2016 Outlook:
Modest Growth with Volatility
Ahead, and Oh Yes, the Election
Jerry A. Webman, Ph.D., CFA
Chief Economist
February 2016
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC
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For Institutional Use Only. This material has been prepared by OppenheimerFunds Distributor, Inc. for institutional investors only. It has
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© 2016 OppenheimerFunds Distributor, Inc. All rights reserved.
Is the Market Really Like a Casino?
Odds of Winning at Various Casino Games
Percentage of Years U.S. Stocks Posted Positive
Returns Over Rolling Periods (1926–2015)
44.7%
40.0%
48.0%
83.1%
87.3%
94.5%
99.8%
75.3%
48.8%
48.6%
46.5%
23.0%
46.6%
1-Year
3-Year
5-Year
10-Year
15-Year
Rolling Monthly Returns
Source: Morningstar Direct, 12/31/15. Chart is for illustrative purposes only and is not intended as investment advice. U.S. stocks are represented by the S&P 500 Index.
Source of Casino odds: Wizard of Odds. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the
performance of any investment. Index definitions can be found on Page 31. Past performance does not guarantee future results.
2
Volatility Does Not Equal Loss Unless You Sell
S&P 500 Index Calendar Year Total Return(%)
1982
1984
1986
1988
1990
1992
1994
S&P 500 Index Largest Intra-Year Price Decline (%)
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
38
32
32
33
30
32
23
22 23
19
29
29
26
21
17
6
16
8
5
-3
-7
-14
-8
-8
-9
-8
-13
-18
-20
-6
-6
+11.6%
5
5
2
1
-3
-5
-9
-8
-11
-12
-19
-9
-8
-12
-7
-8
-6
-10
-10
-14
-17
-16
-33
“I’ve lived through some terrible things in my life
some of which have actually happened.”
-7
-12
Average Intrayear Price
Decline
-19
-22
–14.1%
-28
-30
—Mark Twain
Annualized
Total Return
14
11
10
1
-5
16
15
-34
-37
-49
Source: Bloomberg, 12/31/15. Calendar year returns are price returns, meaning that they do not include the reinvestment of dividends. The index is unmanaged and
cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment.
Index definitions can be found on Page 31. Past performance does not guarantee future results.
3
Stocks Go Up Because Earnings Improve
S&P 500 Index and S&P 500 Index Earnings
2,000
$120
Stocks are partial ownership,
in real companies with real revenue
100
80
1,200
Correlation
800
400
0.95
60
40
20
0
0
1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
S&P 500 Earnings
Right Axis
S&P 500 Index Earnings per Share
S&P 500 Index
1,600
S&P 500 Index
Left Axis
Source: Bloomberg, as of 12/31/15. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does
not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc. Correlation expresses the strength of relationship between distribution of returns of
two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the
two series being compared behave in exactly the same manner. Index definitions can be found on page 31. Past performance does not guarantee future results.
4
Long-Term Views
•
The secular bull in developed markets is intact
•
The next years won’t look like the last 5 years
•
Rates (still) low for long
•
Credit down, but not out
•
The EM transition
•
The election
5
The duration and magnitude of the current bull
market pales in comparison to those of the past
Bull Market Cumulative Advance (%)
Duration and Magnitude of Past Secular Bulls
S&P 500 Index
Growth of 100 from Start of Secular Bull Markets
S&P 500 Index
1400%
450%
1200%
400
1982-1999
1000%
1942-1966
350
1987
2015
300
800%
Average
600%
250
400%
200
200%
150
2009Present
0%
0
100
200
Bull Market Duration (Months)
1946
100
300
0
1942-1966
5
Bull Market Duration (Years)
1982-1999
10
2009-Present
Source: Bloomberg, 1/31/16. Index definitions can be found on Page 31. Past performance does not guarantee future results.
6
U.S. recession unlikely, consumer doing better
University of Michigan Consumer Sentiment Index
110
Average Hourly Earnings
+2% Y/Y
100
90
Gasoline Prices
Since April 2014
-46%
80
70
Home Prices
+5.5% Y/Y
60
50
1978
1988
1998
2008
Source: Bloomberg, University of Michigan, Bureau of Labor Statistics, American Automobile Association, S&P-Case/Shiller 20 City Home Price Index.
7
No signs of the excesses found at end of past cycles
1929
1980
2000
2008
Today
20.9%
11.03%
10.97%
10.05%
7.4%
Inflation
1.2%
14.8%
3.7%
5.6%
0.2%
Valuation
20.2x
9.9x
30.4x
17.7x
17.1x
51%
68.7%
97.8%
132.3%
104.4%
and falling
Bank Credit
Household Debt as a
% of Disposable
Personal Income
Source: Robert Shiller, the Federal Reserve and Haver Analytics, 12/31/15. Past performance does not guarantee future results.
8
Few signs of equity market exuberance
S&P 500 10-Year Total Return Minus Barclays LT Treasury Bonds 10-Year Total Return
400%
Stocks outperform
300
200
100
0
Bonds outperform
-100
-200
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 31. Past performance does not guarantee future results.
9
Expansion in Europe, U.S. teetering on Slowdown
Recovery
Equities
Expansion
High Yield
Credit
Slowdown
Contraction
Duration
Source: OppenheimerFunds’ proprietary research of the U.S. Business Cycle Leading Indicator, 12/31/15. Annualized monthly returns of the defined risk premia from
January 1970 – December 2013. Risk Premia are defined as follows: US Equity Premium = S&P 500 - Citigroup US 7-10 YR Treasury. High Yield Premium = Citigroup
High Yield Cash Pay BB Rated (7-10)YR - Citigroup USBIG Corp BBB Rated (7-10)YR. Credit Premium = Citigroup USBIG Corp BBB Rated - Citigroup US 7-10 YR
Treasury. Duration Premium = Citigroup US 7-10 YR Treasury – Citigroup 90day T-Bill. Please see page 31 for index definitions. Past performance does not guarantee
future results.
10
Prolonged bout of international
underperformance unlikely to repeat
Equity Performance During Fed Tightening Cycles
(1977-2004)
Index Total Returns
250%
20%
18%
200
16%
14%
150
12%
10%
100
8%
6%
50
4%
2%
0
0%
2009
2010
U.S. Equity
2011
2012
Dev. Int'l.
2013
2014
2015
Emerging Markets
U.S. Equity
Dev. Int'l.
12 Mos. After First Rate Hike
EM
Full Tightening Cycle
Source: Bloomberg 12/31/15 U.S. equity represented by S&P 500 Index, developed international represented by MSCI EAFE Index, emerging markets represented by
MSCI EM Index. Index definitions can be found on Page 31. Past performance does not guarantee future results.
11
Imbalance: The Home Bias
Typical U.S. Investor Portfolio
Stocks with a Market Cap Over $1 Billion
Morningstar Equity Mutual Fund Assets by Category
80%
7,000
70
6,000
60
5,000
50
4,000
40
3,000
30
2,000
20
1,000
10
0
0
U.S.
International
Emerging
1992
1998
U.S.
2001
International
2007
2010
2015
Emerging Markets
Source: Morningstar, Bloomberg, 12/31/15. Does not include target date funds or funds of funds. Global funds are classified as international. Chart is for illustrative
purposes only.
12
Valuations not necessarily cheap but stocks
are cheap to bonds globally
Earnings Yields vs.
10-Year Government
Bond Yields
S&P 500 Index Earnings Yield Minus 10-Year Treasury Yield
8%
Stocks cheap
to bonds
Spread (%)
4
751 bps
621 bps
322 bps
0
665 bps
602 bps
494 bps
-4
Bonds cheap
to stocks
397 bps
360 bps
-8
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
Source: Bloomberg, 12/31/15. The earnings yield is calculated as earnings divided by price. The earnings yield spread which is the difference between the S&P 500
earnings yield and the 10-year U.S. Treasury yield and the spread between the earnings yield of the MSCI country specific indices and that country's 10-year government
bond yield.
Index definitions can be found on Page 31. Past performance does not guarantee future results.
13
Long-Term Views
•
The secular bull in developed markets is intact
•
The next years won’t look like the last 5 years
•
Rates (still) low for long
•
Credit down, but not out
•
The EM transition
•
The election
14
Diverging policy creates near-term volatility
U.S. markets underestimating Fed moves?
Global central banks still accommodative
Central Bank Interest Rate Policy By Country: Last Rate Move
Fed Funds Rate and Market Expectation
Fed Funds Rate
7%
FOMC Year-End 2016 and 2017 Estimates
6
Market Expectations on 12/31/15
5
4
3
2.40%
2
1.40%
1
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
Tightening
0
2002
Easing
Source: Ned Davis Research, 12/31/15.
15
Long-Term Rates to Remain Anchored During
Tightening Cycle
Average U.S. Treasury Yield Changes During Fed Rate
Hike Cycles (Since 1965)
350
U.S. Treasury Yield Curve (2004 Tightening Cycle) Long-term
Basis Points
305
300
5%
250
4%
188
200
3%
142
150
100
rates remain
anchored
Yield curve in 2006 – end
of last tightening cycle
6%
Yield curve in 2004
Beginning of last
tightening cycle
Short-term
rates increase
2%
70
1%
Current rates at
historical lows
0%
50
1 Mo
0
2 Year
5 Year
10 Year
30 Year
3 Mo
1/31/2016
2 Yr
5 Yr
1/30/2004
10 Yr
30 Yr
10/31/2006
Source: Bloomberg. For illustrative purposes only. A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but
differing maturity dates. The Treasury yield curve plotted above compares the one-day, three-month, two-year, five-year, ten-year, and 30-year U.S. Treasury date. Index
definitions can be found on page 31. Past performance does not guarantee future results.
16
Interest Rates Likely to Stay Low for a
Long Time
10-Year Treasury Rate and Nominal Gross Domestic Product (GDP) Y/Y Percent Change (10-Year Moving Average)
15
Treasuries
Oversold
12
Correlation
9
0.92
6
3
Treasuries
Overbought
3.12%
1.96%
2014
1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
10-Year U.S. Treasury Rate
Nominal GDP (Real GDP + Consumer Price Index)
Sources: U.S. Bureau of Economic Analysis and Bloomberg, as of 1/31/16. Nominal GDP is smoothed over 10 years, and as of 6/30/15. Forecasts may not be achieved. GDP (gross
domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of
returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the
two series being compared behave in exactly the same manner. Index definitions can be found on Page 31. Past performance does not guarantee future results.
17
Long-Term Views
•
The secular bull in developed markets is intact
•
The next years won’t look like the last 5 years
•
Rates (still) low for long
•
Credit down, but not out
•
The EM transition
•
The election
18
Credit growth not excessive
Growth of Domestic Non Financial Debt
16%
14%
12%
10%
8%
6%
4%
2%
0%
Total
Last 12 Months
Households
Businesses
State & Local Gov'ts
Federal government
2007 Peak
Source: Federal Reserve 9/30/15. Latest data available.
19
The duration and magnitude of the current bull
market pales in comparison to those of the past
Bull Market Cumulative Advance (%)
Duration and Magnitude of Past Secular Bulls
S&P 500 Index
Growth of 100 from Start of Secular Bull Markets
S&P 500 Index
1400%
450%
1200%
400
1982-1999
1000%
1942-1966
350
1987
2015
300
800%
Average
600%
250
400%
200
200%
150
2009Present
0%
0
100
200
Bull Market Duration (Months)
1946
100
300
0
1942-1966
5
Bull Market Duration (Years)
1982-1999
10
2009-Present
Source: Bloomberg, 1/31/16. Index definitions can be found on Page 31. Past performance does not guarantee future results.
20
Credit fundamentals still sound, no wall of maturities
Barclays U.S. High Yield Index
Weighted Average Leverage Ratio
JP Morgan High Yield Index Maturities by Year
$600
8.5x
7.9
7.5
7.0
6.5
7.1
507
7.2
7.0
6.5
6.3
5.8
6.0
5.5
5.0
4.5
$500
5.4
6.6
6.3
5.7
5.5
5.7 5.7 5.7
5.5
Billions of Dollars
8.0
$400
$300
$100
243
262
192
$200
4.0
3.5
255
139
98
52
$0
2016 2017 2018 2019 2020 2021 2022 2023
or
later
Source: Bloomberg. For illustrative purposes only. A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but
differing maturity dates. The Treasury yield curve plotted above compares the one-day, three-month, two-year, five-year, ten-year, and 30-year U.S. Treasury date. Index
definitions can be found on Page 31. Past performance does not guarantee future results.
21
Long-Term Views
•
The secular bull in developed markets is intact
•
The next years won’t look like the last 5 years
•
Rates (still) low for long
•
Credit down, but not out
•
The EM transition
•
The election
22
EM is Projected to be the Driver of Global Growth
EM Contribution to Global GDP Growth
5
Y/Y % Change
4
4.4%
4.3%
45.7%
58.8%
3.0%
3
2
3.8%
70.4%
98.4%
54.3%
41.2%
1
29.6%
1.6%
0
1988
Developed Markets
1998
Emerging Markets
2008
2018
Forecast
Source: Bloomberg and bank credit analyst (BCA), 12/31/15. Index definitions can be found on Page 31. Past performance does not guarantee future results.
23
EM: The Long-Term Story
Source: U.S. Census Bureau and China National Bureau of Statistics. Past performance does not guarantee future results.
24
Long-Term Views
•
The secular bull in developed markets is intact
•
The next years won’t look like the last 5 years
•
Rates (still) low for long
•
Credit down, but not out
•
The EM transition
•
The election
25
Economy Predicts Elections
Misery Index (Unemployment Rate + Inflation)
Down in Last Year of Term: Incumbent Wins
Misery Index (Unemployment Rate + Inflation)
Up in Last Year of Term: Opposition Wins
Misery Index Incumbent Party Opposition Party
Up or Down
Candidate
Candidate
1960
1968
1980
2000
2008
Exceptions
1976
1992







Misery Index
Up or Down
1964
1972
1984
1988
1996
2004
Unchanged
Incumbent Party Opposition Party
Candidate
Candidate






Source: Bloomberg, 12/31/15
26
But Elections Don’t Predict markets
DJIA Annualized Return during each party’s 4 year terms since 1928
Democrats
Republican
FDR 1932-1936
30.1%
Clinton 1992-1996
16.9%
Clinton 1996-2000
16.1%
Wilson 1912-1916
12.0%
JFK/LBJ 1960-1964
10.7%
Truman 1948-1952
9.4%
Obama 2008-2012
8.8%
FDR/Truman 1944-1948
6.5%
LBJ 1964-1968
2.2%
FDR 1940-1944
2.1%
Carter 1976-1980
Wilson 1916-1920
FDR 1936-1940
-1.1%
-5.0%
-6.6%
Coolidge
Reagan
Eisenhower
G HW Bush
T Roosevelt
Reagan
Harding/Coolidge
Eisenhower
McKinley/Roosevelt
Taft
Nixon/Ford
Nixon
G W Bush
G W Bush
Hoover
1924-1928
1984-1988
1952-1956
1988-1992
1904-1908
1980-1984
1920-1924
1956-1960
1900-1904
1908-1912
1972-1976
1968-1972
2004-2008
2000-2004
1928-1932 -29.6%
24.8%
15.5%
15.5%
10.7%
7.0%
6.9%
5.2%
4.9%
3.8%
2.4%
0.2%
0.1%
-1.8%
-2.2%
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 31. Past performance does not guarantee future results.
27
Waiting for “Your Team” to Win Before You Invest?
Growth of $10,000 Since 1945 in the Dow
The Markets Actually Like Divided Government
Gains for Stocks (DJIA) 1901–2014
$1,300,000
Divided Government
7.0% Annualized Returns
975,000
650,000
Unified Government
4.6% Annualized Returns
325,000
0
1945
1955
1965
1975
1985
1995
2005
2015
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 31. Past performance does not guarantee future results.
28
Conclusion
Hating the
Government
Is Not an
Investment
Strategy
“Americans always do the right thing but only after exhausting all other options.”
— Winston Churchill
29
Next Steps
1. Maintain a 3-5 year time horizon
•
Credit cycle isn’t over
•
Interest rates to remain low for long
•
Stocks more attractive than most other asset classes
2. Be more tactical
•
Defend against market volatility and drawdowns
•
Volatility will create dislocations
•
Regional opportunities will present themselves
30
Index Definitions
The S&P 500 Index is a market capitalization weighted index of the 500 largest domestic U.S. Stocks.
The Barclays Long Term Bond Index is an index of U.S. Government bonds that includes reinvestment of dividends.
The Credit Suisse High Yield Bond Index covers the universe of fixed rate, non-investment grade debt.
The MSCI Emerging Market Index is a free-float weighted equity index designed to measure the equity market performance of the emerging
markets.
The MSCI EAFE Index is designed to measure developed market equity performance, excluding the U.S. and Canada.
GMAG Risk Premia:
1. US Duration Premium: US Treasuries 10Yr – US T-bills 3-month. For the 10Yr Treasuries, Citigroup UST 10Yr total return index is used from
1980 onward. Prior to 1980, history is backfilled with estimated total returns using 10Yr yields from Bloomberg between 1970 and 1980.
2. US High Yield Premium: US High Yield – US Investment Grade Credit, using the Credit Suisse US High Yield Index and the Barclays US
Aggregate Credit Index.
3. US Credit Premium: US Investment Grade – US Treasuries, using the Barclays Capital US Aggregate Credit excess return index from 1988
onward. Prior to 1988, we backfill the excess returns using the Barclays Capital US Aggregate Credit Total Return Index minus estimated
duration-equivalent US Treasury total returns.
4. US Equity Premium: MSCI US Total Return index – US Treasuries 10Yr.
Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not
predict or depict the performance of any investment. Past performance does not guarantee future results.
31
Disclosures
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of
any investment. These views are as of the open of business on January 31, 2016, and are subject to change based on subsequent
developments.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political
and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth
companies may be volatile. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall.
Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the
FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully
consider a fund’s investment objectives, risks, charges and expenses. Fund
prospectuses and summary prospectuses contain this and other information about
the funds, and may be obtained by visiting oppenheimerfunds.com. Investors
should read prospectuses and summary prospectuses carefully before investing.
Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc.
225 Liberty Street, New York, NY 10281-1008
© 2016 OppenheimerFunds Distributor, Inc. All rights reserved.
DT0116.021.0116
32