The Business cycle: Understanding the bigger picture

Transcription

1 The Business cycle: Understanding the bigger picture

2 Topics covered 1) Understand the big picture (business cycle) 2) The big four key indicators to watch 3) Where are we in the cycle? 4) Stock markets and the economy 5) Importance of the U.S. Dollar 6) Current conditions

3 Business Cycle n Reasons to use the business cycle when investing Most dominant force. Dictates earnings, unemployment, rate of growth of an economy Generally lags the stock market by 4-8 months Important first step in investing. Helps assess risk and growth potential Acts as a confirmation to the stock market

4 Business Cycle Definitions Four phases of the cycle n n n n Recession: A decline in real GDP for at least two quarters. Low point: The time at which the real GDP stops its decline and starts expanding. Recovery: A period in which the real GDP grows. Peak: The point at which the real GDP stops increasing and begins its decline.

5 Business Cycle Peak GDP growth Recovery Decline Low point Low point Model of the business cycle. Av. 4.5 years Phases of the Business Cycle

6 The Big Four Key Indicators n Annual Gross Domestic Product (GDP) n Industrial Production (measures industrial output) n Nonfarm Employment n Disposable Personal Income

7 The Big Four Key Indicators The average annual GDP since 1960 is 3.3% 2 years of decline A significant low develops about every 5 years. If this pattern continues, the next major correction should develop in 2014.

8 The Big Four Key Indicators The average since 1960 is 2.93% If this pattern continues, the next major correction should develop in 2014.

9 The Big Four Key Indicators More people are getting employed. Still rising.

10 The Big Four Key Indicators Disposable income is still moving higher.

11 The Big Four Key Indicators Average GDP since 1960 is 3.22% Current cycle started in 2009 A significant low develops about every 5 years. If this pattern continues, the next major correction should develop in 2014.

12 The Big Four Key Indicators If this pattern continues, the next major correction should develop in 2014.

13 The Big Four Key Indicators Slow recovery. A drop below 138,000 would signal a reversal U.S. disposable income is still rising.

14 Unemployment and the TSX Unemployment rate and the TSX move in opposite trends.

15 Unemployment and the S&P 500 U.S. unemployment rate moves in the opposite trend as the Dow. Fed s goal 6.5%

16 World Economies - GDP

17 World Stock Markets Switzerland and the U.S. are the only markets at new highs.

18 Commodities and the TSX TSX Commodity Research Bureau Index

19 Importance of the U.S. Dollar Commodity Research Bureau Index U.S. Dollar Index

20 Current Conditions: Trailing P/E: The not so reliable indicator

21 Current Conditions: P/E 10-yr : Getting expensive P/E10 average is 16.5

22 Current Conditions: Leading Indicators: NYSE Debt Margin Is this the peak? NYSE debt margin is higher now then in Leverage began to spike is 2012.

23 Current Conditions: Leading Indicators: CBLE Index 1) Average weekly hours, manufacturing 2) Average weekly initial claims for unemployment insurance 3) Manufacturers new orders, consumer goods and materials 4) ISM Index of New Orders Manufacturers' new orders, nondefense capital goods excluding aircraft orders 5) Building permits, new private housing units 6) Stock prices, 500 common stocks 7) Leading Credit Index 8) Interest rate spread, 10-year Treasury bonds less federal funds 9) Average consumer expectations for business conditions There is a slight rebound but the Index is still far below the 2010 high.

24 Sector rotation: Six months ago In Q1 And Q2 the best Six months ago, performing sectors strength were was evenly financials and healthcare. spread among Sector expanding rotation economy into defensive industries consumer and not in staples, utilities defensive sectors. and healthcare.

25 Current Conditions: Where is the money going? The best performing sectors since May 30th to October 4th have been consumer discretionaries, industrials, materials and healthcare. Rotation more into growth and risk.

26 Current Conditions: Retail Sales Retail sales are down from the last business cycle Both U.S. and Canadian retail sales are declining Same level as 2002

27 Current Conditions: U.S. Consumer: Spending patterns Consumer Discretionary ETF (XLY): Consumer Staples ETF (XLP). This ratio generally leads the S&P 500. Consumer Discretionaries are still out performing Consumer Staples.

28 Current Conditions: U.S. Consumer: Spending patterns Investors moved to staples before the 2008 correction. Investors are focusing on discretionaries verses staples. That is a very good sign for the markets.

29 Current Conditions: Bond yields U.S. 10-yr Treasury bond yields are still trending down only a move to 4% would signal a change in trend and inflation. Two times that QE was stopped 78.60% 55.23%

30 Quantitative Easing and the Markets P/E10 average is 16.5

31 Current Conditions: Percentage of Rising Stocks 78.60% Two times that QE was stopped 55.23%

32 Big Picture Conclusion Investing Environment n Canada s GDP and Industrial Product have been falling for two years. They peaked in n The 20-year pattern of lows in GDP suggest there maybe another low in Most world economies have also been stalling or flat for the two years. Little or no growth. n Trailing 12-month and 10-yr P/E on the S&P 500 is above its long-time averages n The current market is 56-months old. Average cycle since 1960 is 54-months n Most world stock markets are flat over the last 3-years n Capital over the last quarter has been moving toward the consumer discretionaries, industrials, materials and away from defensive groups. n U.S. Dollar is stabilizing and rising long term. This is not favourable to commodities. The TSX is weighted 49% to commodities

33 Business Cycle: Understanding the Bigger Picture Contact information Donald W. Dony, FCSI, MFTA Ph: P/E P/E P/E 12-13