Economic and Financial Market Update

Transcription

1 Economic and Financial Market Update James W. Paulsen, Ph.D. Chief Investment Strategist WELLS CAPITAL MANAGEMENT is a registered service mark of Wells Capital Management, Inc.

2 New-Normal Working-Age Population Growth!??! 2

3 Declining Labor Force Participation Mainly Demographics?!? Employment to Population Ratio 25 to 54 year olds 3

4 Weak Labor Force Growth and Slow Productivity!?! 4

5 The New Normal Is Aging Demographics!?!! Real GDP Adjusted For the U.S. Labor Force Annual Growth Rate Real GDP Adjusted for the U.S. Labor Force Annualized Growth During 18 Quarters of Recoveries *1970 is the annualized growth for only the 12 quarters which the recovery lasted 5

6 Core Private Economic Growth Better Than Perceived??? 6

7 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 7

8 Credit-Driven Growth!!! Total U.S. Bank Loans Total U.S. Household Debt Annual Growth Rate 8

9 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 9

10 Better Household World!!! 245K Average Monthly Job Gains in Last Six Months Unemployment Rate Soon With a 5-Handle Unemployment Claims (layoffs) < 300K Wages Turning Up??? Low Inflation Low Yields Low Gas Prices Restored Balance Sheets Improved Confidence 10

11 Household Balance Sheets are Restored!!! U.S. Household Net Worth Trillions of U.S. Dollars U.S. Household Debt Service Burden 11

12 U.S. Real Wages Have Been Rising!!! Real Wage Rate vs. De-Trended U.S. Productivity SOLID (left scale) Average hourly earnings index divided by consumer price index shown on a natural log scale. DOTTED (right scale) U.S. Productivity Index: percent above/below its long-run trendline average level. 12

13 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 13

14 Lots of DRY POWDER Waiting for Animal Spirits!?! U.S. Corporate Net Cash Flow as a Percent of Nominal GDP 14

15 Global Synchronization Helps!! U.S. Capital Spending as a Percent of Nominal GDP* *Nominal Non-residential Investment Spending as a Percent of Nominal GDP Proportion of Global Economies Contracting 15

16 Tighter Resource Markets Require Cap Spending U.S. Capital Spending as a Percent of Nominal GDP U.S. Capacity Utilization Rate 16

17 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 17

18 Another Nice Leg in Housing Activity U.S. Housing Starts Millions, SAAR 18

19 Record Home Affordability!!! Homebuyer Affordability Composite Index* *Source: National Association of Realtors and ISI Group LLC 19

20 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 20

21 U.S. to Become a Trade Surplus Nation? Record Low Real Exchange Rate Below Global Average Grower Emerging World Becoming Consumption BASED 21

22 U.S. A. Has Cheap Produce! U.S. Trade Deficit vs. U.S. Real Exchange Rate Solid Line U.S. Real Trade Deficit as a Percent of Real GDP Dotted Line U.S. Trade-Weighted Real Broad Dollar Index (lagged forward eight quarters) 22

23 A Silver Lining for Slow Growth!! U.S. Trade Deficit & Relative U.S.A. Growth Solid Line U.S. Real Trade Deficit as a Percent of Real GDP Dotted Line Global Nominal GDP Divided by U.S.A. Nominal GDP (in U.S. Dollars) 23

24 Emerging Economies Becoming Global Consumer! Emerging World Personal Consumption Expenditures As a percent of U.S. Personal Consumption Expenditures* *Nominal U.S. Dollars United States Emerging World Trade Ratio* *Ratio of U.S. Exports to Emerging Economies divided by U.S. Imports to Emerging Economies 24

25 Six New Forces For Growth!!! Finally. Some Credit Creation Better Household World Capital Spending Cycle Still Coming Housing Starts Rise Another 50% U.S. Trade Improvement A Confidence Revival 25

26 STAGES OF CONFIDENCE?!? Conference Board Consumer Confidence Present Situation Index 26

27 Small Biz Confidence Breaks Out!!! 27

28 The Great Exaggeration!!!? Annual U.S. Real GDP Growth* S& P 500 Total Return Index *Nominal GDP Deflated by CPI Index Utilized until 1947 and Real GDP thereafter 28

29 Financial Market Outlook Longest Recovery in U.S. History? Inflation Biggest Secular Risk! Short-Term FED/OVERHEAT Hiccup? 29

30 Intermediate Term Brewing an OVERHEAT Cocktail???! New Dovish Fed Chair Global Growth Has Synchronized U.S. Growth Has Notched Up to 3% Tighter Resource Markets A Weak U.S. Dollar Rising Commodity Prices Accelerating PPI, CPI, PCE Core Inflation Wage Inflation Turning Up?? Faster Loan Growth Fed Discussion HEATING UP 30

31 Inflation Evidence Is Broadening!?!? CRB Spot All Commodity Price Index 31

32 A Wage Controversy?!? Annual Wage Inflation Non-Supervisory Workers (solid) vs. Total (dotted) 32

33 Wage Pressures Nearing!!? Wage Inflation vs. CPI/Unemployment Indication Solid Line Annual Wage Inflation Non-Supervisory Workers Dotted Line Core Consumer Inflation Rate Less Labor Unemployment Rate 33

34 Labor Market Slack??? Part-Time Employment for Economic Reasons As a Percent of the Labor Force 34

35 INFLATION is Biggest Correction Risk!?? U.S. Stock Market vs. Core Consumer Inflation Rate 35

36 Important Expectation Shift Emerging???! 36

37 Repricing Bond Yields Post Armageddon Fears!!! Real 10-Year Treasury Bond Yield* *10-Year Bond Yield Less Core Consumer Price Inflation Rate 37

38 Bond Yields Can Move Fast!?! 10-year Treasury bond yield JP Morgan Chase junk bond yield spread* *Yield spread to worst on B-rated bonds 38

39 Yields: Lower Lows or A Higher High?? U.S. 10-Year Treasury Bond Yield Natural Log Scale 39

40 GAPS Imply a Long Recovery!!! U.S. Nominal Output Gap* *Percent Difference Between Actual Nominal GDP and Potential GDP 40

41 Diversity Away from U.S.A.!?! Relative price of Canadian versus U.S. stocks* *Canada EWC EFT Index relative to U.S. Spy ETF Index Relative price of Australia versus U.S. Stocks* *MSCI Australia USD Index relative to U.S. SPX Index Relative price of European versus Japanese stocks* *MSCI EMU ETF Index relative to MSCI Japan ETF Index Relative price of emerging market stocks versus U.S. Stocks* *Emerging Market EEM ETF Index relative to U.S. SPX Index 41

42 BARBELL Sector Exposure! S&P 500 technology sector* relative price performance versus capital goods spending as a capital goods spending as a percent of GDP *since 1990, current S&P 500 info-technology sector. Before 1990, S&P 500 technology sector derived from industry composites. Relative price performance of S&P 500 consumer staples sector Relative price performance of S&P materials sector versus JOC Industrial Commodity Price Index *MSCI Australia USD Index relative to U.S. SPX Index Relative total return on S&P 500 utilities versus 10-year Treasury bond yield Relative price of S&P 500 materials sector (solid) Relative price of S&P 500 technology sector (solid) U.S. capital goods spending as a percent of GDP (dotted) JOC Industrial Commodity Price Index (dotted) 42

43 CONFIDENCE Is Key For Stock Market!?! S&P 500 Trailing PE vs. Consumer Confidence 43

44 PE vs. Long-Term Growth ScatterPlot of S&P 500 PE Multiples vs. Long-Term Growth Rate Estimates March 2014 ScatterPlot of S&P 500 PE Multiples vs. Long-Term Growth Rate Estimates June 2000 Price to forward one-year IBES mean earnings estimate Price to forward one-year IBES mean earnings estimate IBES mean long-term growth rate estimates IBES mean long-term growth rate estimates 44

45 Price of Growth!?! The Price of Growth (POG) * Among S&P 500 Stocks *This chart represents the slope coefficient from a cross-sectional regression, each quarter since 1987, of the price-earnings multiples PE (based on IBES one-year forward mean earnings per share estimates) for every S&P 500 stock regressed against each stock s IBES mean estimated long-term growth rate. The resulting coefficient represents the value the stock market places on sustainable company growth i.e., the price of growth. It records the expected percent change in a stocks PE due to a 1 percentage point increase in it s long-term growth rate estimate. Stocks included in coefficient estimates were confined to those whose PE was positive and less than 125 to avoid distorting the regression coefficient estimates. 45

46 It Is Not About Earnings?!? S&P 500 Trailing Reported Earnings Per Share Natural Log Scale S&P 500 Composite Stock Price Index High, Low, and Close Chart 46

47 POST-WAR STOCK MARKET STORY!??! U.S. Stock Market vs. Long-Term Trend line Level S&P 500 Stock Price Index (Solid) Trend line Level (Dotted) Total U.S. Corporate Profits Actual Level (Solid) vs. Trend line (Dotted) 47

48 CULTURAL GLOOM TO GLEE CYCLE!!? U.S. Stock Market Percent Above/Below Long-Term Trend Line 48

49 Could A Return To NORMAL CONFIDENCE Double the Stock Market??? De-trended U.S. Stock Market vs. U.S. Consumer Confidence 49

50 A Confidence-Driven Secular Bull à la 1950s-60s!??! U.S. Stock Market vs. Long-Term Bond Yields* *Sources: Robert Schiller s database, Bloomberg. 50 U.S. Stock Market* Natural Log Scale (Solid) Long-Term Bond Yield* Natural Log Scale (Dotted)

51 Which Valuation Range??? Price-to-Trailing 12 Month Earnings Per Share* U.S. Stock Market PE MULTIPLES Shiller Cyclically-Adjusted P/E10 Ratio* U.S. Stock Market 51

52 Where Wall Street Meets Main Street Corner of Capital & Labor?!? U.S. Capital-Labor Ratio* *Annual Average of Monthly Series Total Capacity Index divided by U.S. Labor Force Natural Log Scale 52

53 A Rising K/L Ratio is Good For Stocks!! Relative Stock-Bond Return Performance vs. Capital-Labor Ratio* *Both Series are shown on a Natural Log 53

54 A Rising K/L Ratio Also Good for Main Street!! 54

55 Investment Themes BONDS? 10-Year Needs to Reprice to Between 4% to 5% Bullet Now & Barbell as Fed Gets in Game Stay Below Average Duration Overweight Lower Quality (Junk) 55

56 Investment Themes STOCKS? Maintain Secular Overweight to Stocks Near-Term Correction Good Longer-Term Potential Diversity To a Different Policy Cycle Japan & Eurozone To Resource-Based Economics Canada & Australia To Emerging World Between Cyclical & Defensive Stocks Look for Entry Back to Cyclical, Small, and U.S.A. Stocks 56

57 Questions? 57