The drivers of short-term market moves can be vastly different from those which underpin the cycles of longer-term market direction. This month we examine a variety of these factors.

1. Market Perspective – June 2016
Experience Insight Impact
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Overview: The factors which drive markets can be quite dissimilar over the short and long-term.
Ultimately, we look for growth, the cost of capital, and valuations as long-term drivers. In the
shorter-term however, sentiment can dominate the investor psyche. This month we attempt to
gauge the status of these various factors.

2. Trailing One Year Performance: Volatile But Flat
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Experience Insight Impact
As we discussed
last month, the
market has been
engaged in a
wrestling match
between the bears
and bulls for the
past few years,
and accordingly,
has been range
bound. As of the
beginning of June,
markets are at the
top end of the
range.

3. Margin Erosion
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Experience Insight Impact
The above chart demonstrates that although margins have been
falling (orange bars), the S&P 500 (white line) has largely ignored this
factor for now.
Margin erosion has been a contributing factor for falling earnings
for the past year. The left 4 quarters of earnings declines are
represented on the bottom left of the above chart. The current
quarter is represented by the middle horizontal line and future
growth is to the right. Expectations are lofty and such growth
would appear necessary for markets to continue advancing.
Corporate Operating Margins % vs. S&P 500 Index S&P 500 Profit Growth (Actuals through 1Q16 and Consensus
Projections through 1Q17)

4. Interest Rates and Low Cost Capital
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Experience Insight Impact
Interest rates remain near historical lows thanks to a poor May jobs report, and the prospect of the Fed once again delaying the next rate hikes.
This allows companies an ongoing refinance opportunity, and the chance to continue to repurchase stock using very low cost debt.

5. Valuations
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Experience Insight Impact
Valuations are at the
high end of the historical
range, with the S&P 500
trading at 18x projected
earnings.

6. Investors Are Currently Expressing Enthusiasm For Markets
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Experience Insight Impact
• This index from CNN Money incorporates various demand indicators (including stock momentum, relative
strength, breadth, options volumes, stock volatility, and junk bond demand) to judge market sentiment.
• Current conditions suggest investor enthusiasm is at elevated levels (as indicated by the “extreme greed”
reading) and corrective action could occur.

7. Conclusion: In the short-term, investors have looked beyond the current fact pattern of valuations
and growth in sending markets towards the top end of the recent range. This enthusiastic buying
(“greed”) historically suggests a contrarian signal for future market performance. For markets to
continue to advance, growth will need to re-emerge as a force. This probably means margins will
need to stabilize and begin to turn upwards. In the meantime, investors await new data as we
continue to watch Central Bank policy around the globe. As always, our goal is to create portfolios
which balance the current risks with a longer-term perspective in order to meet the goals and
objectives of our clients.
Experience Insight Impact
Market Perspective – June 2016
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8. Experience Insight Impact
Disclaimer
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Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.