Presentation For Québec CFA Association

Transcription

1 PORTFOLIO STRATEGY Presentation For Québec CFA Association François Trahan Chief Investment Strategist Portfolio Strategy & Quantitative Research May 31,

2 Redefining The New Normal For Economics... The New Speed Limit 10% 8% Max United States Real GDP (QoQ) 10% 8% 6% 4% 2% +1 Std Dev 3.6% Average 2.43% 0.07% 6% 4% 2% 0% -2% -4% -1 Std Dev Min 0% -2% -4% -6% -8% The Era of Uncertainly will likely see shorter expansions and longer contractions! -6% -8% -10% "The Great Moderation" ( ) "The Boom-Bust Years" ( ) "The Era Of Uncertainty" (Post-2008) -10% This was partially offset by the greates credit conditions of the past century! Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

3 Redefining The New Normal For Economics... The New Speed Limit The Era Of Uncertainty: Expectations For 2012 And Beyond While While Tailwinds Tailwinds Boosted Boosted Equities Equities In The In 80s The & 80s 80s 90s, && Headwinds 90s, 90s, Headwinds Have Have Created Have Created A Created Bumpy A Bumpy A Ride Bumpy Ride Since Since Ride Since 1,0 1,400 1,200 1, ,0 1,400 Between Between 1980 and and stock 1999 stock prices annualized 17.9% growth 1,200 prices annualized 17.9% growth 1, ,0 1,400 1,200 1, ,0 1,0... which... fell which to 0.21% fell to over 0.21% over 1,500 1,400 1,500 the past the 11 past years. 11 years. 1,400 1,400 1,200 1,300 1,300 1,000 1,200 1, ,100 1, , , Stock markets Stock markets generally generally rose rose over the over past the decade, past decade, markets markets between between 1980 and and have gone have nowhere. gone nowhere ,0 1,0 1,500 1,500 1,400 1,400 1,300 1,300 1,200 1,200 1,100 1,100 1,000 1, S&P 500 S&P Price 500 Index Price Index Source: Wolfe Source: Trahan Wolfe & Trahan Co. Portfolio & Co. Strategy. Portfolio Strategy. S&P 500 S&P Price 500 Index Price Index Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

4 Redefining The New Normal For Economics... The New Speed Limit Lessons From Japan's Experience With Secular Headwinds Tailwinds In The 70s and 80s Have Become Headwinds In Recent Decades 40,000 35,000 30,000 Annual returns averaged +18.9% in the 70s and 80s. 40,000 35,000 30,000 20,000 Since the 90s, the average return in Japan has been -4.2%. 20,000 25,000 25,000 15,000 15,000 20,000 20,000 15,000 10,000 15,000 10,000 10,000 10,000 5,000 5, , ,000 Nikkei Price Index Nikkei Price Index Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

5 Redefining The New Normal For Economics... The New Speed Limit Lessons From Japan's Experience With Secular Headwinds Japan Has Been In Its Own New Normal For Over 20 Years Japan Has Been In Its Own New Normal For Over 20 Years 8.0% Japan Real GDP 8.0% 6.0% 6.0% 4.0% 4.0% The average annual Nikkei return in the Old Normal was +13.7% 2.0% 0.0% -2.0% -4.0% -6.0% Average GDP was 4.50% Average GDP has been.98% with fat tails 2.0% 0.0% -2.0% -4.0% -6.0% the average market return in Japan's New Normal has been -1.7% annualized. -8.0% Old Normal (Pre-1990s) New Normal (Post-1990s) -8.0% Source: Wolfe Trahan & Co. Portfolio Strategy. Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

6 Redefining The New Normal For Economics... The New Speed Limit Lessons From Japan's Experience With Secular Headwinds Once BOJ Rates Hit Zero Inflation Became The Biggest Driver Of The Economy 70% Japan: Correlation to LEIs % 50% 40% 55.3% 56.2% 30% 26.3% 20% 10% 0% 4.4% Pre 1990 Post 1990 BOJ Policy 12-month lead Japanese CPI 6-month lead Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

7 Redefining The New Normal For Economics... The New Speed Limit 75.0% 55.0% 35.0% 15.0% -5.0% -25.0% -45.0% Inflation (Not Deflation) Has Led To Weaker Markets In Japan The best equity returns have come in the wake of disinflation/deflation. -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% -65.0% % While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump. - Ben Bernanke 2002 Nikkei Index (YoY, L) Japan's CPI (Inverted, Adv 6m, R) Despite Fears Of Deflation, Japan Has Performed Well In The Wake Of Lower Inflation Goldilocks In Japan's New Normal Decline In CPI Trough In LEIs Trough In Market Rise In Equities -1.00% Sep-95 Jun % -2.80% Dec-98 Sep % -0.80% Mar-05 May % -2.40% Mar-09 Mar-09.02% Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. - Ben Bernanke Month Lag Lower inflation has led to higher LEIs and stronger equity markets (even in Japan) with a lag. Portfolio Strategy May 31,

8 Redefining The New Normal For Economics... The New Speed Limit Inflation Overthrew Policy As The Best Measure Of Leading Indicators 100% Correlation To LEIs 100% % 80% 70% % 50% 40% 30% 20% 10% 0% Policy WAS the primary driver of the economy but now the most powerful indicator is inflation. 55.7% 31.1% 33.0% 70.1% Today 90% 80% 70% % 50% 40% 30% 20% 10% 0% In the New Normal, the relationship between inflation and LEIs has reached new highs! Monetary Policy Inflation 10-Year Monthly Correlation Between Inflation (Advanced 6 months) and LEIs Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

9 Redefining The New Normal For Economics... The New Speed Limit Lower Inflation Pressures Pave The Way For A Continued Rise In LEIs ? ? ISM Manufacturing Index (L) U.S. CPI Food And Energy (Inverted, Adv 6m, YoY % Chg, R) ISM Manufacturing Index (L) S&P 500 (YoY % Chg, R) Portfolio Strategy May 31,

10 Reasons Why Investors Are Feeling Very Uncertain Today Investor Sentiment Is Back To Levels That We Last Saw At The October Lows 1, , , , , , , , Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 After a 4% pullback in equities, bullish sentiment has fallen back to the same levels that we saw in October. S&P 500 Index (L) AAII Bullish Sentiment (R) Portfolio Strategy May 31,

11 Reasons Why Investors Are Feeling Very Uncertain Today 1. Macro Forces Are The Dominant Driver Of Equity Returns 100% 90% 80% 70% % 50% 40% 30% 20% 10% 0% Stock Specific Influence On Equity Returns (28% long-term av erage) Equity Return Explained By Macro Forces (71% long-term av erage) Change in Price Explained by Macro Forces Company Specific 100% 90% 80% 70% % 50% 40% 30% 20% 10% 0% Because macro is the driving force behind markets, it has a very strong influence on overall equity returns. Portfolio Strategy May 31,

12 Reasons Why Investors Are Feeling Very Uncertain Today 2. Macro Forces Have Become More Volatile Sources Of Stimulus Monetary Policy Fed Funds Rate Long-Term Yields Fiscal Policy Tax Policy Government Spending Inflation Low Commodity Prices Consumer Consumer Credit Wage Growth The 80s, 90s & 00s "The Era Of Uncertainty" (Post-2008) There are very few ways that policy makers can stimulate demand today compared to the past 30 years. Portfolio Strategy May 31,

13 Reasons Why Investors Are Feeling Very Uncertain Today 3. Fewer Companies Are Providing Guidance 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, U.S. Listed Firms Providing Financial Guidance (12-month sum, R) Portfolio Strategy May 31,

14 Reasons Why Investors Are Feeling Very Uncertain Today Macro-Driven Markets + Less Company Guidance = Uncertainty Bull, Bear, Bull, Bear, Bull, Bear Which Is It? Jan-10Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12-40% -45% -50% -55% -% -65% -70% -75% -80% -85% Changes In Bull And Bear Sentiment Are More Frequent And More Polarized A high negative correlation between changes in bull and bear sentiment suggests investors have become very herd-like in switching between bulls and bears. Bull / Bear changes almost a perfect mirror image of each other very few neutrals. -90% AAII Bullish Sentiment AAII Bearish Sentiment Correlation Between Changes In Bull And Bear Sentiment (Weekly Changes, 5-Year Rolling) Portfolio Strategy May 31,

15 The Case Against A Bear Market In U.S. Equities In the days of economic tailwinds, a pullback used to be about 3-5% post- 08 in the days of economic headwinds a pullback is now 10-20%. Call it the new normal for technicals. Equities Have Entered Correction Territory But How Long Will It Last? 1,0 1,500 1,400 S&P 500 1,300 1,200 1,100 1, % % -10% -15% -20% Market pullback from peak -25% Pct Drawdown From Peak (6m) Pullback (-5%) Correction (-10%) Bear Market (-20%) Portfolio Strategy May 31,

16 The Case Against A Bear Market In U.S. Equities The DAX And The S&P 500 Two Highly Correlated Global Benchmarks 7, The correlation between U.S. and German equities is higher than it is between Germany and Greece or Spain! 7,000 6,500 6,000 5, Major developed markets remain tightly traded. A recovery in U.S. economic prospects would likely fuel a rally in most markets. 5,000 Jul-11 Oct-11 Jan-12 Apr-12 Jul DAX Inde x (L) S&P 500 (R) Portfolio Strategy May 31,

17 The Case Against A Bear Market In U.S. Equities Early Cyclicals Argue Correction Set To End Imminently 15% 1,0 10% 1,500 A period of underperformance that last lasted about six weeks in early cyclicals last fall foreshadowed this correction 5% 0% -5% -10% 5/30/2012, 0.1%? 1,400 1,300 1,200 1,100 The massive outperformance of early cyclicals earlier this year argues that equities are set to reembark on an uptrend shortly. -15% 1,000 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Early/Late-Stage Cyclicals Relative Perf. (Adv 6m, YoY % Chg, L) S&P 500 (Level, R) Portfolio Strategy May 31,

18 The Case Against A Bear Market In U.S. Equities Short-Term LEIs Suggest Better Markets In June 66 1, , ,425 1, ,325? 56 1, , , , , Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct ? Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 S&P 500 Index (L) ISM Manufacturing New Orders (Adv 2m, R) NAHB Housing Market Index Adv 1m (L) S&P 500 (R) Portfolio Strategy May 31,

19 The Case Against A Bear Market In U.S. Equities The Effects Of Higher Oil Prices May Weigh On Markets For A While Longer ? July 17th Oil Price (Inverted, Adv 5m, L) S&P 500 P/E (R) Portfolio Strategy May 31,

20 The Case Against A Bear Market In U.S. Equities The Past Rise In Prices Paid Indices May Be Weighing On Leading Indicators /31/ ? The lagged effect of rising inflation may be a factor that is weighing on LEIs today. Philly Fed Index (L) Philly Fed Index: Prices Paid (Inv, Adv 6m, R) Portfolio Strategy May 31,

21 Strong-Dollar Stimulus Makes This A Soft Patch, Not A Recession A Strong Dollar Is Helping To Push Down Inflation Pressures U.S. Trade Weighted Dollar % U.S. Trade Weighted Dollar ? -20% -15% -10% -5% 5 0% 0 5% % 15% 20% 25% U.S. Import Prices (YoY % Chg, L) U.S. Broad Trade-Weighted Dollar (Adv 3m, YoY % Chg, Inverted, R) Portfolio Strategy May 31,

22 Strong-Dollar Stimulus Makes This A Soft Patch, Not A Recession Cooling Inflation Increases Consumers Purchasing Power And Helps Fuel Economic Prospects % -10% -5% 0% 5% 10% 15% 20% 25% ISM (L) Import Prices (Inverted, Adv 6m, YoY % Chg, R) ? May Est % 0% 5% 10% 15% 20% 25% Portfolio Strategy May 31,

23 Strong-Dollar Stimulus Makes This A Soft Patch, Not A Recession Most Inflation Pressures Continue To Recede And Point To Higher Leading Indicators From Here ? May Est May Est.? ISM Manufacturing Index (L) Producer Price Index (Inv, Adv 6m, R) ISM Manufacturing Index (L) U.S. CPI Food And Energy (Inverted, Adv 6m, YoY & Chg, R) Portfolio Strategy May 31,

24 Strong-Dollar Stimulus Makes This A Soft Patch, Not A Recession Early Cycle Industries Such As Housing Tend To Signal Changes In Money Velocity While wages aren t growing, consumers have been able to cut costs at a very fast clip leaving more discretionary spending dollars left over % % 8% 6% 4% 2% 0% -2% -4% -6% -8%? 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% Consumer Free Cash Flow % (Personal Income - Debt Service - Food - Energy Expenditures, Pct Of Total) M2 Money Velocity (YoY % Chg, L) Housing % Of GDP (Adv 6q, YoY % Chg, R) Portfolio Strategy May 31,

25 Policy s Reach Has Been Uneven Across Europe Uneven Policy = Uneven Recovery 1. Sentiment Is Depressed Sentiment on the Euro is at a level we've only seen three times in the past three years. 2. Policy Is Uneven Germany has benefitted a lot from a weaker Euro and lower interest rates; the peripherals are being hurt by higher import prices and higher rates. 3. Germany Is Booming Economic Growth Within Europe Has Decoupled Unemployment near record lows, exports at record highs. 4. Peripheral Economies Need More Stimulus Lower inflation has failed to stimuluate Greece. Peripheral economies need more than LTRO. Portfolio Strategy May 31,

26 Policy s Reach Has Been Uneven Across Europe 1. Euro Sentiment Extremely Bearish Even While Germany s Unemployment Rate Is At A 20-Year Low Sentiment near multiyear lows again Euro Sentiment (L) USD/EUR Spot (R) Portfolio Strategy May 31,

27 Policy s Reach Has Been Uneven Across Europe 2. Policy Is Uneven: Why Europe Is Staring At A Recession, Not A Soft Patch Austerity Periphery Countries Are A Drag 2. Less "CE" Stubborn CPI Weaker Currency 3. Higher Interest Rates Germany is getting a huge dose of stimulus from a weaker Euro and record-low interest rates Aug-11 Nov-11 Feb-12 May-12 Aug-12 Germany 10-Year Yield (L) Euro Spot Rate (R) 1.15 Portfolio Strategy May 31,

28 Policy s Reach Has Been Uneven Across Europe 3. Germany Has Continued To Strengthen: Unemployment Rate At 20-Year Low 30 Unemployment Rate 30 8,000 7,500 Germany Exports Decoupling in Europe has been taking place for several years now. 24% ,000 6,500 6, , % % France Spain Germany 5,000 4,500 4,000 3,500 German exports to U.S. and Asia at all-time highs , To United States (L) To Asia (R) Portfolio Strategy May 31,

29 Policy s Reach Has Been Uneven Across Europe 4. Higher Interest Rates Are Overwhelming The Benefit Of Lower Inflation Greece PMI (L) Greece CPI (Inverted, Adv 6m, R) Greece PMI (L) Greece 10 Year Yield (Inverted, Log Scale, Adv 3m, R) Portfolio Strategy May 31,

30 Policy s Reach Has Been Uneven Across Europe LTRO Has Tried To Chop Off The Fat-Tail Risk Of Financial Contagion It s Working 12, ,000 10,000 9,000 8, Looking at this chart, we are not convinced that it is Greece and not the U.S. that is mostly responsible for the market correction. 7,000 6,000 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Spain Equity Market (R) Euro TED Spread (INVERTED, R) 200 Portfolio Strategy May 31,

31 Decoupled Economies Markets Set To Do The Same? The U.S. Remains The Bright Spot How Will Decoupling End? 65 Manufacturing Indices: Decoupled Economies typically decouple when policy has decoupled in the recent past China Eurozone United States Portfolio Strategy May 31,

32 Decoupled Economies Markets Set To Do The Same? Chinese Stocks Have Decoupled From The Rest Of World Gaining Over 5% Since April 3, ,150 0? 2 2,650 2, , Shanghai Composite (L) China CPI (Inverted, Adv 6m, R) Stock Market Return Since April China U.S. Germany Greece Portfolio Strategy May 31,

33 Decoupled Economies Markets Set To Do The Same? CPI Is Likely To Decelerate Further Good News For The Chinese Equity Market ? ? China CPI Outlook (Industrial Output, Money Supply, Adv 9m, L) China CPI (R ) China Policy Rate (YoY % Chg, L) China CPI (YoY % Chg, R) Portfolio Strategy May 31,

34 Our Macro Guidance Suggests LEIs Will Continue To Rise LEIs Poised To Continue Higher On The Back Of Lower Inflation Pressures? ISM Manufacturing Index (L) U.S. CPI Food And Energy (Inverted, Adv 6m, YoY % Chg, R) Source: Wolfe Trahan & Co. Portfolio Strategy May 31,

35 Portfolio Strategy & Quantitative Research Team François Trahan Michael Kantrowitz, CFA Stephen Gregory Joe Ramirez Emily Needell, CFA (646) (646) (646) (646) (646) DISCLOSURES The content of this report is to be used solely for informational purposes and should not be regarded as an offer, or a solicitation of an offer, to buy or sell a security, financial instrument or service discussed herein. Opinions in this communication constitute the current judgment of the author as of the date and time of this report and are subject to change without notice. Information herein is believed to be reliable but Wolfe Trahan & Co. and its affiliates, including but not limited to WR Securities, LLC, makes no representation that it is complete or accurate. The information provided in this communication is not designed to replace a recipient's own decision-making processes for assessing a proposed transaction or investment involving a financial instrument discussed herein. Recipients are encouraged to seek financial advice from their financial advisor regarding the appropriateness of investing in a security or financial instrument referred to in this report and should understand that statements regarding the future performance of the financial instruments or the securities referenced herein may not be realized. Past performance is not indicative of future results. This report is not intended for distribution to, or use by, any person or entity in any location where such distribution or use would be contrary to applicable law, or which would subject Wolfe Trahan & Co. or any affiliate to any registration requirement within such location. For additional important disclosures, please see The views expressed in Wolfe Trahan & Co. research reports with regards to sectors and/or specific companies may from time to time be inconsistent with the views implied by inclusion of those sectors and companies in other Wolfe Trahan & Co. analysts research reports and modeling screens. This report is limited for the sole use of clients of Wolfe Trahan & Co. Authorized users have received an encryption decoder which legislates and monitors the access to Wolfe Trahan & Co. content. Any distribution of the content produced by Wolfe Trahan & Co. will violate the understanding of the terms of our relationship. The analyst(s) at Wolfe Trahan & Co. primarily responsible for this research report are affiliated with an investment advisory firm (the "Investment Adviser") that provides investment advice to clients, including limited partnerships and other pooled investment vehicles. The Investment Adviser may give advice or take action with respect to its clients utilizing the quantitative analysis and/or portfolio strategies described in this research report, and nothing herein shall limit or restrict the Investment Adviser from utilizing such analysis and strategies or from buying, selling or trading securities or financial instruments for the accounts of its clients. The clients of the Investment Adviser may at any time have, acquire, increase, decrease or dispose of the specific securities or financial instruments, if any, discussed herein. The Investment Adviser may also give advice and take action with respect to its clients that differs from the analysis, strategies, information, statements, views and opinions included herein. Copyright Wolfe Trahan & Co All rights reserved. All material presented in this document, unless specifically indicated otherwise, is under copyright to Wolfe Trahan & Co. None of the material, nor its content, nor any copy of it, may be altered in any way, or transmitted to or distributed to any other party, without the prior express written permission of Wolfe Trahan & Co. Source: Wolfe Trahan & Co. 34