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Is A Recession Necessary For The S&P 500 To Fall 20% From All-Time Highs?

Is it possible for a bear market to occur when the U.S. economy is expanding? Certainly. In spite of the obvious evidence that U.S. stock assets tend to fall long before the most prominent minds affirm contraction in the U.S. economy, an overwhelming number of analysts keep exclaiming that there is no recession in sight. Right now, U.S. stocks require clarity on rate policy more than they require anything else. Is it possible for a bear market to occur when the U.S. economy is expanding? Certainly. In fact, most bear markets are already well on their way to becoming 20% price declines long before a recession is formerly identified. Consider the most recent bearish retreat (10/07-3/09). The National Bureau of Economic Research (NBER) officially declared on 12/1/08 that the U.S. recession had started in December of 2007 – a declaration that came nearly one year after the economic downturn’s inception. Nine months before the NBER expressed its “recession” call, the S&P 500 had already plummeted close to the 20% level (March 2008.) At that moment, the Federal Reserve saved financial markets by joining JPMorgan Chase in bailing out Bear Stearns. Then, in the first week of July, five months before the NBER proclamation, the S&P 500 had descended more than the requisite 20%. And by the time anyone could count on an authenticated recession, the S&P 500 had already plummeted roughly 47.8% – close to half of its entire value. Well, okay. I suppose that the world’s best economists should err on the side of caution before making hasty decisions. Perhaps NBER, composed of academic economists from Harvard, Stanford and other top-notch universities, were quicker in warning investors prior to the 3/2000-10/2002 tech wreck? Unfortunately, nine months before the NBER expressed a March 2001 recession start in November of 2001, the S&P 500 had already made its bearish descent. (Nine months again?) It gets worse. The S&P 500 had already dropped 29% by November of 2001 and the “New Economy” NASDAQ had already plummeted 65%! In spite of the obvious evidence that U.S. stock assets tend to fall long before the most prominent minds affirm contraction in the U.S. economy, an overwhelming number of analysts keep exclaiming that there is no recession in sight. And without a recession, they say, there’s not going to be a bear. I am not sure this is an accurate statement. Since 1950, we have seen non-recession 20%-plus drops in 1962, 1966, 1978 and 1987. We have also seen non-recession drops that do not get the full benefit of the bear title (e.g., 1998’s Asian currency crisis/Long-Term Capital Management, 2011’s eurozone, etc.), yet reached the 20% threshold via “intra-day” price movement and/or “rounding.” What’s more, why do people automatically assign the recession tag to bear markets like the 3/2000-10/2002 tech wreck when the recession first began one year later in March of 2001? Perhaps because NBER later revised the recession date as having started in Q4 2000? I have no idea if we will see a bear on this correction go-around or the next 10%-19% pullback or the one after that. What I do know is that the commodity slump has resulted in ConocoPhillips (NYSE: COP ) slashing 10% of its global workforce; high paying oil jobs continue to disappear in a world of $45 oil. I also know that the Federal Reserve wants to hike overnight rates, likely raising the borrowing costs for consumers and businesses just as the Atlanta Fed expects Q3 GDP at an anemic 1.2%. Perhaps most importantly, I recognize that the U.S. economy is part of a global economy that has been decelerating. JPMorgan’s Global Manufacturing PMI is now at 50.7 where a reading below 50 would be indicative of a global manufacturing recession. In mid-August’s ” 15 Warning Signs ,” I discussed the reasons why a pullback from the market top was exceptionally likely. One week later, in ” Don’t Blame China, ” I talked about the reasons why investors should expect a relief rally. And in my Thursday (8/27) commentary, ” Are You Selling The Drama Or Buying The Rally ,” I wrote: If history teaches us that benchmarks tend to retrace half of their losses before retesting their lows – if you feel like you’ve been here before and you don’t choose to be scarred like that again – perhaps you might anticipate better buying opportunities in the weeks ahead. You should not be surprised by today’s (Tuesday, September 1) extremely volatile move lower. The S&P 500 has moved back below the correction point of 1917 because the global economy is decelerating and investors are fearful that a rate hiking campaign by the Federal Reserve might be the straw that breaks the U.S. camel’s spine. And manufacturer-dependent sector funds like Materials Select Sector SPDR (NYSEARCA: XLB ) are taking the heaviest hits. Do I think that a Fed tightening cycle might cause an imminent U.S. recession? Not if chairwoman Yellen and other committee members decide upon a sloth-like pace of one-eighth of a point every third meeting or a “one-n-done” quarter point that would not be revisited for six months. Then again, I am not sure that the recession/non-recession matters as much as others do. Right now, U.S. stocks require clarity on rate policy more than they require anything else. The longer it takes for the Fed to provide clarity, the more U.S. stocks are likely to struggle. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Manning & Napier Pro-Blend Conservative Term Series S, September 2015

Objective and strategy The fund’s first objective is preservation of capital. Its secondary concerns are to provide income and long-term growth of capital. The fund invests primarily in fixed-income securities. It tilts toward shorter-term, investment grade issues, while having the ability to go elsewhere when the opportunities are compelling. It also invests in foreign and domestic stocks, with a preference for dividend-paying equities. Finally, it may invest a bit in a managed futures strategy as a hedge. In general, though, bonds are 55-85% of the portfolio. In the past five years, stocks have accounted for 25-35% of the portfolio, though they might be about 10% higher or lower if conditions warrant. Adviser Manning & Napier (NYSE: MN ). Manning & Napier was founded in 1970 by Bill Manning and Bill Napier. They’re headquartered near Rochester, NY, with offices in Columbus, OH, Chicago and St. Petersburg. They serve a diversified client base of high-net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. It’s a publicly traded company with $43 billion in assets under management. Of that, about $18 billion are in their team-managed mutual funds and the remainder in a series of separately managed accounts. Manager The fund is managed by a seven-person team headed by Jeffrey Herrmann and Marc Tommasi. Both of them have been with the fund since its launch. The same team manages all of Manning & Napier’s Pro-Blend and Target Date funds. Management’s stake in the fund We generally look for funds where the managers have placed a lot of their own money to work beside yours. The managers work as a team on about 10 funds. While few of them have any investment in this particular fund, virtually all have large investments between the various Pro-Blend and Lifestyle funds. Opening date November 1, 1995. Minimum investment $2,000. That is reduced to $25 if you sign up for an automatic monthly investing plan. Expense ratio 0.87% on $1.5 billion in assets as of August 2015. That’s about average for funds of this type. Comments Pro-Blend Conservative offers many of the same attractions as the Vanguard STAR Fund (MUTF: VGSTX ), but does so with a more conservative asset allocation. Here are three arguments on its behalf. First, the fund invests in a way that is broadly diversified and pretty conservative . The portfolio holds something like 200 stocks and 500 bonds, plus a few dozen other holdings. Collectively, those represent perhaps 25 different asset classes. No stock position occupies as much as 1% of the portfolio, and it currently has much less direct foreign investment than its peers. Second, Manning & Napier is very good . The firm does lots of things right, and they’ve been doing it right for a long while. Their funds are all team-managed, which tends to produce more consistent, risk-conscious decisions. Their staff’s bonuses are tied to the firm’s goal of absolute returns, so if investors lose money, the analysts suffer too. The management teams are long-tenured – as with this fund, 20-year stints are not uncommon – and most managers have substantial investments alongside yours. Third, Pro-Blend Conservative works . Their strategy is to make money by not losing money. That helps explain a paradoxical finding: they might make only half as much as the stock market in a good year, but they managed to outperform the stock market over the past 15. Why? Because they haven’t had to dig themselves out of deep holes first. The longer a bull market goes on, the less obvious that advantage is. But once the market turns choppy, it reasserts itself. At the same time, the fund has the ability to become more aggressive when conditions warrant. It just does so carefully. Chris Petrosino, one of the managing directors at Manning, explained it this way: We have the ability to be more aggressive. For us, that’s based on current market conditions, fundamentals, pricing and valuations. It may appear contrarian, but valuations dictate our actions. We use those valuations that we see in various asset classes (not only in equities), as our road map. We use our flexibility to invest where we see opportunities, which means that our portfolio often looks very different than the benchmark. Bottom Line The Pro-Blend Conservative Term Series S Fund has been a fine performer since launch. It has returned over 6% since launch and 5.4% annually over the past 15 years. That’s about 1% per year better than the total stock market and its conservative peers. In general, the fund has managed to make between 4-5% each year; more importantly, it has made money for its investors in 19 of the past 20 years. It is an outstanding first choice for cautious investors.

How The BRICs Came Down To Earth

The popularity of the acronym “BRICs” – which stands for the fast-growth economies of Brazil, Russia, India and China – spread like wildfire in the post-financial-crisis world. Coined by ex-Goldman Sachs economist Jim O’Neill in 2003, the BRICs came to symbolize the shift in global economic power away from the developed G7 economies and toward the developing world. Not so long ago, the rise of the BRICs seemed inevitable. After all, together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And the combined Gross Domestic Product (GDP) of the BRICs exceeds that of the United States. And if you adjust for Purchasing Power Parity, together, the BRICs already account for 52% of the planet’s GDP. In 2010, Standard Chartered Bank predicted China would overtake the United States to become the world’s largest economy by 2020. And China’s economy would be twice as large as the United States’ by 2030 and account for 24% of global GDP. U.S. jobs were migrating to Indian outsourcers. Brazil was finally set to take its place among the world’s great economic powers, with its economy having overtaken the United Kingdom’s in size. No wonder that investors poured money into the BRICs stock markets in the expectation that their profits would echo the rise to global prominence of these newly dominant economies. Alas, things did not quite turn out that way. BRIC Investing Gone Bust After the financial meltdown of 2008, many investors favored BRICs over stagnant, old-world economies like the United States. Yet things turned out differently. Even as U.S. markets still trade within striking distance of their all-time highs, the MSCI BRIC Index now languishes 48% below its 2007 peak. No wonder BRIC investors are pulling in their horns. Below is a quick look at how BRIC investors in the United States have fared in the recent market turmoil. I. China – Deutsche X-trackers Harvest CSI300 CHN A (NYSEARCA: ASHR ) The Chinese stock market has been in the headlines often of late, collapsing pretty much as I had predicted in early June . The latest news is that the Chinese government has thrown in the towel on supporting the stock market in a $200 billion spending spree funded by the central bank, local brokerages and commercial banks. Attention has shifted to Chinese journalists, who now are “confessing” to writing stories that stoke panic in the markets. In the meantime, bad loans at China’s banks have soared, with ICBC’s book of bad loans soaring by 28% last quarter alone. And the banking sector is often the canary in the coal mine about more bad things to come. In any case, the “this time it’s different” conviction that seemed to undergird China’s dominance in the world has waned along with the size of investors’ portfolios in the Chinese markets. Deutsche X-trackers Harvest CSI300 CHN A has fallen 35.88% over the past three months. (click to enlarge) II. Brazil – iShares MSCI Brazil Capped (NYSEARCA: EWZ ) The knock-on effects of the Chinese slowdown are particularly evident in Brazil, as its commodity bet on China has turned sour. Brazil’s exports to China tumbled by an astonishing 19% in the first seven months of this year. Economic growth in Q2 came in worse than expected at minus 1.9%. Put another way, on an annual basis, Brazil’s economy contracted by a whopping 7.2%. Inflation is nudging double digits. The government is cutting back spending, exacerbating the contraction. Wealthy Brazilians are abandoning ship, snapping up properties in southern Florida. As one commentator put it in the Wall Street Journal , “Brazil mania has turned to Brazil nausea.” iShares MSCI Brazil Capped has fallen 21.46% over the past three months. (click to enlarge) III. Russia – Market Vectors Russia ETF (NYSEARCA: RSX ) Senator John McCain once dismissed Russia as “a gas station with a country attached.” Over the past 18 months, Russia has been hammered by the oil price and the costs of its increasing economic isolation and political adventurism. At the same time, Russia is a value investor’s dream: it is both hated and cheap. In fact, Russia is the second-cheapest market in the world on a long-term cyclically adjusted price earnings (“CAPE”) basis. Trading at a price-to-earnings (P/E) ratio of about 4.8, and a price-to-book ratio of 0.7, the Russian market trades at about half of the level of the broader MSCI Emerging Markets Index. Gazprom, the world’s largest natural gas producer, trades at a P/E ratio of 5. Here’s the biggest surprise. Despite the pullback in recent months, Russia is up 14.97% for 2015. That makes it the third-best-performing market of 2015 among the 47 markets I track at my firm, Global Guru Capital. NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications. Market Vectors Russia ETF has fallen 11.24% in the past three months. (click to enlarge) IV. India – WisdomTree India Earnings ETF (NYSEARCA: EPI ) India has long suffered in the shadow of China. No wonder Indian officials are working hard not to gloat at the Chinese economy’s well-publicized stumbles. That’s largely because India’s GDP growth forecast for 2015 of 7.7% exceeds China’s estimated 6.9%. And that’s assuming you accept China’s seriously fuzzy economic statistics. That said, critics are equally suspect of India’s projections, which seem too good to be true. Most worrisome is that Prime Minister Modi’s reforms have bogged down in parliament, as investment in industry and infrastructure has ground to a halt. WisdomTree India Earnings ETF has fallen 11.29% over the past three months. (click to enlarge) No ‘Cheery Consensus’ For all the hoopla surrounding the BRICs, this highly fêted group has turned out to be a bust for investors making a one-way bet. Meanwhile, growth in emerging markets is only slowing. Projected growth of 3.6% in emerging markets in 2015 is the lowest since 2001, excluding the crisis year of 2009. And if China’s growth is actually 4%, and not 6.9%, that emerging markets growth number withers to 2.7%. About the only thing that the BRICs have going for them is that they have become among the most hated markets on Earth. And as Warren Buffett has noted, “markets pay dearly for a cheery consensus.” Certainly, the current sentiment surrounding the BRICs is anything but cheery.