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These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

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Market View

Investors often sell when they should buy—and vice versa.

“Timing is everything,” as the saying goes, and in many endeavors that is true. In investing, on the other hand, trying to time the market can be costly. As Chart 1 reveals, individual investors often sell when they should buy, and buy when they should sell. Late in 2008 and early in 2009, for example, when the market was at or near a bottom, many investors pulled out of their equity mutual funds, and flows were largely negative. On the other hand, during the dot-com bubble of the late 1990s, investors poured money into the market because its continued rise seemed inevitable. Repeatedly mistiming the market means that individual investors often “buy high” and “sell low.”

 

Chart 1. Investors Sometimes Buy and Sell at the Wrong Time
Growth of $10,000 in the S&P 500 Index and flows into U.S. equity mutual funds, 01/01/1993–12/31/2013

Source:  Standard & Poor’s and Investment Company Institute.
Past performance is no guarantee of future results.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results.
The index is unmanaged, does not reflect the deduction of fees or expenses, and is not available for direct investment. Performance during other time periods may be different or negative. Investors may experience different results. Due to market volatility, the market may not perform in a similar manner in the future.

 

To be fair, though, market timing is very difficult, even for professionals. Research has shown that those who employ market timing are, on average, less successful than those who opt instead for a more steady, bottom-up stock-picking approach. (See “Why Stock Picking Keeps on Ticking,” March 3, 2014.)

The market’s robust return in 2013 and its continued climb in 2014 now have investors worried about a correction—and, once again, trying to time the market. The argument is that the current market is overvalued—in a bubble, even—though conventional valuation measures suggest otherwise. Even with the S&P 500® Index near record levels, the trailing price-earnings (P/E) ratio on the index, for example, was 18.0, as of August 29, 2014. This is not much higher than 16.6, the monthly average since January 1960, according to Bloomberg data—hardly indicative of a bubble. In contrast, during the dot-com bubble of the late 1990s, for example, the P/E ratio on the S&P 500 reached a high of 30.1 in June 1999, according to Bloomberg (monthly data).

So, the market is not in a bubble, and if earnings continue to rise, the market potentially can continue to rise as well. Earnings are likely to keep growing if the economy at least continues to muddle along, and the consensus is that continued growth is likely. Bloomberg Consensus forecasts indicate that economists expect the U.S. economy to expand by 2.0% in 2014 and by 3.0% in 2015. 

 

Chart 2. Corporate Profits Potentially Can Continue to Rise
Quarterly Corporate Profits, 2Q 1994 -- 2Q 2014 

Source: Federal Reserve.
Due to market volatility, the market may not perform in a similar manner in the future.

 

But margins are near an all-time high, according to data from the Federal Reserve, and some observers believe that profit margins are “mean-reverting.” So, when profit margins return to their average, earnings will decline, and the market will follow, or so the argument goes. But some observers have noticed that while profits are cyclical, they don’t necessarily return to the same long-run average.

As equity strategists at Bank of America Merrill Lynch have written, “A look at the history of margins suggests that secular shifts in underlying margin trends can last for decades. The argument for the mean reversion of margins assumes that there is some natural equilibrium of margins and ignores the structural changes in the economy, policy, and mix that can have real and long-lasting impacts on profitability.”[i] Between 1967 and 1991, for example, the trend in profit margins was downward, while the trend since then has been largely upward.

Two structural factors that have been boosting net margins are reduced corporate income tax rates and lower interest rates. Today, a larger portion of the profits of S&P 500 companies comes from overseas, where corporate tax rates are generally lower; and in the wake of the credit crisis of 2008–09, companies have refinanced debt at lower interest rates, resulting in lower interest expense.

This suggests that corporate profit margins could remain near current levels for some time. A correction, however, is not out of the question, and most likely will occur eventually. But research by Ibbotson Associates shows that the longer an investor stays in the stock market, through thick and thin, the more the odds may favor a positive return. In other words, when it comes to equity investing stay invested.

 

[i] Dan Suzuki, Savita Subramanian, Alex Makedon, and Jill Carey, “S&P 500 Outlook,” BofA Merrill Lynch, May 17, 2013.

 

MARKET VIEW PDFs


  Market View
  U.S. Market Monitor

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