Setting the Scene for 2016: U.S. Equities

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SETTING THE SCENE FOR 2016

U.S. Equities

Joseph Graham, Investment Strategist

What trends could shape the equity markets next year?

Joe Graham: So, earnings expectations, always an important issue but we think especially important right now. We are at about 16 times next year’s earnings estimates on the S&P 500.  That’s pretty fair relative to history, pretty average.
We don’t think there will be a ton of movement in market multiples. The level of earnings, however, will be a very much watched metric. There’s been a lot of speculation that we are extended in terms of margins.
We are relatively high in terms of margins relative to history. We think there are some good reasons why we are high relative to history and why those margins may be sustainable, but I think the really important point is that earnings growth is not necessary for short to medium term market performance. 
You know, we’ve seen 16 instances since 1960 where earnings have retraced or retracted in a calendar year. If you invested only in those 16 instances, the average market return was 11%. It’s not too bad. 
If you pick the instances in which there is not a coincident economic recession, which it is very possible that we’re in one of those instances now, the average return is 22% and that’s obviously quite good. So I think it’s important to separate an earnings retraction from market performance. What is really important is expectations of earnings.

What are some key points for investors to consider a the New Year begins?

Joe Graham: So, right now we are at a post-crisis high in terms of PE multiples on S&P 500 stocks and the dispersion of those multiples. What that means is that this is really driven by a momentum market that’s made stocks that have performed well perform even better into the future.
So it has rewarded past performance with future performance, stocks like staples and consumer discretionary stocks. You know stocks that have performed poorly like materials, energy stocks, have continued to perform poorly and so that leaves you with a lot of valuation dispersion.
And I use sectors as an example but even within sectors the valuation dispersion has been quite prominent. So, we think that opens up a great opportunity for active management, particularly active management focused on valuation. So, dividend investing, always an important source of returns in equities, dividends, we think next year a moderate return environment, dividends will be even more important.
If you think about what an aging, retiring population needs in terms of income, what they are being offered in terms of bank CD yields, Treasury yields, they don’t match up. Earnings yields, the dividends that are able to be paid out on those earnings yields, which are often rising, look very attractive in comparison so we think it’s a good time to be a dividend investor going forward.
DISCLOSURE

Source for data on market returns (as represented by the S&P 500® Index) during years of earnings declines: S&P, FactSet, BofA Merrill Lynch. Although due to market volatility, the market may not perform in a similar manner in the future. Note that references to future performance pertain to years following prior periods of reported earnings.

Glossary
A certificate of deposit (CD) is a time deposit, a financial product commonly sold in the United States and elsewhere by banks, thrift institutions, and credit unions.

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock.

Earnings yield is the quotient of earnings per share divided by the share price. It is the reciprocal of the P/E ratio.

P/E Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.

Risks to Consider
The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. No investing strategy can overcome all market volatility or guarantee future results.

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company

Indexes are unmanaged, d not reflect the deduction of fees or expenses, and are not available for direct investment.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

All economic and performance information is historical and does not guarantee future results.

This broadcast serves as reference material for information purposes only; does not constitute an offer to acquire, solicitation for an offer to acquire, an offer to sell or solicitation for an offer to buy, any securities, nor is intended to be relied upon as a forecast, research, or investment advice on any securities, and cannot be used for any of the foregoing.
The views and opinions expressed by the Lord Abbett speaker are those of the speaker as of the date of the broadcast, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Neither Lord Abbett nor the Lord Abbett speaker can be responsible for any direct or incidental loss incurred by applying any of the information offered.
The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Please consult your investment professional for additional information concerning your specific situation.
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