Charts for the beach—2018 -...

© 2018 Richard Bernstein Advisors LLC 1PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

CONTACT RBA

Website: RBAdvisors.comTwitter: @rbadvisorsPhone: (212) 692-4088

It’s time for our annual August report, “Charts for the beach.” Each year we highlight five of our favorite charts we think consensus is currently overlooking. Remember to ask your RBA representative for your official RBA eyeglass cleaning cloth to keep your sunglasses spotless!

Profits (not GDP or politics) drive the stock market.

At RBA, we approach the current environment by staying disciplined, slowing down the investment process, and by staying dispassionate with respect to politics.

Along those lines, our first two charts show US real GDP and corporate profits through time. There has been considerable hoopla about the strength of GDP growth during the second quarter, but US real GDP growth remains within a slow-growth band that has existed since the bursting of the Technology bubble in 2000 (See Chart 1).

Richard Bernstein Advisors Richard Bernstein Advisors LLC (RBA) is an independent investment adviser focusing on longer-term investment strategies that combine top-down, macroeconomic analysis and quantitatively-driven portfolio construction. We strive to be the leading provider of innovative investment solutions for investors, and our competitive edge is our research-driven macro style of investing.

Our top-down macro approach differentiates our firm from the more common, traditional bottom-up approach of most asset managers. Our extensive array of macro indicators allows us to construct portfolios for clients that are innovative, risk-controlled, and focused on overall portfolio construction instead of individual stock selection.

Insights

Richard Bernstein, Chief Executive and Chief Investment Officer

August 2018

Charts for the beach—2018

The Leaders In Pactive® Management


Insights

4%

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LT Average

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LT Average

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5%

6%

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5%

6%

7%

8%9%

10%

11%

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Dec-51

Dec-55

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Dec-63

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Dec-79

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Dec-87

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Dec-99

Dec-03

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5%

6%

7%

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Dec-75

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LT Average

August 2018

CHART 2 US Corporate Profits as a Percentage of GDP

(4Q 1947 – 1Q 2018)

CHART 1: US Real GDP

(QoQ % Jan. 1946 – Jul. 2018)

Chart 2 helps explain why the US bull market has been so powerful despite continued anemic GDP growth by highlighting corporate profits as a percent of GDP. The corporate sector’s proportion of national income rose to all-time highs post-2010. This ratio has smartly rebounded, which has fueled the more recent leg of the bull market.

Contrary to popular belief, the corporate sector (upon which the stock market ultimately focuses) has been historically healthy relative to the overall economy. The combination of tremendous liquidity provided by the Federal Reserve and an historically healthy corporate sector seems to justify both the length and magnitude of the 9-year bull market.

Source: Richard Bernstein Advisors LLC, BEA, Bloomberg Finance L.P.

Source: Bloomberg Finance L.P.


Insights August 2018

Source: Bloomberg Finance L.P. For Index descriptors, see "Index Descriptions" at end of document

CHART 3 Stocks, Commodities and Fixed Income

(Total Returns Jul. 2016 – Jul. 2018)

We prefer fixed liabilities, not fixed income, during inflationary periods.

Data demonstrate that investors continue to focus on disinflationary asset classes and have yet to re-orient portfolios toward assets that outperform during periods of accelerating inflation. Unfortunately, inflation expectations troughed more than two years ago, and asset classes that benefit from accelerating nominal growth (stocks and commodities) have appreciated significantly whereas broad fixed-income has provided negative total return.

Chart 3 compares the returns of stocks, commodities, and various popular fixed-income benchmarks since July 2016. The ongoing popularity of income-oriented investments shows investors have yet to understand the implications of higher potential inflation.

Household and corporate balance sheets constructed with general combinations of fixed asset values and floating liabilities tend to outperform during periods of disinflation/deflation. However, a combination of floating assets and fixed liabilities has proven more beneficial during periods of inflation. FIXED-income is unlikely to be a successful core holding if we are correct and inflation continues to be higher than investors expect. Inflation is the kryptonite of income.



Source: Richard Bernstein Advisors LLC, Bloomberg Finance L.P.

CHART 4 Secular Inflation:

Feb. 1965 thru Mar. 1980 vs. Current

-2%0%

2%4%6%8%

10%12%14%16%

M0

M12

M24

M36

M48

M60

M72

M84

M96

M10

8

M12

0

M13

2

M14

4

M15

6

M16

8

M18

0

y/y inflation rate Feb. '65 thru Mar.'80

y/y inflation rate Apr.'15 thru Jun.'18

Secular inflation?

We’re not wild about these types of charts, but Chart 4 compares the current cycle’s inflation with the secular period of inflation from the 60s and 70s. We are not showing this chart to suggest that inflation will follow a definitive pattern. Rather, we show it to demonstrate how benignly one of the worst inflationary periods in US history started. That might be worth considering simply because investors remain quite sanguine about inflation given the economic and policy backdrop. (http://www.rbadvisors.com/images/pdfs/Overheating_Ahead.pdf).

Quick history lesson

RBA believes that there could be considerably more inflation than investors currently expect, but we do not believe there will be secular stagflation. Nonetheless, it is a good history lesson to review what asset classes and sectors outperformed during the stagflation of the late-1970s (see Table 1 on the following page).

http://www.rbadvisors.com/images/pdfs/Overheating_Ahead.pdf

http://www.rbadvisors.com/images/pdfs/Overheating_Ahead.pdf



US Asset Class and Sector Performance during Stagflation

(Total Return: 12/31/1975 - 12/31/1979)

Asset Class/Sectors Annualized Total Return

Small Stocks 36.7%

Energy 24.0%

Misc. Industrials/Services 19.6%

Financials 17.3%

Business Equipment 13.8%

Utilities 11.5%

Manufacturing 11.4%

Telecom 10.9%

Consumer NonDurables 10.4%

S&P 500® 9.8%

Consumer Durables 9.5%

Health 7.7%

Cash 6.9%

Retail and related 5.2%

Chemicals 4.7%

LT Treasuries 3.1%

TABLE 1

To learn more about RBA’s disciplined approach to macro investing, please contact your local RBA representative. www.rbadvisors.com/images/pdfs/Portfolio_Specialist_Map.pdf.

Source: Richard Bernstein Advisors LLC, Kenneth R. French, Morningstar Ibbotson SBBI


RBA Investment Process:

➜ Quantitative indicators and macro-economic analysis are used to establish views on major secular and cyclical trends in the market.

➜ Investment themes focus on disparities between fundamentals and sentiment.

➜ Market mis-pricings are identified relative to changes in the global economy, geopolitics and corporate profits.

August 2018 Insights INDEX DESCRIPTIONS:

The following descriptions, while believed to be accurate, are in some cases abbreviated versions of more detailed or comprehensive definitions available from the sponsors or originators of the respective indices. Anyone interested in such further details is free to consult each such sponsor’s or originator’s website.

The past performance of an index is not a guarantee of future results.

Each index reflects an unmanaged universe of securities without any deduction for advisory fees or other expenses that would reduce actual returns, as well as the reinvestment of all income and dividends. An actual investment in the securities included in the index would require an investor to incur transaction costs, which would lower the performance results. Indices are not actively managed and investors cannot invest directly in the indices.

S&P 500®: Standard & Poor’s (S&P) 500® Index: The S&P 500® Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad US economy through changes in the aggregate market value of 500 stocks representing all major industries.

Commodities: S&P GSCI® Index: The S&P GSCI® seeks to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets, and is designed to be a “tradable” index. The index is calculated primarily on a world production-weighted basis and is comprised of the principal physical commodities that are the subject of active, liquid futures markets.

Bloomberg Barclays US Aggregate Bond Index: The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).

Bloomberg Barclays EM USD Aggregate Total Return Index: The Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index is a hard currency Emerging Markets debt benchmark that includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers.

Bloomberg Barclays US Floating Rate Notes Total Return Index Value Unhedged USD: The Bloomberg Barclays Capital US Floating Rate Notes Total Return Index Value Unhedged USD measures the performance of USD denominated, investment-grade, floating-rate notes across corporate and government-related sectors.

LT Treasury: Long-term Treasuries are represented by the Morningstar Ibbotson Long-Term Government Bonds Index Series which is composed to the greatest extent possible of a one bond






August 2018 Insights portfolio with a term of approximately 20 years and a reasonably current coupon was used each year.

Small Stocks: Small Stocks are represented by the Morningstar Ibbotson Small Company Stocks Index Series which is composed of stocks making up the fifth quintile of the NYSE by market capitalization.

Cash: Cash is represented by the Morningstar Ibbotson US Treasury Bills Index Series which is composed of a one bill portfolio rebalanced monthly to the shortest-term bill having not less than one-month to maturity.

Sectors represented by the Fama French 12 Industry Series as described below.

Consumer Non Durables: Fama French NoDur: Consumer NonDurables—Food, Tobacco, Textiles, Apparel, Leather, Toys

Consumer Durables: Fama French Durbl: Consumer Durables—Cars, TV's, Furniture, Household Appliances

Manufacturing: Fama French Manuf: Manufacturing—Machinery, Trucks, Planes, Off Furn, Paper, Com Printing

Energy: Fama French Enrgy: Oil, Gas, and Coal Extraction and Products

Chemicals: Fama French Chems: Chemicals and Allied Products

Business Equipment: Fama French BusEq: Business Equipment—Computers, Software, and Electronic Equipment

Telecom: Fama French Telcm: Telephone and Television Transmission

Utilities: Fama French Utils: Utilities

Retail and related: Fama French Shops: Wholesale, Retail, and Some Services (Laundries, Repair Shops)

Health: Fama French Hlth: Healthcare, Medical Equipment, and Drugs

Financials: Fama French Money: Finance

Misc. Industrials/Services: Fama French Other: Other —Mines, Constr, BldMt, Trans, Hotels, Bus Serv, Entertainment


August 2018 Insights





About Richard Bernstein Advisors

Richard Bernstein Advisors LLC is an independent investment adviser. RBA partners with several firms including Eaton Vance Corporation and First Trust Portfolios LP, and currently has $8.6 billion collectively under management and advisement as of July 31ST, 2018. RBA acts as sub‐advisor for the Eaton Vance Richard Bernstein Equity Strategy Fund and the Eaton Vance Richard Bernstein All‐Asset Strategy Fund and also offers income and unique theme‐oriented unit trusts through First Trust. RBA is also the index provider for the First Trust RBA American Industrial Renaissance® ETF and the First Trust RBA Quality Income ETF. Additionally, RBA runs ETF asset allocation SMA portfolios at UBS, Merrill Lynch, Morgan Stanley Smith Barney, Wells Fargo, RBC, Janney and on select RIA platforms. RBA’s investment insights as well as further information about the firm and products can be found at www.RBAdvisors.com. © Copyright 2018 Richard Bernstein Advisors LLC. All rights reserved.PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment’s value. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Past performance is, of course, no guarantee of future results. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein. w

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Charts for the beach—2018 -...

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