 - 3/31/2018. The hypothetical portfolios are for illustrative purposes only. Results may vary for a portfolio with similar holdings. The hypothetical portfolios consist of: 1) 100% stocks represented by the S&P 500 Total Return Index. 2) 65% stocks represented by the S&P 500 Total Return Index and 35% bonds represented by the Barclays U.S. Aggregate Bond Index. 3) 48.75% U.S. stocks represented by the S&P 500 Total Return Index, 16.25% international stocks represented by the MSCI EAFE NR Index, and 35% bonds represented by the Barclays U.S. Aggregate Bond Index. The hypothetical portfolios are for illustrative purposes only. Results may vary for an individual portfolio with similar holdings. Performance does not include payment of any ex-penses, fees or sales charges, which would lower the performance results. Indexes are unmanaged and are not available for direct investment. Investing in stocks involves risk. The value of your shares will fluctuate, and you may lose principal. The prices of bonds can fluctuate, and an investor may lose principal value if the investment is sold prior to maturity.

Action for InvestorsWe recommend an

above-average allocation

to international equity

investments. We think they’re

attractive because they have

faster rising earnings, higher

dividend yields and lower

valuations than U.S. stocks,

and they can benefit as global

growth accelerates.

Past performance is not a guarantee of future results. Diversification does not guarantee a profit or protect against loss in declining markets. Special risks are inherent to emerging-market and international investing, including those related to currency fluctuations and foreign political and economic events.

International Outlook

Portfolios With Stocks, Bonds and International Exposure Have Historically Improved Chances of Earning Positive Returns

Time Horizon 100% U.S. Stocks 65% U.S. Stocks 35% U.S. Bonds

65% U.S. & International Stocks 35% U.S. Bonds

1 Month 63.9% 65.7% 66.3%

1 Year 81.3% 84.5% 86.5%

3 Years 87.5% 90.0% 90.3%

5 Years 89.1% 99.3% 99.3%

10 Years 93.7% 99.7% 100.0%




Despite concerns about higher tariff proposals, we think negotiations should limit their effects, and our fundamental outlook for global growth remains positive. But the impacts could be much broader, especially if higher tariffs are imposed on more products and countries. Tariff announcements themselves have been disruptive. So far, though, we think the effects of improving economic and earnings growth should be far stronger for both U.S. and international equity investments.

Trade and global growth – The U.S. consumes more than it produces, and the resulting trade deficit generally grows with the economy. In contrast, China and many other emerging markets produce more than they consume, giving them trade surpluses and high savings rates. Trade accounts for less than 25% of the U.S. economy, a small percent compared to nearly 60% globally. As the chart shows, trade was growing faster than the global economy until the financial crisis and likely rebounded faster as global growth improved.

Possible impact of higher tariffs – If tit-for-tat tariffs escalate and are implemented, then they could trim the outlook for economic growth – and U.S. consumers and producers could feel the biggest effects. Higher tariffs typically mean higher prices and reduced purchases, slowing economic growth globally. In addition, as buyers try to switch to products or producers not affected by tariffs, the impacts can be broad and unexpected.

Stay invested internationally – Concerns about possible trade wars and tariff hikes could affect the U.S. more than other countries, making your developed-market international investments better-positioned than you may think. Further declines in the dollar could help international investment returns. But the possibility of higher tariffs on China’s products could hurt China and other emerging markets more than others.

Action for InvestorsThe possibility of higher

tariffs could reduce global

growth, but it may have a

larger effect on the U.S. That’s

why we think it’s important

to continue to own both

U.S. and international equity

investments in appropriate

amounts, keeping your

portfolio well-diversified

internationally.

Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal. Special risks are inherent to emerging-market and international investing, including those related to currency fluctuations and foreign political and economic events. Diversification does not guarantee a profit or protect against loss in declining markets.

Trade Tensions and the Outlook

Global Trade as a Percent of Gross Domestic Product

70%

60%

50%

40%

30%

20%’60 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 ’00 ’04 ’08 ’12 ’16

Source: World Bank, 12/31/2016.




Asset Class DiversificationAggressive (Target = Middle): We remain cautious on commodity investments and think there’s greater risk in emerging-market stocks due to concerns about the possible impacts of tariffs and trade disruptions. We think the risks and opportunities are balanced.

Growth (Target = Middle): U.S. small- and mid-cap stocks lagged large-cap stocks over the past year, but we think they’ll perform better in 2018 due to lower corporate tax rates and better growth. Opportunities and risks also appear balanced for international small-cap stocks.

Growth & Income (Target = Middle): We think risks and opportunities are balanced in U.S. large-cap stocks. Above-average valuations reflect our expectations for improving economic growth and rising earnings. We recommend overweighting international developed-market large-cap equities because expectations are low, dividend yields are high, and we believe earnings are poised to grow faster as the global economy accelerates.

Income (Target = Low): Long-term interest rates tend to move with inflation, which should rise slightly as growth improves. And the interest rate risk of longer-term fixed-income investments still appears above average. Rates on high-yield bonds have fallen despite their additional risk, so the aggressive-income target is low. We think international fixed income looks relatively unattractive due to low interest rates that also have started to rise slowly.

Cash (Target = High): We recommend overweighting cash, having enough to cover short-term expenses and invest during pullbacks.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates, and investors can lose some or all of their principal. The prices of small-cap, mid-cap and emerging-market stocks are generally more volatile than those of large company stocks. Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

Target Guidance by Investment Category

Income

Cash

Aggressive1

Growth &Income

Growth

Investment Category Asset ClassTarget

Guidance in Range

Our Target Definitions

START HERE

U.S. Large-cap Stocks,2 InternationalLarge-cap Stocks & Real Estate

EquityInvestments

Fixed-incomeInvestments

U.S. Small- and Mid-cap Stocks,International Small- and Mid-cap Stocks

Commodities & Emerging Markets

U.S. Investment-gradeBonds & CDs,

International Bonds &High-yield Bonds

Cash & Money Market

Middle

Middle

Middle

Low

High

Opportunities outweigh the risks in some (or all) asset

classes in the invest-ment category.

Attractive because opportunities and risks are balanced.

Risks outweigh the opportunities in

some (or all) asset classes in the invest-

ment category.

1 Alternative Investments and Stocks trading less than $4 align with the aggressive investment category, but they are not recommended.

2 Large-cap stocks that do not pay a dividend are in the Growth investment category.

Asset classes we don’t recommend separately include alternative investments, micro-cap equities and international high-yield bonds.

Asset Class OutlookEquity versus Fixed Income (Target = Middle) – We think the bull market in stocks can run further. We continue to expect stronger economic growth and rising corporate profits, helped by the tax cuts. Interest rates remain low but are likely to continue to rise slowly. A laddered bond portfolio and enough in cash may help provide downside protection for portfolios as volatility picks up.

Domestic versus International (Target = Middle) – We recommend overweighting international equities and underweighting international fixed income as global growth strengthens.



Source: Morningstar Direct, 3/31/2018. U.S. large-cap stocks represented by the S&P 500 Index. U.S. mid-cap stocks represented by the Russell Mid-cap Index. U.S. small-cap stocks represented by the Russell 2000 Index. International large-cap stocks represented by the MSCI EAFE Index. U.S. bonds represented by the Barclays U.S. Aggregate Bond Index. Cash represented by the Barclays U.S. Treasury Bellwethers 3Mon Index. High-yield bonds represented by the Barclays U.S. HY 2% Issuer Cap Index. Commodities represented by the S&P GSCI Index. Emerging market stocks represented by the MSCI EM Index. International bonds represented by the Barclays Global Aggregate Ex U.S. Index. International small-cap stocks represented by the MSCI EAFE Small-cap Index. Real Estate repre-sented by the FTSE NAREIT All Equity REITs Index. All performance data reported as total return. An index is unmanaged and is not available for direct investment. Performance does not include payment of any expenses, fees or sales charges, which would lower the performance results. The value of investments fluctuates, and investors can lose some or all of their principal. Past performance does not guarantee future results.

Investment Performance Benchmarks

As of March 31, 2018

Benchmarks for Major Investment CategoriesTotal Return YTD 1-Year 3-Year 5-Year

U.S. Large-cap Stocks -0.8% 14.0% 10.8% 13.3%

U.S. Mid-cap Stocks -0.5% 12.2% 8.0% 12.1%

U.S. Small-cap Stocks -0.1% 11.8% 8.4% 11.5%

International Large-cap Stocks -1.5% 14.8% 5.6% 6.5%

U.S. Bonds -1.5% 1.2% 1.2% 1.8%

U.S. Cash 0.4% 1.1% 0.5% 0.4%

Benchmarks for Investments That Can Add DiversificationTotal Return YTD 1-Year 3-Year 5-Year

U.S. High-yield Bonds -0.9% 3.8% 5.2% 5.0%

Commodities 2.2% 13.8% -4.2% -11.9%

Emerging-market Stocks 1.4% 24.9% 8.8% 5.0%

International Bonds 3.6% 11.7% 4.6% 1.2%

International Small-cap Stocks 0.2% 23.5% 12.3% 11.1%

Real Estate -6.7% -1.1% 2.9% 6.7%

U.S. Equity Sector PerformanceTotal Return YTD 1-Year 3-Year 5-Year

Basic Materials -5.5% 10.5% 7.4% 9.9%

Consumer Discretionary 3.1% 16.9% 12.2% 15.7%

Consumer Staples -7.1% -0.9% 5.4% 8.6%

Energy -5.9% -0.2% -1.2% -0.4%

Financials -1.0% 18.0% 14.3% 15.5%

Health Care -1.2% 11.3% 5.6% 13.9%

Industrials -1.6% 14.0% 11.7% 14.0%

Technology 3.5% 27.7% 19.9% 20.6%

Telecom -7.5% -4.9% 4.7% 4.1%

Utilities -3.3% 1.9% 8.2% 9.2%

S&P 500 -0.8% 14.0% 10.8% 13.3%

It’s natural to compare your portfolio’s performance to market performance benchmarks, but it’s important to put this information in the right context and understand the mix of investments you own. Talk with your financial advisor about any next steps for your portfolio to help you stay on track toward your long-term goals.


Documents

QUARTERLY MARET OUTLOO: Third Quarter in Review - · PDF filequarterly maret utl: first quarter 2018 8