It has been more than nine years since the S&P 500® Index hit a low during the financial crisis. During this time, the S&P 500 Index has returned more than 420% (March 10, 2009 – September 30, 2018), and in the past year, U.S. equity investors have benefited from 12 consecutive months of positive returns. The rally from March 2009 to September 2018 has lasted 115 months, significantly longer than the 81-month average for all rallies since 1970. The most recent rally has not only produced substantial returns, it has done so in a relatively consistent manner. The chart below plots the number of months with positive returns in each calendar year. The strong market performance has inflated U.S. equity valuations, potentially moving the risk/return ratio out of the investor's favor.

Analysis is as of September 30, 2018, and is based on S&P 500 Index monthly price return data. Past performance is no guarantee of future results.

Source: FactSet, Standard & Poor's. As of December 31, 2017. Past performance is no guarantee of future results.

Source: Chicago Board of Exchange. As of September 30, 2018.
Past performance is no guarantee of future results.

According to the most common indicator of volatility, the VIX® Index, volatility fell below the long-run average of 20.0 on June 28, 2016. The downward trend continued for nearly six months before spiking at the end of January 2018. The change in market trend was a reminder to all market participants that investments contain risk and volatility can swiftly spike.

Strong market performance has inflated U.S. equity valuations, potentially moving the risk/return ratio out of the investor's favor. At the end of the year, the S&P 500 Index price-to-earnings ratio (P/E) was more than 50% higher than the MSCI EAFE® Index (33.2 vs. 19.6).

Source: Bloomberg, Robert Shiller, Yale. S&P 500 Index as of September 30, 2018. MSCI Emerging Markets (EM) Index as of May 31, 2018. MSCI EAFE Index as of August 31, 2018. The Shiller price-to-earnings (P/E) ratio is a cyclically adjusted valuation measure defined as price divided by average of the past 10 years of earnings adjusted for inflation. Past performance is no guarantee of future results.

Strong market performance combined with unusually low volatility may have investors feeling a false sense of security. As the equity market rallied since March 10, 2009, individual investors have steadily decreased their cash allocation to near 20-year lows.

Source: American Association of Individual Investors, FactSet. As of September 30, 2018.

For investors who still want—and require—U.S. equity exposure despite the current late cycle bull market and divergent valuations, consider a More Conservative Approach. Seek investments that may alter the nature of that exposure by combining:

• Strong attention to risk and allocation to investments that may potentially provide greater downside protection relative to an index
• A conservative approach focused on undervalued stocks

Over time, the challenges facing investors change. However, many of those challenges have arisen before, and recognizing that fact may provide an advantage in navigating uncertain markets. It may be the key to turning cyclical markets into consistent success.

During times of uncertainty, it is important to have a manager with a proven track record and experience in successfully investing through multiple market cycles. The AMG Yacktman Fund (YACKX) and the AMG Yacktman Focused Fund (YAFFX) have produced strong results relative to the S&P 500 benchmark over their respective histories. Although the Funds’ managers expect some performance lag late in a market rally due to their focus on managing risk, the Funds have provided significant outperformance during market declines and off market lows when bargain hunting is often best.

Yacktman maintains a long-term investment approach, attempting to identify companies with low purchase prices, good long-term businesses and shareholder-oriented management teams. They manage the Funds with a broad mandate, are benchmark agnostic and will utilize cash as an integral part of their portfolio construction process. Historically, the Yacktman Funds have performed especially well on a relative basis after equity market peaks. The Yacktman team does not attempt to prognosticate market direction as part of their investment process. The charts below demonstrate the Yacktman Funds results compared to the S&P 500 Index in the years following market peaks reached in 2000 and 2007:

Source: FactSet. Recovery based on months with value less than $1,000,000 at any point during the month. Past performance is no guarantee of future results.

Source: FactSet. Recovery based on months with value less than $1,000,000 at any point during the month. Past performance is no guarantee of future results.

The performance data shown represents past performance. Past performance is not a guarantee of future results. Current performance may be lower or higher than the performance data quoted. The investment return and the principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. For performance information through the most recent month end, please call 800.835.3879 or visit our website at amgfunds.com.

Source: FactSet. Past performance is no guarantee of future results.