My Notes From the CFA Institute’s Annual Conference
Thursday, May 25, 2017

I spent the first half of this week at the CFA Institute’s Conference in Philadelphia. The conference is targeted toward CFA charterholders and covers a very wide range of topics. It’s also an international conference, with the third biggest delegation of attendees, behind the U.S. and Canada, coming all the way from South Africa. I’ve got several pages of notes from the conference and will distill them into a few highlights below.

Yale University’s Robert Shiller and University of Pennsylvania’s Jeremy Siegel spoke during the same session before sitting down together for a bit of back-and-forth. Shiller described the current level of his CAPE (cyclically adjusted price-earnings) ratio as signaling a modest return for stocks going forward. He described the U.S. market as halfway to being overvalued, but still thinks long-term investors should mostly hold onto stocks. Shiller also believes a stagflation narrative currently exists—something that hasn’t occurred since the Great Depression. Siegel, who also continues to favor owning equities (and is widely regarded as being persistently bullish), thinks stocks could realize a 5% to 5.4% real (inflation-adjusted) return over the long-term given prevailing valuations or a small increase in the price-earnings ratio. Though positive, his forecast is less than the historical real return for stocks of 6.7%. Siegel attributed the ongoing low interest rate environment to slow growth, demand for liquidity, regulation and risk aversion—not the central banks. Shiller countered that “we don’t understand inflation.”

Vanguard founder John Bogle anticipates lower returns relative to the historical averages as well. He anticipates annualized returns of 4.0% over the next 10 years due to the current high price-earnings ratio. Much of his prepared remarks and his responses during the Q&A portion of the session echoed what he said at the Morningstar Investment Conference last month. He was critical of the mutual fund industry, citing the costs and paraphrasing Adam Smith by saying “serving the customer is everything.” When asked for his opinion on smart beta funds, Bogle cautioned that successful marketing strategies are rarely good long-term investing strategies. He expressed concerns about the proportion of stocks now owned cumulatively by BlackRock, Vanguard and State Street. Regarding advice, he encouraged the audience to focus on limiting costs (“costs matter”), limiting the amount of trading (“trading transfers money out of clients” portfolios) and developing good lifetime investing strategies.

Staying with market commentary for just one more paragraph, Goldman Sachs’ Abby Joseph Cohen finished the conference with her global outlook. Cohen anticipates U.S. economic growth of 2.1% this year and just 2.2% growth next year. (She disagrees with the Trump Administration that 3% domestic growth is possible.) Commenting on the current low level of volatility, Cohen does not think market volatility in general is a good predictor of future returns, but does view the market as being currently “priced for things to continue to go well.” Cohen added that stocks are not overvalued, but fixed income is. Her firm is less optimistic about earnings growth for the S&P 500 than the consensus. Goldman Sachs forecasts profit growth of 9% for this year and 5% for next year versus 10% and 11%, respectively, for the consensus.

University of Chicago professor and behavioral economist Richard Thaler argued that neoclassical economics’ assumptions that humans make “optimizing” decisions—acting in their self-interest, having self-control and holding unbiased beliefs—do not hold up in reality. He believes the biggest behavioral economics risk is overconfidence. Thaler pointed to the National Football League’s draft as a good example. His analysis shows the 33rd pick in the draft being worth more than the first pick. Thaler added that a profitable trading strategy would be to short first-round picks and go long on second-round picks (if it were possible to do so). Regarding his portfolio, Thaler mostly indexes. He does not hold any individual stocks or bonds—partially to avoid compliance problems, but mostly because he doesn’t feel like he knows enough to determine which security will outperform.

Elisabeth Kashner of FactSet described Vanguard’s Total Stock Market Index ETF (VTI) as the competition for strategic (“smart”) beta funds. Cost is a big reason why: The Vanguard fund has an expense ratio of just 0.04%. (Most smart beta funds have similar risk characteristics, making cost a big differentiator.) She characterized the odds of a strategic beta exchange-traded fund outperforming a traditional market index fund as 50/50. Kashner views ideas for launching market (“vanilla”) ETFs as being “exhausted” and thinks strategic beta ETF ideas are now being pushed out to the edge because of the number of such funds that are already in existence. Though new ETFs are still being introduced, their launches represent the desire of fund companies to attract and keep investment dollars as opposed to actual interest on the part of investors.

Morningstar’s David Blanchett (who will be speaking at our Investor Conference as well) believes the biggest driver of retirement portfolio allocations should be how much certainty a retiree needs in terms of income. He views the value added by a good financial plan as being more significant than the value added by making good investments. Blanchett further suggests investors and advisers should focus on asset allocation (the tax treatment of the account an investment is held in) to boost aftertax returns as much as possible.

Finally, a few miscellaneous items of note from the conference. Among the things Elizabeth Corley of Allianz Global Investors advised investment managers to focus on are political risks (these “cannot be ignored”), active investing, getting yield from equities and taking risks. Michael Falk of Focus Consulting Group discussed demographics among his topics, noting that the generational growth in labor force participation from the baby boom generation has ended. This is now causing a shift in the dependency ratio, which is the ratio of kids plus retirees divided by workers. (Falk wrote an interesting and broad-based policy piece for the CFA Institute, which is free to download.) BNY Mellon’s Leo Grohowski observed more occurrences of clients becoming traders in an effort to beat a benchmark such as the S&P 500. (My take is that this is not a positive development.) The CFA Institute’s president and CEO, Paul Smith, called on the investment community to revise its business model to shed its image of always prospering regardless of whether “the client sinks or swims,” to use more candor and be more transparent, to recruit people with good ethics and a sense of purpose, and to adapt to new technologies (the technological revolution is “inescapable”). The CFA Institute has a conference blog for those of you who want even more highlights.

Lastly, for those who work in office environments, you may want to be nice to your co-workers. Abby Joseph Cohen displayed a chart showing office space per worker declining 25% from the fourth quarter of 2009 to now.

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Highlights from this month's AAII Journal

The Week Ahead

The U.S. financial markets will be closed on Monday in observance of Memorial Day. We wish you a happy (and hopefully sunny) holiday weekend.

We’re hitting the quarterly lull for earnings news. Just six members of the S&P 500 are scheduled to report: Analog Devices (ADI), Hewlett Packard Enterprise Co. (HPE) and Michael Kors Holdings (KORS) on Wednesday; and Broadcom (AVGO), Cooper Companies (COO) and Dollar General (DG) on Thursday.

The week’s first economic reports will be April personal income and outlays, the March Case/Shiller home price index and the Conference Board’s May consumer confidence survey. Wednesday will feature the May Chicago PMI, the April pending home sales index and the periodic Beige Book. The May ADP Employment Report, revised first-quarter productivity, the May PMI manufacturing index, the May ISM manufacturing index and April construction spending will be released on Thursday. Friday will feature May jobs data—including the change in nonfarm payrolls and the unemployment rate—as well as April international trade.

San Francisco Federal Reserve bank president John Williams will speak on Wednesday.

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AAII Sentiment Survey

Nearly one out of three individual investors expect stocks to rebound over the short-term as optimism rebounded strongly in the latest AAII Sentiment Survey. At the same time, both neutral sentiment and pessimism pulled back.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 9.0 percentage points to 32.9%. The rise puts optimism back into its typical range. The jump is not large enough, however, to prevent bullish sentiment from staying below its historical average of 38.5% for the 18th time out of the last 19 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.8 percentage points to 37.1%. Neutral sentiment is above its historical average of 31% for the fourth consecutive week and the ninth time in 10 weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, pulled back by 4.3 percentage points to 30.0%. The decline puts pessimism slightly below its historical average of 30.5% for the third time in four weeks.

This week’s readings are very close to the levels recorded two weeks ago. The rise in optimism follows what had been an unusually low level of bullish sentiment and implies some reversion back toward the average. It also occurred as the S&P 500 index set new record highs. Though some individual investors are encouraged by the gains, others fret about valuations or fear that a significant drop is forthcoming.

Beyond the current level of stock prices, President Donald Trump is having a big influence on many investors’ attitudes. Also playing roles are this year’s lack of volatility and the possibility of a significant international event occurring.

This week’s special question asked AAII members how first-quarter earnings have influenced their outlook for stock prices. Nearly two out of five respondents (39%) said the quarterly profit reports had no or only a minimal impact on their outlook. Many of these respondents said they are more focused on politics, though others said the earnings reports confirm their outlook or that they take a long-term view and are not influenced by one quarter’s results. Nearly 33% of respondents credited first-quarter earnings for making or keeping them optimistic about the prospects for stocks. Some of these respondents pointed to corporate profits as a sign of growth. Slightly more than 13% described the market as fairly valued or overvalued and don’t think earnings were good enough to reduce valuations.

Here is a sampling of the responses:

  • “I try not to let one quarter influence my purchases or sales.”
  • “Better than expected, so I’m cautiously bullish, although valuations are high for the S&P 500.”
  • “They’re just good enough to keep the market from selling off.”
  • “Earnings on average are still not high enough to support current prices.”
  • “Not at all. It’s all about politics now.”


This week’s Sentiment Survey results:

Bullish: 32.9%, up 9.0 points
Neutral: 37.1%, down 4.8 points
Bearish: 30%, down 4.3 points

Historical averages:

Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%
Take the Sentiment Survey.

Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!