T his I s Not Further Economic Growth and Stock Market Gains

Transcription

1 T his I s Not 2 8 Th e C a s e f o r Further Economic Growth and Stock Market Gains I N V E S T M ENT S TR ATE G Y GROUP

2 We are now well into the seventh year of the economic recovery that followed the Great Recession. While the current economic expansion has not lived up to most expectations, we have created over 13 million jobs and the stock market has returned over 2%. During times of market turbulence, similar to what we are currently experiencing, common concerns we hear are this feels like 28 or what can keep this market going higher? This piece points out the significant differences between the economic conditions leading up to the Great Recession and our current conditions. It also makes the case for further economic growth and stock market gains. Leading up to the financial crisis, U.S. consumers were taking on higher and higher levels of debt to buy ever more expensive homes and cars. Figure 1 shows that household debt service reached unsustainably high levels which was a major cause of the crisis. While much of this debt resulted in defaults and bad loans on banks balance sheets, household debt service levels are now at record low levels and indicate a much healthier consumer. Meanwhile, household net worth is now at an all-time high as a result of the housing market recovery and stock market gains. Figure 1 U.S. Household Debt Service Ratio HEALTHY CONSUMER AND LABOR MARKET Consumer debt reached unsustainably high levels prior to financial crisis. Debt service levels are now at historically low levels. While labor markets were deteriorating in 28, they are now showing significant improvement. Job creation has been very steady with over 13 million jobs created since the crisis, while the unemployment rate has steadily fallen from over 1% to its current 5.1%. Figure 2 shows that while job openings were falling by 28, they are now making new all-time highs. All of this is resulting in a rebound of consumer confidence as shown in Figure 3. Figure 2 Job Openings Are at an All-Time High Figure 3 Conference Board Consumer Confidence While confidence was deteriorating by 27, it continues to move higher today. 2

3 A healthy, confident consumer is able and willing to make big-ticket purchases. While home and car sales were falling going into 28, they are both currently exhibiting solid recoveries and are at their highest levels since 25 as shown in Figures 4 and 5. This healthy consumer supports our overweight of the Consumer Discretionary and Consumer Staples sectors. Figure 4 U.S. NAHB Homebuilder Index (SAAR) Highest since 25 EASY CREDIT AND HEALTHY BANKS Higher interest rates and tighter credit conditions engineered by the Federal Reserve (Fed) cause recessions. The Fed started aggressively raising interest rates in 24 which ultimately led to tight credit conditions and financial stress by 27. Note that the stock market peaked in October of 27, long after the Fed started raising interest rates. Figure 6 illustrates the tight monetary policy pursued by the Fed leading up to the financial crisis. This figure also shows the very easy credit conditions in place since the crisis. Considering that the Fed has not even started raising rates, tight credit conditions that harm the economy and stock market should not be in the foreseeable future. These easy credit conditions are also being pursued by most other global central banks which was not the case heading into the financial crisis. Figure 5 U.S. Auto Sales (SAAR) Figure 6 U.S. Federal Funds Target Rate Fed induced tight credit conditions by 27. Highest since 25 Fed maintaining very easy credit conditions today. 3

4 The easy monetary policy settings put in place by the Fed since the crisis have enabled the banks to return to health. Figure 7 shows several financial system stress indicators that we monitor. The top panel shows the Chicago Federal Reserve s National Financial Conditions Index which includes financial conditions in money markets, debt and equity markets, and the banking system. The second panel includes measures of credit risk. When these credit risk indicators rise, default risk is considered to be increasing. The third panel shows whether bank lending standards are easing or tightening. All of these indicators were pointing to financial system stress by the middle of 27 but remain very calm today. HEALTH CARE BENEFITS FROM A STRONG CONSUMER AND HEALTHY FINANCIAL SYSTEM In addition to Consumer Discretionary, Consumer Staples, and Financial stocks, we favor the Health Care sector. The Health Care sector benefits from a strong consumer and further economic growth. The pace of health care expenditure growth should continue to exceed that of the overall economy with pent-up demand for health care services, lower unemployment levels, rising commercial insurance membership, and aging demographics bolstering the sector. Figure 7 U.S. Financial Conditions that Deteriorated well Before the 28 Crisis, Remain well Behaved Today 4 U.S. NATIONAL FINANCIAL CONDITIONS INDEX* U.S. FINANCIAL RISK INDICATORS: TED SPREAD** U.S. FINANCIAL RISK INDICATORS: ABS OPTION-ADJUSTED SPREAD*** BPs 2 5 BPs -2 1 U.S. LEVERAGE INDICATORS: C&I LENDING STANDARDS (ABOVE ZERO = TIGHTENING STANDARDS, BELOW ZERO = EASING STANDARDS)**** U.S. LEVERAGE INDICATORS: Baa-RATED CORPORATE BOND OAS*** -5 1 % BPs BCA Research 214 * SOURCE: FEDERAL RESERVE BANK OF CHICAGO ** 3-MONTH LIBOR OVER 3-MONTH T-BILL RATE *** SOURCE: BARCLAYS **** AVERAGE OF SMALL AND LARGE BUSINESSES, SOURCE: FEDERAL RESERVE (Source: Janney ISG and BCA Research) Easy Fed monetary policy settings and very low levels of financial stress indicators are indicative of a healthy financial system which should support future economic growth. This also supports our overweight of the Financial sector. 4

5 Table 1: Actionable Investment Ideas For Further Economic Growth Company Name Ticker Forward P/E Earnings Growth Dividend Yield Credit Rating Notes Coverage Consumer Discretionary Consumer stocks are the major beneficiary of a strong consumer with many industries showing strong fundamentals including home builders, restaurants, drug stores, and consumer staple stocks. CHIPOTLE MEXICAN GRILL INC CMG Gaining share with best combination of growth and store level returns. MCDONALD S CORP MCD A- Largest fast food restaurant in the world with significant dividend. WALT DISNEY CO/THE DIS A Iconic consumer brands with a strong management team. COSTCO WHOLESALE CORP COST A+ Consistent earnings track record with strong cash flow and balance sheet. APPLE INC AAPL AA+ Apple platform has over 9% customer retention and is returning cash. AMAZON.COM INC AMZN AA- E-commerce continues to take share and AMZN is the dominant force. CVS HEALTH CORP CVS BBB+ Largest pharmacy health care provider well positioned for aging demographics. PEPSICO INC PEP A Dominant brands well positioned for higher discretionary spending. PROCTER & GAMBLE PG AA- Blue chip consumer product firm with significant dividend yield. CONSUMER DISCRETIONARY ETF XLY Offers diversified exposure to 87 Consumer Discretionary stocks. ISHARES U.S. HOME CONSTRUCTION ETF ITB Offers diversified exposure to 38 home construction stocks. Financials The Financial sector has healed from the financial crisis and is well positioned to extend the needed credit and insurance for pent-up consumer expenditures. ALLSTATE CORP ALL A- Solid returns, valuation support and is returning cash to shareholders. /J DISCOVER FINANCIAL SERVICES DFS BBB- Industry leading revenue growth, solid credit quality and buying back shares. /J JPMORGAN CHASE & CO JPM A Top management and deep bench with risk reduction as a catalyst. WELLS FARGO & CO WFC A+ Solid management and well positioned for consumer credit needs. SIMON PROPERTY GROUP INC SPG A Real estate that is well positioned for a FINANCIAL SELECT SECTOR SPDR ETF XLF SPDR REGIONAL BANKING ETF KRE ISHARES U.S. INSURANCE ETF IAK healthy consumer. Includes 88 stocks for broad-based financial sector exposure. Includes 9 equally-weighted regional bank stocks. Includes 64 U.S. insurance provider stocks. Health Care The Health Care Sector is a major beneficiary of job growth, increased insurance coverage (Obamacare), an aging population and future high levels of healthcare spending. MEDTRONIC PLC MDT A Very diverse product line, strong cash flow, valuation and dividend support. BRISTOL-MYERS SQUIBB CO BMY A+ Multiple catalysts driving Immuno- Oncology franchise. MCKESSON CORP MCK BBB+ Drug distribution benefitting from strong pricing with cross-sell opportunities. GILEAD SCIENCES INC GILD A- HCV market still in early stage while stock is trading well below historical levels. HCA HOLDINGS INC HCA Hospital fundamentals are solid with HCA levered to many growth categories. VANGUARD HEALTH CARE ETF VHT Cap-weighted basket of 318 companies offers broad exposure. ISHARES U.S. MEDICAL DEVICES ETF IHI Cap-weighted basket of 49 manufacturers and distributors. ISHARES U.S. HEALTHCARE IHF Cap-weighted basket of 5 health care PROVIDER ETF ISHARES US PHARMACEUTICALS ETF IHE providers. Cap-weighted basket of 41 pharmaceutical companies. Definitions: Forward P/E - Current stock price divided by EPS consensus estimate for the next four quarters. Earnings Growth Estimate - Mean broker estimate of the compounded annual growth rate of the operating eps over the company s next full business cycle (typically 3-5 years). Dividend Yield - Trailing 12 month dividend per share divided by share price Credit Rating - Rating assigned by Standard & Poor s to the long term obligations of the issuer if repaid in the local currency of the issuer. 5

6 Disclosure This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Indexes are hypothetical portfolios of specified securities, the performance of which is used as a benchmark in judging the relative performance of securities. Indexes are unmanaged portfolios and do not guarantee future performance. Index performance returns reflect results of an asset class based on target allocation weightings. Weightings are subject to change. Index returns are for illustrative purposes only and do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and it is not possible to invest directly in an index. A client s investment results are reduced by advisory fees and transaction costs and other expenses including advisory fees charged by mutual funds that may be held in the account. All calculations were based on information obtained from sources we believe to be reliable, but we cannot guarantee the accuracy of such information. Janney makes no representation that an account will obtain gains or losses similar to those illustrated. There are distinct differences between hypothetical performance and performance achieved by actual trading platforms. Hypothetical results in practice are prepared with the benefit of hindsight. Additionally, hypothetical trading does not involve the risks and cannot account for the impact of risk in actual trading. The ability to withstand losses or adhere to a trading program in spite of losses are material facts that can adversely affect trading results. There are other factors related to markets in general that cannot be accounted for in the preparation of hypothetical performance results. Performance data quoted represents past performance and is no guarantee of future results. Current returns may be either higher or lower than those shown. Individual account performance may not match the results shown and will depend upon various factors including market conditions at the time of investment. Janney investment professionals are available to discuss the suitability and risks involved with various financial products and strategies. We will be happy to provide a prospectus, when available, and other information upon request. JANNEY MONTGOMERY SCOTT LLC The Highest Standard of Success in Financial Relationships 215, Janney Montgomery Scott LLC Member: NYSE, FINRA, SIPC Ref