Voya Global Perspectives
Table of Contents
World Economy — Gross Domestic Product (GDP)
Global economic growth has more than doubled in the last 11 years driven by growth in emerging and
Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.
Fundamentals Drive the Market
Advancing earnings drive markets up, and negative earnings drive markets down, albeit with
a reporting lag.
Earnings Per Share vs. S&P 500 Prices
Since 1999, earnings for S&P 500 companies have grown 294% — from $39 to $115 — and will likely
reach even higher levels for 2015, while the price level is now only 41% higher.
S&P 500 Earnings
Reported first quarter earnings growth for S&P 500 companies is 1.1% year-over-year.
The latest U.S. and euro manufacturing reports indicate expansion while emerging markets are slightly
Capital Expenditures and Age of Equipment
Capital expenditures are on the upswing, and the average age of equipment has climbed to the highest level in 15 years.
The latest U.S. manufacturing report shows the highest level of manufacturing shipments and
industrial production ever.
Global household consumption of goods and services has increased 100% in the last decade but 95% of consumers reside outside the U.S. China is now the largest auto market in the world.
Consumer as Game Changer
At about 70% of GDP, the U.S. consumer is the game changer in economic growth. Consumption, income
and retail sales have achieved all-time highs.
Developing Markets Drive Growth
World GDP accelerated in the last decade, supported by the largest emerging markets, which now outproduce
the largest developed economies, where generally higher debt levels hinder economic growth.
After two bull and two bear market cycles, the S&P 500 is now 35% above its 2007 peak.
Dow Jones Industrials (price only — 100 years)
It is not unusual for stocks to have prolonged periods of flat returns — sometimes punctuated by
Index Total Returns
Fundamentals trumped global risks in 2014, and most equities performed well; in 2015 common stock
returns are off to a mixed start.
Sector Total Returns
Wide variations in sector returns have generally been the norm; at the end of the first quarter, healthcare
and consumer discretionary are leading, while utilities, energy and financials have stumbled.
Style Total Returns
Small- and mid-cap styles led the market every calendar year except 2007, 2011 and 2014.
Stock vs. Bond Valuation
Stocks look historically attractive based on their earnings yield (E/P) compared to the yield-to-maturity of
Operating Profits and Operating Margins
With steady improvement since the Great Recession, operating income and operating margins have
flattened out at an all-time high level.
Disregarding the 2008 spike, stock dividend yields remain generally above levels seen since 1996 —
and are still historically attractive relative to bond yields.
Performance by Market Capitalization
Mid-cap stocks have had the best U.S. equity 10-year return record.
Fundamental Characteristics by Market Capitalization
Size matters in terms of growth and valuation. Smaller stocks have higher growth rates, and in terms of
the price/earnings ratio, higher valuation.
Equity Volatility (VIX)
Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below
average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.
Bond and Loan Returns
Although long-term U.S. Treasuries have been winners in periods of uncertainty — including 2014 — over
time, risk relates to return in a rational way, and riskier bonds have been the leaders.
Senior Loan Yield Spreads
The yield spreads on senior (leveraged) loans indicate the attractiveness of the asset class in historical
Senior Loans and Rising Rates
A broad historical view of debt markets shows that senior loans potentially offer some protection against
the threat of rising U.S. interest rates.
Investors seeking income may benefit from the rich opportunities for higher yield available
from global bonds.
Fed Funds Target Rates and U.S. Treasury Yields
The Fed funds rate and Treasury yields remain historically low, and the Fed has indicated it intends to
keep rates low until economic growth and inflation reach actionable levels.
Municipal Bond Yields ÷ Treasury Yields
Municipal yields have dropped to 97% of Treasury yields; defaults have been minimal, but pressures to
cut spending and balance budgets have been intense.
Corporate Spreads and TED Spread
Credit spreads have declined since the 2008 crisis, yet still offer good opportunity; TED spreads are at
the low end of the normal range despite debt and deficit concerns.
Mortgage Spreads and Loan Delinquency
The Fed’s mortgage bond buying program helped keep mortgage rates (and spreads) low despite high
home loan delinquencies, which continued to decline as the housing market has recovered.
U.S. Debt Reduction
Declining U.S. household debt should constrain growth less than in recent years. Accelerating growth
and low interest rates should foster increases in corporate leverage.
Monetary Policy Outlook
The major central banks will continue accommodative monetary policies, and even the European Central
Bank has now embarked on a quantitative easing program.
Spread Sectors Outlook
The search for yield in a low-rate environment will support credit markets, but 2014 was oriented towards
earning yield, rather than spread compression, as many sectors appeared to be fairly valued.
World Market Returns by Region — USD
Emerging market equity (EME) has often been a top performer but lagged since 2011. Japan and Europe
Ex-UK have forged ahead this year, while the S&P 500 ranks near the bottom.
Global Returns — Local and USD
The dramatic rise of the S&P 500 in 2013 and 2014 combined with a strong U.S. dollar have left foreign
market returns to U.S. investors lagging behind those achievable in the U.S. domestic market.
Country Returns — USD (YTD)
Mixed results in both developed and emerging markets have greeted the start of 2015; Greek markets
stumbled badly as new elections brought more geopolitical and economic tensions.
U.S. and International Stocks vs. Bonds
International stocks and global bonds performed largely in line with their U.S. counterparts through 2014
but have rallied significantly in the last few months.
Economic growth fuels demand for imports, aggravating the trade deficit, which plummeted in the great
recession as demand dwindled. Exports have faced headwinds in 2015 due to the strong dollar.
Ninety five percent of consumers reside outside of the U.S. making global trade imperative for growth.
The TPP countries represent 40% of the global economy.
Despite declining industrial and electricity production and choppy export growth, recent GDP growth
is 7.0%. China is attempting to tame excesses while sidestepping a “hard landing”.
European Industrial Production
Ongoing debt woes are straining the euro zone economy; growing global export demand is a welcome
offset, but more central bank stimulus is on the way in the quest to achieve sustainable growth.
Euro Zone Real GDP
Euro zone growth has teetered close to zero for three years. Meager growth coupled with ultra low
inflation has sparked another round of European Central Bank stimulus.
Europe is a tale of two markets: the peripheral economies — Spain, Portugal, Italy and Greece — have
total debt around 100% of GDP and those with much stronger economic fundamentals such as Germany.
Frontier countries are emerging markets with lower capitalizations and less liquidity. Although volatile,
they offer high growth potential and are fueling global growth as they evolve and mature.
The U.S. dollar surged in 2014 against major currencies on the underlying strength of the U.S. economy
and is up 7% in 2015.
China and India are growing rapidly, and China is second only to the U.S. in total economic output,
while Germany’s export-driven economy is the runaway euro zone leader.
Global Stock Fundamentals
Emerging market equities appear to offer competitive profitability and balance sheet strength with
valuations at or below those of S&P 500 and EAFE stocks.
U.S. consumer confidence hit a five-year high but is still off pre-crisis levels. Consumer confidence is
typically backward-looking and has often been a contrary indicator for subsequent stock market returns.
Savings Rates and Household Net Worth
Lower personal savings rates and household net worth tend to increase the burden on future savings to
fund retirement security; rising stock and housing markets have driven household net worth upwards.
Among the most-watched commodities, gold is regarded as a safe haven and inflation hedge, yet gold
actually sells for less today in real — inflation-adjusted — terms than in 1980.
Total payrolls, including all non-farm employment, have inched steadily upward with private job creation
leading the way.
The unemployment rate has slowly improved in line with economic growth; recent reports and news of
job growth and payrolls have continued the favorable trend.
Labor and Productivity
Labor costs have climbed higher but productivity has lagged.
S&P Case-Shiller Home Price Index
Home values are still 15% below 2006 levels, but the 20 City Composite Index has shown signs of a
sustainable recovery after promising year-over-year price increases.
Home Sales and Housing Starts
While the sector still lags other U.S. industries, housing has turned the corner; housing starts are
advancing fitfully, and the supply of existing homes for sale has moderated.
U.S. Leading Indicators
U.S. Leading Indicators have been consistently positive — in fact, for 22 of the last 24 months.
Durable and Non-Durable Goods Orders
New durable goods orders have made upward progress with surges and slumps along the way.
Real GDP (Q/Q)
The U.S. has more than recovered the output level lost in the Great Recession and has reached new
highs. Expansions historically last about five years.
U.S. Government Debt and Deficit
Total federal public debt exceeds 100% of GDP, and the U.S. deficit is less than 3% of GDP. A definitive
plan to tame the deficit remains elusive but sequestration contributed to a reduction.
Corporate Income Tax Rates
Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.
Inflation — CPI
Core and headline inflation remain under control; recent figures show that commodities prices have
followed a choppy path downward — with occasional spikes — for over two years.
Federal Budget Deficit
Troubling projected budget deficits are driven by large mandatory entitlement programs, defense
spending and interest payments, making it difficult to reduce government spending.
Oil Price and Intensity
Crude oil prices collapsed in the fourth quarter, and gasoline prices followed suit, delighting consumers.
The oil consumed per unit of GDP in the U.S. (oil intensity) has steadily declined for many years.
Tectonic Shift: Energy
Abundant natural gas in North America and the ability to extract oil from shale are changing the global
energy landscape. The IEA recently forecast that the U.S. will be the world’s largest oil producer by 2020.
The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many
high paying jobs. The recent drop in oil prices has caused the energy sector to cut back.
Average Investor Behavior
Over the past 20 years the average asset allocation investor has significantly underperformed stock and
bond markets and barely kept pace with inflation.
Long-Run Correlation (since 1995)
Return correlations below 1.0 indicate ways to combine investments and reduce overall risk; negative or
near zero correlations offer the best diversification benefits.
Mutual Fund Flows
Weekly fund flows continued their mixed trend; cumulative equity flows, despite a multi year bull market,
have yet to turn positive.
Alternative Investment Returns
Global REIT Dividend Yields
Global REITS have consistently provided higher dividend yields than large cap stocks across almost all
time periods — and better liquidity than most alternative investments.
Global Asset Allocation — Effective Diversification
A broadly diversified global strategy produced better performance — with lower risk — than a common
mix of U.S. large-cap and EAFE equities plus corporate bonds.
Benefits of Portfolio Rebalancing
Over 20 years, regular rebalancing increased returns and reduced risk compared to a buy and hold
approach, which allows allocations to drift away from the intended targets.
Asset Class Returns
Asset class returns vary widely over time, making allocation decisions difficult and market timing
success unlikely. Equal-weighted global asset allocation returns (“Global AA”) are shown for illustration.
Cash on the Sidelines and Equity Fund Flows vs. Stock Prices
The excess of M2 over M1 money supply data shows record levels of cash on the sidelines, while equity
mutual fund flows show extreme swings that highlight investors’ reactions to stock market performance.
Expectations for Future Retirement Income
To fund retirements lasting many years, today’s workers expect to rely more on personal sources of
retirement income, such as their savings plan and IRA, than is presently the case for those over 65.
Declining funding and sponsorship of pension plans is shifting the burden of retirement savings to
participants in defined contribution plans.
Savings Needed for Retirement
Among workers who reported, total savings and investments — not including their personal residence or
defined benefit plans — are far below what they will need to retire.
Sequence of Returns Matters
Asset Allocation by Participant Age
As participants age, declining equity and increasing fixed income allocations may increase the risk of
outliving assets, particularly in an ultra-low interest rate environment.
Index Definitions Part 1
Index Definitions Part 1