Economic Outlook and Market Forecast€¦ · The global market sell-off and resulting spike in...

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Economic Outlook and Market Forecast

March 2019


Source: Factset

While it is slowing down, U.S. GDP should grow 2.5% in 2019 due to a healthy consumer and an expected revival in capital spending.

Easing trade tensions and a stabilizing dollar could produce a positive surprise in net exports over the second half of the year.

The Global Economic Backdrop


2

-6%

-4%

-2%

0%

2%

4%

6%

Mar

-89

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

U.S. Real GDP Growth (year over year)

-15%

-10%

-5%

0%

5%

10%

15%

20%

U.S. Exports (year over year %)



Developed Economies

Three events should pull the European economy from the brink of a recession: the currency depreciation in 2018, fiscal stimulus domestically and in important export destinations such as China, and a successfully-negotiated Brexit agreement. One tangible risk to this recovery is renewed U.S. focus on trade, particularly German auto tariffs.

Chinese fiscal stimulus should bolster Japanese exports. However, the government will likely need to scrap its proposed sales tax hike. In its current state, the Japanese economy wouldn’t be able to absorb any tightening measures.

Source: Factset

3

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17

Japanese Real Year Over Year Export & Import Growth

Exports Imports

40

45

50

55

60

65

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18

Purchasing Managers’ Index (PMI) Manufacturing

Eurozone - PMI Manufacturing Sector United Kingdom -PMI Manufacturing Sector


If trade negotiations result in fewer tariffs or tariff threats, then the spending and tax measures introduced over the last few months should allow the Chinese government to achieve its target of roughly 6.0% growth for 2019.


Emerging Market Economies

Source: IMF & Factset; 2018 & 2019 GDP Growth Rates are forecasts

4

0%

2%

4%

6%

8%

10%

12%

14%

16%

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

Chinese Real GDP Growth

Real GDP

1.3%

6.6%

7.3%

5.1%

2.1%1.7%

0.8%

2.5%

6.2%

7.5%

5.1%

2.1%1.6% 1.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Brazil China India Indonesia Mexico Russia South Africa

Real GDP Growth

2018 2019


Monetary Policy

Source: Factset

With the approaching end to Fed tightening, the U.S. Treasury yield curve has stopped flattening, and the threat of actual inversion has lessened.

Even the more hawkish members of the European Central Bank concede that the Eurozone economy isn’t strong enough to begin tightening rates in 2019.

The Bank of Japan has little choice but to maintain monetary policy at its extremely easy levels. The bank’s biggest concern is its perceived lack of tools to react to any economic downturn in the future.


5

1.00%

0.25%

0.00% 0.00%0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

U.S. Federal Funds TargetRate

U.K. Bank Rate Japan Policy Rate Eurozone Refinancing Rate

One-Year Change in Policy Rates

2.4%2.5% 2.6% 2.5% 2.5%2.7%

1.5%

1.8%2.1%

2.2%

2.6%2.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1M 6M 1Y 2Y 5Y 10Y

U.S. Yield Curve

Now 1 Year Ago

Data as of 3/1/2019


U.S. Fixed Income

Source: Factset

Longer term rates are expected to increase gradually as the year progresses with the 10-year note hitting 3.0% by year-end.

Municipal bonds should travel a similar path as their taxable counterparts with yields meandering higher throughout the year. However, the slowdown in issuance should prevent any meaningful price depreciation.


6

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

10-Year Treasury Yield

US 10Y T-Note Yield

0%

1%

2%

3%

4%

5%

6%

Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17

Bloomberg Barclays Municipal Bond 10-Year Yield


The prospect of continued U.S. economic growth and the stabilization of oil prices have brought the yields of high-yield bonds to levels that are no longer considered cheap, but better reflect the continued low default rates forecasted over the next twelve months.

Chinese fiscal stimulus, higher oil prices, and the impending end of Fed tightening have driven emerging market debt prices higher in both dollars and local currency. A reduction in tariffs and tariff threats may be needed to drive further price appreciation.


Credit Markets

Source: Factset

7

6.5%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

Emerging Market Debt Yield

JP Morgan EMBI Global - Yield to Maturity

0

500

1000

1500

2000

2500

U.S. High-Yield Credit Spreads

ICE BofAML US High Yield - Spread - Option Adj Spread Average


U.S. Equities

Source: Factset

The recovery from last year’s sharp Q4 decline has been surprisingly swift and largely indicative of a U.S. economy still growing at a healthy rate with little inflationary pressure. Valuation may again become a barrier, but with rates remaining relatively low, further price appreciation is expected.


8

8x

10x

12x

14x

16x

18x

20x

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18

S&P 500 PE Ratio

S&P 500 P/E (next 12 months) Average

$152

$0

$20

$40

$60

$80

$100

$120

$140

$160

Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18

S&P 500 12-Month EPS


International Equities European equities have benefited from continued monetary ease and reduced concern about a global recession. Further upside will depend in part on the resolution of domestic issues, including Brexit, the Italian budget, French protests, and Spanish unity.

Despite the strong year-to-date price performance, emerging markets equities remain very cheap relative to developed markets. Now that oil prices have stabilized and the Fed has tabled further rate hikes, any signs that the Chinese fiscal stimulus is taking hold and U.S. – China trade relations are thawing should set the stage for emerging markets equities to rebound and potentially outperform other international equities this year.


Source: Factset

9

5x

7x

9x

11x

13x

15x

17x

19x

21x

Mar

-05

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Mar

-10

Sep-

10

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Mar

-16

Sep-

16

Mar

-17

Sep-

17

Mar

-18

Sep-

18

P/E Ratios Next Twelve Months (NTM)

MSCI Emerging Markets (EEM) MSCI EAFE (EFA) S&P 500 (IVV)

40

42

44

46

48

50

52

54

56

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19

The Renminbi & Emerging Markets Equities

USD/CNY - Total Return iShares MSCI Emerging Markets ETF - Total Return


Oil

Reduced concerns about a global recession and the magnitude of the Chinese slowdown have heightened confidence in the outlook for oil demand and driven prices higher. U.S. supply should react positively to these higher prices, preventing them from increasing meaningfully above current levels.


Source: Factset

10

$0

$20

$40

$60

$80

$100

$120

Mar-14 Dec-14 Sep-15 Jun-16 Mar-17 Dec-17 Sep-18

Crude Oil (NYM $/bbl) - Price

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19

United States - Baker-Hughes Rotary Rig Count, Oil

United States - Baker-Hughes Rotary Rig Count, Oil


Gold has reacted positively to what appears to be the end of Fed tightening. Look for the price to drift down in the coming months given the continued lack of global inflation.

Industrial metals, especially copper, should benefit from the level of growth expected in both China and the U.S. Reduction and delays in current and future tariffs, while still uncertain, should further boost the prices of these metals.

Gold and Commodities


Source: Factset

11

150

170

190

210

230

250

270

290

310

330

350

Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19

Bloomberg Copper Subindex - Price

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

NY Gold (NYM $/ozt) - Price


The global market sell-off and resulting spike in market volatility during Q4 2018 demonstrated the benefit of exposure to categories such as equity long/short, global macro and multi-strategy managers to help protect capital during turbulent markets.

After a challenging period of ever-rising valuations, the Q4 2018 market sell-off reduced public market comparables, which should help private equity managers acquire good companies at more reasonable valuations than in recent years.


Hedge Funds & Private Equity

Source: Factset, Pitchbook

9.7x

8.7x 8.8x

7.0x

8.1x

9.2x

8.6x

9.4x 9.4x

9.9x

10.4x 10.4x

0x

2x

4x

6x

8x

10x

12x

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

U.S. Middle Market Mergers & Acquisitions Transaction Multiples

12

0

10

20

30

40

50

60

70

80

90

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Mar

-16

Mar

-17

Mar

-18

VIX (CBOE Volatility Index)


Important Information

Cerity Partners LLC (“Cerity Partners”) is an SEC registered investment adviser with offices in New York, Illinois, Ohio, Michigan and California. This commentary islimited to general information about Cerity Partners’ services and its financial market outlook, which may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Investing in the financial markets involves risk, including the risk of loss of the principal amount invested; and may not be appropriate for everyone. The information presented is subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. All information is deemed reliable but is not guaranteed. For information pertaining to the registration status of Cerity Partners, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Cerity Partners, including fees and services, send for our disclosure statement as set forth on Form ADV Part 2A using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

©2019 Cerity Partners LLC, an SEC-registered investment adviser. All Rights Reserved. (03/19)


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Economic Outlook and Market Forecast€¦ · The global market sell-off and resulting spike in...

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