76
Point of View Economy – Markets – Investment Strategy March 2019 1
Point of View
Economy – Markets – Investment Strategy
March 2019
1
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3
Important Information
The views and opinions expressed are those of the speaker and are subject
to change based on factors such as market and economic conditions. These views
and opinions are not an offer to buy a particular security and should not be relied
upon as investment advice. Past performance cannot guarantee comparable future
results.
4
Important Information
Performance quoted is past performance and cannot guarantee comparable future results; current
performance may be higher or lower.
Results shown assume the reinvestment of dividends.
An investment cannot be made directly in an index.
Investments with higher return potential carry greater risk for loss.
Investing in small companies involves greater risks not associated with investing in more established
companies, such as business risk, significant stock price fluctuations and illiquidity.
Foreign securities have additional risks, including exchange rate changes, political and economic
upheaval, the relative lack of information about these companies, relatively low market liquidity and
the potential lack of strict financial and accounting controls and standards.
Investing in emerging markets involves greater risk than investing in more established markets such as
risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates,
adverse political developments and lack of timely information.
Fluctuations in the price of gold and precious metals often dramatically affect the profitability of the
companies in the gold and precious metals sector. Changes in political or economic climate for the
two largest gold producers, South Africa and the former Soviet Union, may have a direct effect on the
price of gold worldwide.
5
Stock Market➢ flash bear market caused by Fed➢ adjusting to earnings deceleration➢ stocks are attractively valued➢ inflation is tame
Point of View
March 2019
6
Stock market
S&P 500 – flash bear market and recovery
Source: Standard & Poor’s. data through March 4, 2019. 1Investment News, April 19, 2016, by John Waggoner. 2 Reuters, July 30, 2016. Barron’s reported in its August 8, 2016 issue that George Soros, Stan Druckenmiller, Carl Icahn and Bill Gross were also negative on stocks. 3The Wall Street Journal, December 21, 2018.
12/19/18Fed rate hike, 3% target reaffirmed
1/4/19Powell signals rates will be
on hold
5/29/18Italian election results blocked
8/27/18Mexico trade deal
10/3/18Powell says: "... we're
a long way from neutral."
12/21/18David Rosenberg
says "the economy will be in recession
within a year."3
12/24/18
-19.8%from 9/20 peak
-12.1% YTD
1/30/19Fed meeting
confirms rates are on hold
2/11/16China, global slowdown worries, oil
hit bottom
-12.0%
4/19/16Blackrock says U.S. stocks will
return 5% or less over the next five years. GMO says U.S. large-
caps will return an average -2.3% per year after inflation over the
next seven years. 1
6/24/16Brexit
-5.3%
7/30/16Gundlach says
"sell everything" 2
11/4/16Election polls tighten
-4.8%
11/9/16Trump win
2/9/17Trump says
"phenomenal" tax plan coming
12/22/17Tax Cut and Jobs Act
signed
2/2/18+2.9% y/y Jan wage gain, inflation fright
2/8/18
-10.2%
3/1/18Trump: "trade
wars are good and easy to win."
3/22/18U.S. threatens tariffs on $60
billion of Chinese imports;
10/29/18
-9.9% from 9/20 peak
FAANGs fall
1800
2000
2200
2400
2600
2800
De
c-15
Feb
-16
Ap
r-16
Jun
-16
Au
g-16
Oct-1
6
De
c-16
Feb
-17
Ap
r-17
Jun
-17
Au
g-17
Oct-1
7
De
c-17
Feb
-18
Ap
r-18
Jun
-18
Au
g-18
Oct-1
8
De
c-18
Feb
-19
S&P
50
0
7
Stock market
S&P 500 – flash bear market in context
Source: Yardeni Research Inc., with permission. March 2, 2019.
8
Stock market arithmetic
Total return = 7.3% earnings-driven price + 2.2% dividends reinvested
+9.5% per year S&P 500 total return over the last 27 years is in line with the stock market’s long-term returns going back to 1926, or back even further to 1871.3
Source: Standard and Poor’s. Data through March 4, 2019.1 Compound annual growth rate. 2 S&P 500 total return index. 3 per Professor Jeremy Siegel’s seminal Stocks for the Long Run, first published in 1994. For representative use only. Not for public distribution.
S&P 500 w/ dividends
reinvested2
S&P 500 price index
+9.5%1 growth path
+7.3%1
growth path
0
200
400
600
800
1000
1200
1400
Jun
-91
Jun
-92
Jun
-93
Jun
-94
Jun
-95
Jun
-96
Jun
-97
Jun
-98
Jun
-99
Jun
-00
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
Jun
-18
S&P
50
0 In
dex
(6/3
0/9
1 =
10
0)
9
Stock market arithmetic
Total return = 7.3% earnings-driven price + 2.2% dividends reinvested
A logarithmic scale gives the S&P 500 a substantially different look.
Source: Standard and Poor’s. Data through March 4, 2019.1 Compound annual growth rate. 2 S&P 500 total return index.
S&P 500 w/ dividends
reinvested2
S&P 500 price index
+9.5%1 growth path
+7.3%1 growth path
100
1000
Jun
-91
Jun
-92
Jun
-93
Jun
-94
Jun
-95
Jun
-96
Jun
-97
Jun
-98
Jun
-99
Jun
-00
Jun
-01
Jun
-02
Jun
-03
Jun
-04
Jun
-05
Jun
-06
Jun
-07
Jun
-08
Jun
-09
Jun
-10
Jun
-11
Jun
-12
Jun
-13
Jun
-14
Jun
-15
Jun
-16
Jun
-17
Jun
-18
S&P
50
0 In
dex
(6/3
0/9
1 =
10
0)
On a logarithmic scale a constant rate of appreciation, say 9.5%, is represented by a constant interval on the y-axis, say one-eighth of an inch.
Hence, the +9.5% growth trajectory is a straight line rather than a hyperbolic curve (previous chart).
10
Stock market
S&P 500 and crises
Source: Standard and Poor’s. Monthly data through February 2019.1 Compound annual growth rate.
1962 Cuban missile crisis
1970Penn
Central
1973 Oil
embargo
1974Franklin National
1979Oil price
spike
1980Silver
bubble
1982Drysdale Securities & Mexico default
1984Continental
Illinois
1987Stock market
crash
1990Persian Gulf war
S&L crisis
1994Mexican
peso crisis
12/5/96"But how do we know when irrational exuberane has unduly excalated asset
values ...?" 1997Pacific Rim
crisis
1998LTCM/Russian default crisis
2001WTC
attack
September 2002:With DJIA at 7600Bil Gross wrote
"Dow 5000".
2002Accounting
scandals
2007Subprimemortgagemeltdown
2008 Lehman
bankruptcy
2010Sovereigndebt crisis
8/5/11S&P U.S.
debt downgrade
2/16 China slowdown
worries
12/18Fed tightening
worries
+6.9% CAGR1
tendline
40
400
Jan-5
7
Au
g-58
Mar-6
0
Oct-6
1
May-6
3
De
c-64
Jul-6
6
Feb
-68
Sep
-69
Ap
r-71
No
v-72
Jun
-74
Jan-7
6
Au
g-77
Mar-7
9
Oct-8
0
May-8
2
De
c-83
Jul-8
5
Feb
-87
Sep
-88
Ap
r-90
No
v-91
Jun
-93
Jan-9
5
Au
g-96
Mar-9
8
Oct-9
9
May-0
1
De
c-02
Jul-0
4
Feb
-06
Sep
-07
Ap
r-09
No
v-10
Jun
-12
Jan-1
4
Au
g-15
Mar-1
7
Oct-1
8
S&P
50
0 In
dex
(lo
gari
thm
icsc
ale)
11
Stock market arithmetic
+7.3% earnings growth has driven +7.3% stock price gains
1 2018 (estimated), 2019 (estimated) and 2020 (estimated) bottom-up S&P 500 operating earnings per share as of March 4, 2019: for 2018(e), $162.00; for 2019(e), $169.07; for 2020(e), $189.00. Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from 2015. Standard and Poor’s for actual operating earnings data through 2014.
S&P 500 Earnings
20191
20201
+7.3% growth path
10.00
30.00
50.00
70.00
90.00
110.00
130.00
150.00
170.00
190.00
19
91
Q2
19
92
Q1
19
92
Q4
19
93
Q3
19
94
Q2
19
95
Q1
19
95
Q4
19
96
Q3
19
97
Q2
19
98
Q1
19
98
Q4
19
99
Q3
20
00
Q2
20
01
Q1
20
01
Q4
20
02
Q3
20
03
Q2
20
04
Q1
20
04
Q4
20
05
Q3
20
06
Q2
20
07
Q1
20
07
Q4
20
08
Q3
20
09
Q2
20
10
Q1
20
10
Q4
20
11
Q3
20
12
Q2
20
13
Q1
20
13
Q4
20
14
Q3
20
15
Q2
20
16
Q1
20
16
Q4
20
17
Q3
20
18
Q2
20
19
Q1
20
19
Q4
20
20
Q3
S&P
50
0 E
arn
ings
per
Sh
are
($
)
+23%
+4%
+12%
Microsof t
Excel Worksheet
Valuation
S&P 500 vs. actual and estimated earnings
49
S&P 500 Earnings(left axis)
20191
20201
S&P 500(right axis)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
3600
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
140.00
150.00
160.00
170.00
180.00
190.00
200.00
19
88
Q4
19
89
Q4
19
90
Q4
19
91
Q4
19
92
Q4
19
93
Q4
19
94
Q4
19
95
Q4
19
96
Q4
19
97
Q4
19
98
Q4
19
99
Q4
20
00
Q4
20
01
Q4
20
02
Q4
20
03
Q4
20
04
Q4
20
05
Q4
20
06
Q4
20
07
Q4
20
08
Q4
20
09
Q4
20
10
Q4
20
11
Q4
20
12
Q4
20
13
Q4
20
14
Q4
20
15
Q4
20
16
Q4
20
17
Q4
20
18
Q3
20
19
Q1
20
20
Q1
S&P
50
0 In
dex
S&P
50
0 E
arn
ings
($
)
1 2018 (estimated), 2019 (estimated) and 2020 (estimated) bottom-up S&P 500 operating earnings per share as of March 4, 2019: for 2018(e), $162.00; for 2019(e), $169.07; for 2020(e), $189.00. Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from 2015. Standard and Poor’s for actual operating earnings data through 2014.
Microsof t
Excel Worksheet
Valuation
S&P 500 vs. 16X and 19X actual and estimated earnings
50
S&P 500
19X S&P 500 actual and estimated earnings
16X S&P 500 actual and estimated earnings
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
3600
19
89
Q2
19
90
Q1
19
90
Q4
19
91
Q3
19
92
Q2
19
93
Q1
19
93
Q4
19
94
Q3
19
95
Q2
19
96
Q1
19
96
Q4
19
97
Q3
19
98
Q2
19
99
Q1
19
99
Q4
20
00
Q3
20
01
Q2
20
02
Q1
20
02
Q4
20
03
Q3
20
04
Q2
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
20
14
Q4
20
15
Q3
20
16
Q2
20
17
Q1
20
17
Q4
20
18
Q2
20
18
Q4
20
19
Q2
20
20
Q1
20
20
Q4
S&P
50
0 In
dex
This is not a forecast or prediction.It’s simply a calculation of 16X and 19X consensus earnings forecasts.
2018 (estimated), 2019 (estimated) and 2020 (estimated) bottom-up S&P 500 operating earnings per share as of March 4, 2019: for 2018(e), $162.00; for 2019(e), $169.07; for 2020(e), $189.00. Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from 2015. Standard and Poor’s for actual operating earnings data through 2014.
14
Stock market
S&P 500 peaking earnings growth
Source: Standard and Poor’s Inc. Data as of March 7, 2019.
actual forecast
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
12
/31
/19
3/3
1/1
9
6/2
9/1
8
9/3
0/1
7
12
/31
/16
3/3
1/1
6
6/3
0/1
5
9/3
0/1
4
12
/31
/13
3/3
1/1
3
6/3
0/1
2
9/3
0/1
1
12
/31
/10
3/3
1/1
0
6/3
0/0
9
9/3
0/0
8
12
/31
/07
3/3
1/0
7
6/3
0/0
6
9/3
0/0
5
12
/31
/04
3/3
1/0
4
6/3
0/0
3
9/3
0/0
2
12
/31
/01
3/3
1/0
1
6/3
0/0
0
9/3
0/9
9
12
/31
/98
3/3
1/9
8
6/3
0/9
7
9/3
0/9
6
12
/31
/95
3/3
1/9
5
% c
han
ge y
/y
S&P 500 operating earnings per sharey/y % change
Q3 2018 marked the peak in y/y earnings growth.
15
Stock market
S&P 500 vs. y/y % △ earnings
Source: Standard and Poor’s Inc. Earnings data as of March 7, 2019. Monthly stock price data through February 2019.
actual forecast
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
12
/31
/19
3/3
1/1
9
6/2
9/1
8
9/3
0/1
7
12
/31
/16
3/3
1/1
6
6/3
0/1
5
9/3
0/1
4
12
/31
/13
3/3
1/1
3
6/3
0/1
2
9/3
0/1
1
12
/31
/10
3/3
1/1
0
6/3
0/0
9
9/3
0/0
8
12
/31
/07
3/3
1/0
7
6/3
0/0
6
9/3
0/0
5
12
/31
/04
3/3
1/0
4
6/3
0/0
3
9/3
0/0
2
12
/31
/01
3/3
1/0
1
6/3
0/0
0
9/3
0/9
9
12
/31
/98
3/3
1/9
8
6/3
0/9
7
9/3
0/9
6
12
/31
/95
3/3
1/9
5
% c
han
ge y
/y
Stocks have made headway in the face of diminishing earnings growth.
S&P 500
S&P 500 operating earnings per sharey/y % change
16
Valuation
S&P 500 P/E ratio vs. inflation
Sources: Standard & Poor’s Corporation and Thomson Reuters I/B/E/S earnings estimates, BEA. Stock price data through March 4, 2019; inflation data through December 2018. Top panel, latest data point: 2793 ÷ estimated trailing operating earnings of $162.00 through 12/31/18 = 17.2X.
The S&P 500’s latest P/E ratio (3/4/19) on trailing 12-months operating earnings is 17.2X.
It is 16.5X on consensus bottom-up 2019 estimated operating earnings.
Inflation(left axis)
S&P 500 P/E ratio
(right axis)
-30-28-26-24-22-20-18-16-14-12-10-8-6-4-2024681012141618202224262830
0
2
4
6
8
10
12
14
16
18
20
22
24
De
c-60
Oct-6
2
Au
g-64
Jun
-66
Ap
r-68
Feb
-70
De
c-71
Oct-7
3
Au
g-75
Jun
-77
Ap
r-79
Feb
-81
De
c-82
Oct-8
4
Au
g-86
Jun
-88
Ap
r-90
Feb
-92
De
c-93
Oct-9
5
Au
g-97
Jun
-99
Ap
r-01
Feb
-03
De
c-04
Oct-0
6
Au
g-08
Jun
-10
Ap
r-12
Feb
-14
De
c-15
Oct-1
7
S&P
50
0 P
/E R
atio
Pers
on
al C
on
sum
pti
on
Exp
end
itu
res
Def
lato
r(y
/y %
ch
ange
)
16.4 = average
17Source: Federal Reserve major currencies index. Monthly data through February 2019. 1Federal Reserve, Remarks by Chairman Alan Greenspan before the Economic Club of New York, March 2, 2004.
U.S. dollar ($)
U.S. Dollar index – trending sideways
The dollar’s surge created a headwind for S&P 500 earnings in 2014-15.
Trending sideways since then.
“… no model projecting directional movements in exchange rates is significantly superior to tossing a coin.”
-- Alan Greenspan1
+3.0% YTD-3.3% from the 12/16 peak+6.6% y/y+6.6% from 2/18 bottom
+54%
$USD
+39%
+35%
60
70
80
90
100
110
120
130
140
150
Jan
-73
Jan
-75
Jan
-77
Jan
-79
Jan
-81
Jan
-83
Jan
-85
Jan
-87
Jan
-89
Jan
-91
Jan
-93
Jan
-95
Jan
-97
Jan
-99
Jan
-01
Jan
-03
Jan
-05
Jan
-07
Jan
-09
Jan
-11
Jan
-13
Jan
-15
Jan
-17
Jan
-19
$U
SD In
dex
(M
arch
19
73
= 1
00
)
18
Buybacks
Strong cash flows funding rising cap-ex
Source: Yardeni Research, Inc., with permission.
special section
Companies are not neglecting cap-ex to fund buybacks.
19
Buybacks
Dividend payout ratios – average
Source: Yardeni Research, Inc., with permission.
special section
Companies are not substituting buyouts for dividends. Dividend payout ratios are average.
20
Buybacks
Buybacks plus dividends – average
Source: Yardeni Research, Inc., with permission.
special section
Companies are not borrowing to fund buybacks plus dividends.
Buybacks plus dividend payouts are less than 100% of operating earnings.
21
Buybacks
Buybacks – a record … but average
Source: Yardeni Research, Inc., with permission.
special section
Buybacks as a % of market capitalization are not unusual.
22
Buybacks
Buybacks aren’t shrinking the share base
Source: Yardeni Research, Inc., Morning Briefing, March 4, 2019, with permission.
special section
“ … buybacks have very little to do with returning cash to investors or boosting earnings per share by reducing the number of shares outstanding. They are mostly driven by stock compensation plans. So buybacks are mostly about the process of redistributing shares from public-market sellers to employees.”
Buybacks have not shrunken the outstanding share base.
23
Fed policy➢ hit the brakes on rate hikes➢ no longer on a path to 3% fed funds rate➢ the Fed manages the yield curve➢ the Fed has created every recession since the 1950s➢ “the Great Unwinding” – bond yields were
supposed to start rising, but they aren’t
Point of View
March 2019
Federal Reserve policy
Fed Funds rate is “right at neutral”
Source: Federal Reserve Bank of New York, March 6, 2019.
From the perspective of monetary policy, the overall picture of the economy is about as good as it gets: very low unemployment, sustainable growth, and inflation just about at our 2 percent goal.Given this favorable situation, when you look at monetary policy, things are looking pretty normal as well. My current estimate for r-star1 is 0.5 percent, so when you adjust for inflation that’s near 2 percent, the current federal funds rate of 2.4 percent puts us right at neutral.
With a strong labor market, moderate growth, and no sign of any significant inflationary pressures, the baseline outlook is quite favorable, as I’ve said.
1 R-star is how economists describe the neutral or natural rate of interest. It’s the rate that we expect to prevail in the long run when interest rates are neither providing a boost to the economy nor trying to cool things down. It’s neither accommodative, nor contractionary. In other words, it’s the “normal” interest rate we expect in “normal” economic times.
➢ Economy is a “good as it gets”➢ Fed funds rate is now “normal”➢ Outlook is “quite favorable”
The U.S. economy is running at its full calculated potential, according to the CBO.
Since the 1950s, U.S. GDP growth has been gradually slowing, principally due to slower population growth and declining labor force participation.
The Congressional Budget Office forecasts an average of < +2.0% annual GDP growth through 2029.
Sources: BEA, CBO. Actual annual data through 2018; and CBO forecast through 2029 dated January 2019 from the CBO’s report The Budget and
Economic Outlook: 2019 to 2029.
Economic growth
GDP growth potential = ∆ productivity + ∆ labor force
CBO forecast
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
Rea
l GD
P %
ch
ange
y/y
(%
)
linear regression trendline
117-month expansion to date
73-month expansion
120-month expansion
92-month expansion
58-month expansion
106-month expansion
Source: Standard and Poor’s Corporation, National Bureau of Economic Research. Data through February 2019. 1The Wall Street Journal, October 6, 2018. 26
Federal Reserve policy
Engineering the soft landing
Shaded bands represent recession.
35
350
Jan-5
7
Au
g-58
Mar-6
0
Oct-6
1
May-6
3
Dec-6
4
Jul-6
6
Feb
-68
Sep
-69
Ap
r-71
No
v-72
Jun
-74
Jan-7
6
Au
g-77
Mar-7
9
Oct-8
0
May-8
2
Dec-8
3
Jul-8
5
Feb
-87
Sep
-88
Ap
r-90
No
v-91
Jun
-93
Jan-9
5
Au
g-96
Mar-9
8
Oct-9
9
May-0
1
Dec-0
2
Jul-0
4
Feb
-06
Sep
-07
Ap
r-09
No
v-10
Jun
-12
Jan-1
4
Au
g-15
Mar-1
7
Oct-1
8
S&P
50
0
(lo
gari
thm
ic s
cale
)
“there’s no reason to think this cycle can’t continue for quite some time, effectively indefinitely.”1
-- Fed Chairman Powell
Recessions trigger bear markets.
27
Federal Reserve policy
Fed’s key policy lever is the yield curve
Source: U.S. Department of the Treasury.
This is an inverted (negative) yield curve resulting from the Fed’s raising the Fed Funds target rate. Recession followed.
March 31, 2007
January 5, 2018
March 8, 2019
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
Yiel
d (
%)
Maturity
The Fed announced at its December 19th meeting that it planned to continue hiking the fed funds rate to a targeted 3%.Had it done so, the yield curve would have inverted.Chairman Powell signaled on January 4th and since then that rates are on hold.
Federal Reserve policy
Fed’s key policy lever is the yield curve
The Fed has flattened the yield curve as it has raised short-term interest rates even as the 10-year Treasury bond yield has remained sub-3%.
Flat or negative yield curves have preceded recessions.
Sources: NBER, Federal Reserve. Monthly data through February 2019. 1The interest rate on the 10-year Treasury bond (long term) minus the fed funds rate (short term).
Shaded bands represent recession.
Yield Curve1
December 19th rate
hike
0.24%
-1.5
-0.5
0.5
1.5
2.5
3.5
Au
g-83
Oct-8
4
De
c-85
Feb
-87
Ap
r-88
Jun
-89
Au
g-90
Oct-9
1
De
c-92
Feb
-94
Ap
r-95
Jun
-96
Au
g-97
Oct-9
8
De
c-99
Feb
-01
Ap
r-02
Jun
-03
Au
g-04
Oct-0
5
De
c-06
Feb
-08
Ap
r-09
Jun
-10
Au
g-11
Oct-1
2
De
c-13
Feb
-15
Ap
r-16
Jun
-17
Au
g-18
10
-yea
r Tr
easu
ry Y
ield
-Fe
d F
un
ds
(%)
Federal Reserve policy
Yield curve vs. the S&P 500
The key for both the economy and stocks is the shape of the yield curve –the difference between bond yields and short term interest rates.
A negative yield curve is what has toppled stocks.
Sources: NBER, Federal Reserve and Standard & Poor’s. Monthly data through February 2019.1The interest rate on the 10-year Treasury bond (long term) minus the fed funds rate (short term).
S&P 500
Yield Curve1
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
Jul-8
3
Jul-8
4
Jul-8
5
Jul-8
6
Jul-8
7
Jul-8
8
Jul-8
9
Jul-9
0
Jul-9
1
Jul-9
2
Jul-9
3
Jul-9
4
Jul-9
5
Jul-9
6
Jul-9
7
Jul-9
8
Jul-9
9
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
Jul-1
5
Jul-1
6
Jul-1
7
Jul-1
8
Yiel
d C
urv
e (%
)
S&P
50
0 In
dex
30
Federal Reserve policy
Quantitative easing, the monetary base and the money supply
Monetary base: currency in circulation plus reserve balances (deposits held by banks in their accounts at the Federal reserve).
M2: currency held by the public plus checking, savings and money market accounts.
A quadrupling of the monetary base did not affect M2 growth.So, a gradually shrinking monetary base should not affect M2 growth.
Source: Federal Reserve, statistical release H.3 and H.6. M2 data through December 2018; monetary base data through December 2018. 1CAGR = compound annual growth rate.
M2
Monetary Base
+5.9% CAGR1 trend line
0
2
4
6
8
10
12
14
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
$ t
rilli
on
s
recession(hatched)
QE1 QE2 QE3
31
Federal Reserve policy
Shrinking its balance sheet
Source: The Wall Street Journal, January 29, 2019.
“It’s hard to fathom the Fed balance sheet is having some dramatic effect.”
32
Bond Yields➢ recent lowest yields in history➢ yields don’t make sense fundamentally➢ Fed’s QE took yields to those levels➢ yields might be higher absent the ECB’s QE➢ the wind-down of the ECB’s QE will remove a
weight on U.S. Treasury yields
Point of View
March 2019
33
Bond yields
All-time low bond yields
Source: Online Data Robert Shiller. Annual data through 2018.
Coming off the lowest long-term interest rates in U.S. history.
Panic of 1873
Gold standard re-established 1875
Panic of 1907
WWI 1914-1918
Great Depression 1929-1941
WWII 1941-1945
Korean War 1950-1953
Vietnam War 1962-1973
OPEC oil embargo and first oil shock
1973
Iranian revolution and second oil
shock 1979
1982: 14.59%
Fed initiates QE
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18
71
18
75
18
79
18
83
18
87
18
91
18
95
18
99
19
03
19
07
19
11
19
15
19
19
19
23
19
27
19
31
19
35
19
39
19
43
19
47
19
51
19
55
19
59
19
63
19
67
19
71
19
75
19
79
19
83
19
87
19
91
19
95
19
99
20
03
20
07
20
11
20
15
Lon
g-te
rm in
tere
st r
ates
(%
)
Long-term bond yields
34Source: Federal Reserve. Monthly data through February 2019.
Bond yields
U.S. Treasury bond yields – nominal and TIPS
Bond yields don’t make sense fundamentally. With the 10-year TIPS yield at 0.80% an investor is receiving very little term premium for making a 10-year loan to Uncle Sam.
Quantitative easing (QE) drove bond yields steadily lower. Bond yields appear to have bottomed and moved higher with the end of the Fed’s bond-buying in October 2014.
The end of the ECB’s QE program is expected to remove another weight on bond yields.
U.S. Treasury 10-year bond yield
U.S. Treasury 10-year TIPS yield
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jan-0
3
Jul-0
3
Jan-0
4
Jul-0
4
Jan-0
5
Jul-0
5
Jan-0
6
Jul-0
6
Jan-0
7
Jul-0
7
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
Jan-1
1
Jul-1
1
Jan-1
2
Jul-1
2
Jan-1
3
Jul-1
3
Jan-1
4
Jul-1
4
Jan-1
5
Jul-1
5
Jan-1
6
Jul-1
6
Jan-1
7
Jul-1
7
Jan-1
8
Jul-1
8
Jan-1
9
Yiel
d (
%)
recession(hatched
Fed QE ECB QE
Source: FRBSL, monthly Bund data through January 2019; monthly Treasury data through February 2019.
Bond yields
ECB QE is likely weighing on U.S. Treasury bond yields
35
German 10-year bund yield
U.S. 10-year Treasury bond yield
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0Ja
n-8
8
Sep
-88
May
-89
Jan
-90
Sep
-90
May
-91
Jan
-92
Sep
-92
May
-93
Jan
-94
Sep
-94
May
-95
Jan
-96
Sep
-96
May
-97
Jan
-98
Sep
-98
May
-99
Jan
-00
Sep
-00
May
-01
Jan
-02
Sep
-02
May
-03
Jan
-04
Sep
-04
May
-05
Jan
-06
Sep
-06
May
-07
Jan
-08
Sep
-08
May
-09
Jan
-10
Sep
-10
May
-11
Jan
-12
Sep
-12
May
-13
Jan
-14
Sep
-14
May
-15
Jan
-16
Sep
-16
May
-17
Jan
-18
Sep
-18
Yiel
d (
%)
These two have historically moved in lockstep, suggesting ECB QE is probably weighing on U.S. Treasury bond yields.
Microsof t
Excel Worksheet0.13%
2.64%
ECB QEFed QE
Crosshatches represent
recessions.
36
Bond yields
ECB’s “new tone of caution”
Source: The Wall Street Journal, January 29, 2019.
Willing to re-start bond-buying.
37
Inflation➢ What Phillips curve?➢ headline PCED +1.7%, +1.9% core➢ headline CPI +1.5%, +2.1% core➢ employment cost inflation rising➢ productivity drives declining unit labor costs➢ inflation expectations remain subdued
Point of View
March 2019
38
Inflation
Phillips curve
This simple schematic illustrates the common notion of an inverse relationship between inflation and the unemployment rate.
The theory behind the Phillips Curve: as labor becomes scarcer employers bid up wages, which are passed through to consumers in the form of higher prices.
This discussion is relevant at present because to the extent the Fed believes the Phillips Curve exists, today’s record low unemployment rate might push them to head off higher inflation with more aggressive monetary tightening.
39
Inflation
Phillips curve – unemployment vs. inflation
This chart illustrates the historic relationship between inflation and the unemployment rate. The correlation coefficient is +0.28, suggesting a positive, not inverse, relationship.
The Fed is grappling with NAIRU. What is the non-accelerating inflation rate of unemployment? Estimates have been much higher than 3.8%, yet inflation remains low.
Source: NBER, BLS, Federal Reserve Bank of St. Louis. Unemployment data through February 2019; core PCED data through December 2018.
Core PCED
1.9%
Unemployment rate
3.8%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-6
0
Sep
-61
May-6
3
Jan-6
5
Sep
-66
May-6
8
Jan-7
0
Sep
-71
May-7
3
Jan-7
5
Sep
-76
May-7
8
Jan-8
0
Sep
-81
May-8
3
Jan-8
5
Sep
-86
May-8
8
Jan-9
0
Sep
-91
May-9
3
Jan-9
5
Sep
-96
May-9
8
Jan-0
0
Sep
-01
May-0
3
Jan-0
5
Sep
-06
May-0
8
Jan-1
0
Sep
-11
May-1
3
Jan-1
5
Sep
-16
May-1
8
Perc
ent
(%)
Hypotheses for global disinflation: a) labor unions lost power, b) globalization, c) technology revolution, d) Amazon, e) aging demographics.
Shaded bands represent
recessions.
40Source: Federal Reserve. Monthly data through February 2019. 2.64% 10-year Treasury yield vs. 0.80% 10-year TIPS yield.
Bond yields
Low inflation expectations
The difference between the nominal 10-year Treasury bond yield and the TIPS yield gives the market’s opinion for a 10-year inflation forecast.
1.84%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan
-03
Jun
-03
Nov-0
3
Ap
r-04
Se
p-0
4
Fe
b-0
5
Jul-0
5
Dec-0
5
Ma
y-0
6
Oct-0
6
Ma
r-07
Au
g-0
7
Jan
-08
Jun
-08
Nov-0
8
Ap
r-09
Se
p-0
9
Fe
b-1
0
Jul-1
0
Dec-1
0
Ma
y-1
1
Oct-1
1
Ma
r-12
Au
g-1
2
Jan
-13
Jun
-13
Nov-1
3
Ap
r-14
Se
p-1
4
Fe
b-1
5
Jul-1
5
Dec-1
5
Ma
y-1
6
Oct-1
6
Ma
r-17
Au
g-1
7
Jan
-18
Jun
-18
Nov-1
8
Imp
lied
infl
atio
n e
xpec
tati
on
s (%
)
U.S. Treasury Bond Yield minus TIPS Yield10-year Maturity
recession
Inflation
PCED – headline and core
Source: NBER, Federal Reserve Bank of St. Louis. Data through December 2018.
The Fed lowered its inflation forecasts in December.
Shaded band represents recession.
PCED
Fed's December 2018 central
tendency PCED forecast
PCED core(dotted)
+1.7% PCED+1.9 core
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan-0
4
Jun
-04
No
v-04
Ap
r-05
Sep
-05
Feb
-06
Jul-0
6
De
c-06
May-0
7
Oct-0
7
Mar-0
8
Au
g-08
Jan-0
9
Jun
-09
No
v-09
Ap
r-10
Sep
-10
Feb
-11
Jul-1
1
De
c-11
May-1
2
Oct-1
2
Mar-1
3
Au
g-13
Jan-1
4
Jun
-14
No
v-14
Ap
r-15
Sep
-15
Feb
-16
Jul-1
6
De
c-16
May-1
7
Oct-1
7
Mar-1
8
Au
g-18
Jan-1
9
Jun
-19
No
v-19
Ap
r-20
Sep
-20
Pri
ce In
dex
fo
r Pe
rso
nal
Co
nsu
mp
tio
n E
xpen
dit
ure
s1
2-m
on
th p
erce
nt
chan
ge (
%)
Microsof t
Excel Worksheet
42 Source: Bureau of Labor Statistics and BEA. ECI quarterly data through December 2018. Core PCED monthly data through November 2018.1 Employment Cost Index. The BLS ‘s ECI is built with fixed weights for individual industries and occupations.
Core inflation has remained flat despite wage and benefit inflation picking up.
Because wages, salaries and benefits are companies’ biggest single cost, they are also presumed to be the biggest single inflation factor for the economy as a whole.
Inflation (core PCE deflator) generally runs lower than measured ECI inflation because higher employment costs can be offset by productivity gains.
Inflation
Employment cost index and inflation
Core PCE Deflator
+1.9%
Shaded bands represent recessions.
ECI1
+2.9%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jun
-82
Sep
-83
De
c-84
Mar-8
6
Jun
-87
Sep
-88
De
c-89
Mar-9
1
Jun
-92
Sep
-93
De
c-94
Mar-9
6
Jun
-97
Sep
-98
De
c-99
Mar-0
1
Jun
-02
Sep
-03
De
c-04
Mar-0
6
Jun
-07
Sep
-08
De
c-09
Mar-1
1
Jun
-12
Sep
-13
De
c-14
Mar-1
6
Jun
-17
Sep
-18
12
-mo
nth
per
cen
t ch
ange
(%
)
43
Source: Bureau of Labor Statistics, quarterly data through December 2018.
Productivity gains have averaged +1.0% per year for the last five years, much lower than the historic average, but the trend is improving.
Productivity gains partially offset wage gains.
Inflation
Productivity
+1.9%
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Q1
95
Q4
95
Q3
96
Q2
97
Q1
98
Q4
98
Q3
99
Q2
00
Q1
01
Q4
01
Q3
02
Q2
03
Q1
04
Q4
04
Q3
05
Q2
06
Q1
07
Q4
07
Q3
08
Q2
09
Q1
10
Q4
10
Q3
11
Q2
12
Q1
13
Q4
13
Q3
14
Q2
15
Q1
16
Q4
16
Q3
17
Q2
18
No
nfa
rm B
usi
nes
s O
utp
ut
per
Ho
ur
per
cen
t ch
ange
fro
m p
revi
ou
s q
uar
ter
at a
nn
ual
rat
e (%
)
Productivity
5-year moving average
Source: Bureau of Labor Statistics, quarterly data through December 2018.
Labor costs are, by far, the biggest driver of inflation.
Unit labor cost increases have been averaging about 2%, in line with inflation.
Inflation
Unit labor costs
+2.0%
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
Q1
95
Q4
95
Q3
96
Q2
97
Q1
98
Q4
98
Q3
99
Q2
00
Q1
01
Q4
01
Q3
02
Q2
03
Q1
04
Q4
04
Q3
05
Q2
06
Q1
07
Q4
07
Q3
08
Q2
09
Q1
10
Q4
10
Q3
11
Q2
12
Q1
13
Q4
13
Q3
14
Q2
15
Q1
16
Q4
16
Q3
17
Q2
18
No
nfa
rm B
usi
nes
s U
nit
Lab
or
Co
sts
per
cen
t ch
ange
fro
m p
revi
ou
s q
uar
ter
at a
nn
ual
rat
e (%
)
Unit Labor Costs5-year moving
average
45Source: Office of the United States Trade Representative, March 22, 2018.
Trade
Made in China 2025
46
(1) “Rob, replicate, and replace.” You Xiaorong, a Chinese-born, naturalized US citizen, was arrested for stealing trade secrets from her US employers, which were doing research with Coca-
Cola. Working with two people in China, she allegedly intended to set up a company in China to produce a competing product and win a reward from a program sponsored by the Chinese government, a 2/14 WSJ article reported.
“The conduct alleged in today’s indictment exemplifies the rob, replicate and replace approach to technological development,” said Assistant Attorney General Demers in the DOJ’s 2/14 press release.
You allegedly took photographs of files open on her computer screen and pictures of her employer’s laboratory equipment in secure and restricted locations. She downloaded secrets to an external hard drive and uploaded files to her Google drive account.
You visited China on a number of occasions starting in 2017 as part of her application in China’s Thousand Talents Program. “This program was designed to induce individuals with advanced
technical education, training and experience residing in Western countries to return or move to China and use their expertise to promote China’s economic and technological development …
[T]hose who were selected sometimes received an annual payment from the Chinese government calculated as a percentage of the applicant’s current salary,” according to the DOJ’s 2/12 indictment. She had also applied to a similar program run by a Chinese provincial government.
(2) All you need is a thumb drive. Hongjin Tan, a Chinese national and a legal permanent resident of the US, was arrested in December, accused of stealing trade secrets from a US petroleum company. His LinkedIn page said he’s part of a research team at Phillips 66, a 12/21 Bloomberg article stated.
Tan was a research engineer in the US company’s battery development group. Tan resigned from the US company, saying he was returning to China to be with his aging parents. However, a
letter dated October 17 found on his computer appears to be an employment agreement with a Chinese battery maker, the 12/20 criminal complaint alleges. The Chinese company “had been in constant contact” with Tan since he was in graduate school, and he interviewed with the company when he visited China in September, the complaint alleges.
The US company determined that Tan accessed hundreds of files, including research reports on how to make “Product A” and market it in China in cell phone and lithium-based battery
systems. He downloaded files to a personal thumb drive. These files were outside of his area of responsibility, and he had no need to access these restricted files, the complaint alleges. The value of the trade secrets is estimated to be more than $1 billion.
(3) Exporting secrets. Suren Qin, a Chinese national and lawful permanent resident of the US, was charged with conspiracy to defraud the US, smuggling, money laundering, and making false
statements to government officials. He operates several companies in China, including LinkOcean Technologies, which imports goods used in underwater and marine applications to China from the US, Canada, and Europe.
The indictment alleges that between 2015 and 2016 Qin exported 60 hydrophones (devices to detect sound under water) from the US to Northwestern Polytechnical University (NWPU), a
Chinese military research institute that the US Department of Commerce considers a national security risk because it has worked closely with China’s People’s Liberation Army. LinkOceanconcealed that the hydrophones were being shipped to the NWPU and falsified end-user information to be filed with the US government.
“[T]he indictment alleges that during an interview with Customs and Border Protection (CBP) Officers in November 2017, Qin stated that he only exported instruments that attach to a buoy.
However, Qin allegedly exported remotely-operated side scan sonar systems, unmanned underwater vehicles, unmanned surface vehicles, robotic boats, and hydrophones. The items that Qin
failed to disclose to, and concealed from, CBP during this interview have military applications, and several of these items were delivered to military end-users in China,” according to an 11/2 DOJ press release.
(4) All you need is an email. Shan Shi, a US citizen, and Gang Liu, a Chinese national working in the US, were among six individuals charged with stealing trade secrets from Company A, a
multinational engineering firm with headquarters in Sweden and a subsidiary in Houston. They have pled not guilty. The trade secrets involve the development of syntactic foam, a lightweight material used in commercial and military purposes, including oil exploration, aerospace and stealth technologies, and underwater vehicles such as submarines.
Shi and others allegedly recruited and hired current and former employees of Company A, including Liu, according to a 4/27 DOJ press release. It states that Liu “and others are accused of passing along those trade secrets. According to the indictment the technology was ultimately destined for China, to benefit the government and other state-owned enterprises.”
The indictment details how in 2015 trade secrets were sent from the indicted individuals’ email accounts at Company A to their personal accounts and then forwarded to the Chinese company’s US arm, which Shi owns.
Source: Yardeni Research, Inc., with permission. February 21, 2019.
Trade
Arrests for theft of technology and trade secrets
Coca-Cola
Phillips 66 – lithium battery technology
sonar technology
foam for stealth technology
47
Trade
U.S. imports and exports % of GDP
Source: U.S. Census Bureau. Includes goods and services. Data for 2017. China’s 2017 GDP was $12.86 trillion, reported by the South China Post 1/18/2018.
$19.4 trillion
$2.9 trillion 15.0% of GDP $2.3 trillion
12.0% of GDP
$568 billion2.9% of GDP
$524 billion2.7% of GDP
18.1% of total imports
$187 billion1.0% of GDP
8.0% of total exports
$337 billion1.7% of GDP
59% of total U.S. trade deficit
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
U.S. GDP U.S. imports U.S. exports U.S. net imports U.S. imports fromChina
U.S. exports to China U.S. net imports fromChina
($b
illio
ns)
➢ The U.S. imported $524 billion from China last year. So, the President’s tariffs of $150 billion covers 29% of Chinese imports.
➢ 59% of the U.S. trade deficit comes from Chinese imports. ➢ 8% of total U.S. exports go to China.
➢ U.S. exports to China comprise 1.0% of U.S. GDP.➢ China’s exports to the U.S. comprise 4.1% of China’s GDP.
this is key
Microsof t
Excel Worksheet
48
Trade
JP Morgan’s view on China tariffs
Source: The Wall Street Journal, October 8, 2018.
$125 billion tariffs compared to $20 trillion GDP … reduce 2019 GDP growth by 0.1%.
49
Trade
Goldman Sachs’ view on China tariffs
Source: The Wall Street Journal, December 4, 2018.
… a hit to U.S. GDP of less than 0.1%.
50
China
Retail sales
Source: Yardeni Research, Inc., with permission.
Gradual slowing in real retail sales …
51
China
GDP growth
Source: Yardeni Research, Inc., with permission.
… driving gradual slowing in GDP growth.
52
China
Working-age population
Shrinking working-age population is a headwind for GDP growth.
400
600
800
1000
1200
1400
1600
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049
Mill
ion
s
China population, total Population ages 15-64, total
Source: World Bank, 2019. Data through 2017.
Total population
Population ages 15-64
actual forecast
53
China
Capital flight
Source: Yardeni Research, Inc., with permission.
Investors taking their money elsewhere.
Source: Yardeni Research, Inc., with permission.
GD
P g
row
th p
ote
nti
al =
∆ p
roduct
ivit
y +
∆ lab
or
forc
e
Wo
rkin
g ag
e p
op
ula
tio
n f
ore
cast
s
54
The U.S. has favorable long-term demographic prospects compared to the world’s major economies.
China
Europe
U.S.
55
Economy
full-employment economy operating at full potential
+2.1% GDP growth forecast, compared to post-recession +2.2% average
pause in upward LEI, strong small business optimism index, strong business investmenthealthy growth in personal income, real DPI, strong retail sales (until probably spurious December reading) strong household balance sheets, savings rate, record FICO scores and low household financial obligations ratiostill-strong PMIs, strong hiring, record high job openings, low unemployment rate, low weekly unemployment claims, flat vehicle sales, flat housing starts
inflation expectations are anchored
Point of View
March 2019
“Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed.”
Federal Reserve Press ReleaseJanuary 30, 2019
56Source: OECD, Interim Economic Outlook dated March 6, 2019.
Global economy
OECD’s March forecast
Small cut to World GDP growth forecast – remains pretty strong.
Mostly cuts to Europe’s growth forecast.
+2.6% U.S. GDP growth forecast – that’s pretty strong.
Economic data
High yield bond index spread to U.S. Treasury bond yield
This market-based measure of risks to the economy spiked in December.
However, it has spiked spuriously in the past.
Source: FBRSL. Monthly data through February 2019.
high-yield spread to U.S. Treasury bond
0
5
10
15
20
Jan-9
7
Sep
-97
May-9
8
Jan-9
9
Sep
-99
May-0
0
Jan-0
1
Sep
-01
May-0
2
Jan-0
3
Sep
-03
May-0
4
Jan-0
5
Sep
-05
May-0
6
Jan-0
7
Sep
-07
May-0
8
Jan-0
9
Sep
-09
May-1
0
Jan-1
1
Sep
-11
May-1
2
Jan-1
3
Sep
-13
May-1
4
Jan-1
5
Sep
-15
May-1
6
Jan-1
7
Sep
-17
May-1
8
Jan-1
9
Spre
ad (
%)
Shaded bands represent recession.
The Conference Board Leading Economic Index® (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers’ new orders – consumer goods and materials; 4) ISM index of new orders; 5) manufacturers’ new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index™; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations.,Source: ©The Conference Board. Data through January 2019, released February 21, 2019.
Economic data
U.S. index of leading economic indicators – flattening
58
“… the US LEI declined very slightly in January and December’s decline was revised up to no change. … The US LEI has now been flat essentially since October 2018. The Conference Board forecasts that US GDP growth will likely decelerate to about 2 percent by the end of 2019.”
This chart shows how the LEI has definitively rolled over well in advance of the last two recessions.
Shaded bands represent recession.
59Source: Copyright 2019, Institute for Supply Management; data through February 2019. This data series was created in 2008. ISM: “A reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.”
Economic data
ISM non-manufacturing PMI – very strong
February at 59.7, up from January’s 56.7.
February’s new orders at 65.2, up from January’s 57.7.
Non-manufacturing captures the vast majority of the U.S. economy.
Shaded band indicates recession.
35
40
45
50
55
60
65
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
Jan-1
1
Jul-1
1
Jan-1
2
Jul-1
2
Jan-1
3
Jul-1
3
Jan-1
4
Jul-1
4
Jan-1
5
Jul-1
5
Jan-1
6
Jul-1
6
Jan-1
7
Jul-1
7
Jan-1
8
Jul-1
8
Jan-1
9
Ind
ex
60
Consumer sentiment
Good for consumer spending but not irrationally exuberant
Source: The University of Michigan Survey Research Center, data through February 2019.
93.8 in February, up from 91.2 in January.
You had to go back a generation –more than 30 years – to find consumer sentiment as low as it got through the last crisis.
Shaded bands represent recessions.
40
50
60
70
80
90
100
110
120
Feb
-60
No
v-61
Au
g-63
May-6
5
Feb
-67
No
v-68
Au
g-70
May-7
2
Feb
-74
No
v-75
Au
g-77
May-7
9
Feb
-81
No
v-82
Au
g-84
May-8
6
Feb
-88
No
v-89
Au
g-91
May-9
3
Feb
-95
No
v-96
Au
g-98
May-0
0
Feb
-02
No
v-03
Au
g-05
May-0
7
Feb
-09
No
v-10
Au
g-12
May-1
4
Feb
-16
No
v-17
U M
ich
Co
nsu
mer
Sen
tim
ent
Ind
ex
(Q1
19
66
=10
0)
1980recession, crude > doubled
14% inflation, silver bubble/burst stocks flat for > 10 years
2007-8/2011global financial crisis, recession,
U.S. debt downgrade, stocks flat for > 10 years
stock market bubble
normalsentiment
61 Source: Bureau of Economic Analysis, data through December 2018.
Economic data
Contributions to GDP growth: C + I + G + Net Exports %
ch
ange
at
ann
ual
rat
e
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0 2
00
5-I
20
05
-IV
20
06
-III
20
07
-II
20
08
-I
20
08
-IV
20
09
-III
20
10
-II
20
11
-I
20
11
-IV
20
12
-III
20
13
-II
20
14
-I
20
14
-IV
20
15
-III
20
16
-II
20
17
-I
20
17
-IV
20
18
-III
continued strength
Personal consumptionexpenditures
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
20
05
-I
20
05
-IV
20
06
-III
20
07
-II
20
08
-I
20
08
-IV
20
09
-III
20
10
-II
20
11
-I
20
11
-IV
20
12
-III
20
13
-II
20
14
-I
20
14
-IV
20
15
-III
20
16
-II
20
17
-I
20
17
-IV
20
18
-III
Gross private domestic investment
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
20
05
-I
20
05
-IV
20
06
-III
20
07
-II
20
08
-I
20
08
-IV
20
09
-III
20
10
-II
20
11
-I
20
11
-IV
20
12
-III
20
13
-II
20
14
-I
20
14
-IV
20
15
-III
20
16
-II
20
17
-I
20
17
-IV
20
18
-III
Government consumption and gross investment
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
05
-I
20
05
-IV
20
06
-III
20
07
-II
20
08
-I
20
08
-IV
20
09
-III
20
10
-II
20
11
-I
20
11
-IV
20
12
-III
20
13
-II
20
14
-I
20
14
-IV
20
15
-III
20
16
-II
20
17
-I
20
17
-IV
20
18
-III
Net exports of goods and services
Q4 ∆GDPConsumption +1.9%Investment +0.8%Net exports -0.2%Government. +0.1%Total +2.6%
62Source: BLS, BEA. AHE data through February 2019.
Wages
Average hourly earnings growth – accelerating
AHE growth at +3.4% y/y has accelerated.
+3.4%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Mar-0
7
Jul-0
7
No
v-07
Mar-0
8
Jul-0
8
No
v-08
Mar-0
9
Jul-0
9
No
v-09
Mar-1
0
Jul-1
0
No
v-10
Mar-1
1
Jul-1
1
No
v-11
Mar-1
2
Jul-1
2
No
v-12
Mar-1
3
Jul-1
3
No
v-13
Mar-1
4
Jul-1
4
No
v-14
Mar-1
5
Jul-1
5
No
v-15
Mar-1
6
Jul-1
6
No
v-16
Mar-1
7
Jul-1
7
No
v-17
Mar-1
8
Jul-1
8
No
v-18
Ave
rage
ho
url
y ea
rnin
gs y
/y p
erce
nt
chan
ge (
%)
63
Economic data – consumer spending
Real disposable personal income per capita
Source: Bureau of Economic Analysis, data through December 2018. CAGR means compound annual growth rate.
Growth in real DPI per capita has lately exceeded the +1.8% y/y rate during the last expansion.
27,000
29,000
31,000
33,000
35,000
37,000
39,000
41,000
43,000
45,000
47,000Ja
n-9
7
Sep
-97
May
-98
Jan
-99
Sep
-99
May
-00
Jan
-01
Sep
-01
May
-02
Jan
-03
Sep
-03
May
-04
Jan
-05
Sep
-05
May
-06
Jan
-07
Sep
-07
May
-08
Jan
-09
Sep
-09
May
-10
Jan
-11
Sep
-11
May
-12
Jan
-13
Sep
-13
May
-14
Jan
-15
Sep
-15
May
-16
Jan
-17
Sep
-17
May
-18
Rea
l DP
I per
cap
ita
(ch
ain
ed (
20
09
) d
olla
rs)
($)
Real DPI per capita7/02-7/07
+1.8% CAGR1
Real DPI per capita
+3.5% y/y
64
Source: Federal Reserve, quarterly data through September 2018; released December 2018.
Consumer balance sheets
Financial obligations ratio – very strong
Comparing consumers’ monthly flow of income to their fixed recurring monthly expenses, including debt service, gives one of the best measures of consumers’ financial health.
Consumers’ ability to cover the monthly “nut” has seldom been stronger as incomes have recovered, household debt has been reduced and interest rates remain low.15.3%
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19
90
Q1
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
20
14
Q1
20
15
Q1
20
16
Q1
20
17
Q1
20
18
Q1
Fin
anci
al O
blig
atio
ns
as a
Per
cen
t o
f D
PI (
%)
The financial obligations ratio consists of estimated required
payments on outstanding mortgage and consumer debt plus
automobile lease payments, rental payments on tenant-
occupied property, homeowners’ insurance and property tax
payments divided by disposable personal income.
Sources: Bureau of Economic Analysis, actual quarterly data through December 2018. The Wall Street Journal survey taken February 2019.
Consensus GDP forecast
Continued healthy growth expected
The 60 economists surveyed in early February see an average +2.1% rate of quarterly GDP growth over the five quarters ahead.
+2.1% average
through Q12020
Q4 2012Hurricane Sandy
Q1 2014East Coast winter
-7.0
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
19
97
-I
19
97
-IV
19
98
-III
19
99
-II
20
00
-I
20
00
-IV
20
01
-III
20
02
-II
20
03
-I
20
03
-IV
20
04
-III
20
05
-II
20
06
-I
20
06
-IV
20
07
-III
20
08
-II
20
09
-I
20
09
-IV
20
10
-III
20
11
-II
20
12
-I
20
12
-IV
20
13
-III
20
14
-II
20
15
-I
20
15
-IV
20
16
-III
20
17
-II
20
18
-I
20
18
-IV
20
19
-III(E)
Rea
l GD
P Q
/Q %
ch
ange
(an
nu
aliz
ed)
Actual and Forecast
Q1 2011Japan
tsunami
66
Jobs➢ full-employment ➢ surprising continued strength in new jobs➢ record job openings➢ declining participation rate due to ageing ➢ Still some slack?➢ strong relative U.S. job formation forecast long-term ➢ accelerating real wage and income growth➢ mean and median incomes bottomed
Point of View
March 2019
Economic data - jobs
Net new job formation and the unemployment rate
Source: Bureau of Labor Statistics. Data through February 2019.
February is probably an aberration, partly due to weather and an 84,000 swing in construction jobs.
Job formation slumped dramatically preceding the last two recessions.
3.8% unemployment rate is a low last seen in 2000.
311
20
Shaded bands represent recession.
3.8%
0
2
4
6
8
10
12
-850
-650
-450
-250
-50
150
350
550
Jan-9
5
Oct-9
5
Jul-9
6
Ap
r-97
Jan-9
8
Oct-9
8
Jul-9
9
Ap
r-00
Jan-0
1
Oct-0
1
Jul-0
2
Ap
r-03
Jan-0
4
Oct-0
4
Jul-0
5
Ap
r-06
Jan-0
7
Oct-0
7
Jul-0
8
Ap
r-09
Jan-1
0
Oct-1
0
Jul-1
1
Ap
r-12
Jan-1
3
Oct-1
3
Jul-1
4
Ap
r-15
Jan-1
6
Oct-1
6
Jul-1
7
Ap
r-18
Jan-1
9
Un
emp
loym
ent
rate
(%
)
Mo
nth
ly c
han
ge in
to
tal n
on
farm
pay
rolls
(0
00
)
Microsof t
Excel Worksheet
Economic data - jobs
Labor force participation rate1 – stronger than expected
Source: BLS actual data through February 2019; and Congressional Budget Office, April 2018 report The Budget and Economic Outlook: 2018 to 2028. 1Labor force participation rate: the proportion of the civilian noninstitutional population 16 years of age and older either at work or actively seeking work.
63.2% in January and February, and exceeding the CBO’s forecast.
CBO forecasts a long-term decline in the participation rate as the age cohort 65 and older takes an increasing share of the total working age population aged 16 and older.
See next slide.
68
CBO's January 2017 forecast
60.5%
61.0%
61.5%
62.0%
62.5%
63.0%
63.5%
64.0%
64.5%
65.0%
65.5%
66.0%
66.5%
67.0%
67.5%
68.0%
Jan-7
7
Jun
-78
No
v-79
Ap
r-81
Sep
-82
Feb
-84
Jul-8
5
Dec-8
6
May-8
8
Oct-8
9
Mar-9
1
Au
g-92
Jan-9
4
Jun
-95
No
v-96
Ap
r-98
Sep
-99
Feb
-01
Jul-0
2
Dec-0
3
May-0
5
Oct-0
6
Mar-0
8
Au
g-09
Jan-1
1
Jun
-12
No
v-13
Ap
r-15
Sep
-16
Feb
-18
Jul-1
9
Dec-2
0
May-2
2
Oct-2
3
Mar-2
5
Au
g-26
Jan-2
8
Lab
or
Forc
e Pa
rtci
pat
ion
Rat
e
employed plus unemployed (the labor force)
as a % of population aged 16 and older
actual forecast
Economic data - jobs
Still some slack in the labor market
Source: BLS. Data through February 2019. 69
Still higher than pre-recession.
There may still be some slack in the labor market.
persons not in the labor force who want
a job now
4,000
4,500
5,000
5,500
6,000
6,500
7,000
Jan
-98
Au
g-9
8
Mar
-99
Oct
-99
May
-00
Dec
-00
Jul-
01
Feb
-02
Sep
-02
Ap
r-0
3
No
v-0
3
Jun
-04
Jan
-05
Au
g-0
5
Mar
-06
Oct
-06
May
-07
Dec
-07
Jul-
08
Feb
-09
Sep
-09
Ap
r-1
0
No
v-1
0
Jun
-11
Jan
-12
Au
g-1
2
Mar
-13
Oct
-13
May
-14
Dec
-14
Jul-
15
Feb
-16
Sep
-16
Ap
r-1
7
No
v-1
7
Jun
-18
Jan
-19
Pers
on
s n
ot
in t
he
lab
or
forc
e w
ho
wan
t a
job
no
w (
00
0s)
Shaded bands represent recessions.
70
Household balance sheets➢ fully repaired ➢ financial obligations ratio at record low
means that consumers are in record good shape to spend money
Debt
Household debt
71
Post-recession, the total value of household assets has reverted to its long-term growth trend.
Consumer balance sheets
Household assets
Non-financial assets = 29% of total household assets.
Financial assets = 71% of total household assets.
Source: Federal Reserve. Financial Accounts of the United States Schedule Z.1, B.103. Data through December 2018, released March 7, 2019. 1Compound annual growth rate. $1.0E+08 = $100 trillion.
trendline CAGR1
= 5.6%
0.0E+00
2.0E+07
4.0E+07
6.0E+07
8.0E+07
1.0E+08
1.2E+08
19
90
Q1
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q2
19
95
Q2
19
96
Q2
19
97
Q2
19
98
Q2
19
99
Q2
20
00
Q2
20
01
Q2
20
02
Q2
20
03
Q2
20
04
Q2
20
05
Q2
20
06
Q2
20
07
Q2
20
08
Q2
20
09
Q2
20
10
Q2
20
11
Q2
20
12
Q2
20
13
Q2
20
14
Q2
20
15
Q2
20
16
Q2
20
17
Q2
20
18
Q2
Ho
use
ho
ld A
sset
s ($
)St
acke
d C
har
t
Non-financial assets(principally real estate)
Financial Assets(bank accounts, money market funds,
stocks and bonds, pension assets, proprietors’ equity in small businesses)
72
Post-recession, households paid down their debts and consumer credit and mortgages are expanding again.
Consumer balance sheets
Household liabilities
Source: Federal Reserve. Data through December 2018, released March 7, 2019. $1.4E+07 = $14 trillion.
0.0E+00
2.0E+06
4.0E+06
6.0E+06
8.0E+06
1.0E+07
1.2E+07
1.4E+07
1.6E+07
19
90
Q1
19
91
Q1
19
92
Q1
19
93
Q1
19
94
Q1
19
95
Q1
19
96
Q1
19
97
Q1
19
98
Q1
19
99
Q1
20
00
Q1
20
01
Q1
20
02
Q1
20
03
Q1
20
04
Q1
20
05
Q1
20
06
Q1
20
07
Q1
20
08
Q1
20
09
Q1
20
10
Q1
20
11
Q1
20
12
Q1
20
13
Q1
20
14
Q1
20
15
Q1
20
16
Q1
20
17
Q1
20
18
Q1
Ho
use
ho
ld L
iab
iliti
es (
$)
Stac
ked
Ch
art
Mortgages
Consumer Credit
Other
73Source: Federal Reserve. Data through December 2018, released March 7, 2019. 1Compound annual growth rate. $1.0E+08 = $100 trillion.
In Q4 household net worth was cut back to trendline with the stock market correction.
Consumer balance sheets
Household net worth
trendline CAGR1
= 5.6%
Real estate and stock market bubble
Stock market bubble
0.0E+00
2.0E+07
4.0E+07
6.0E+07
8.0E+07
1.0E+08
19
90
Q1
19
90
Q4
19
91
Q3
19
92
Q2
19
93
Q1
19
93
Q4
19
94
Q3
19
95
Q2
19
96
Q1
19
96
Q4
19
97
Q3
19
98
Q2
19
99
Q1
19
99
Q4
20
00
Q3
20
01
Q2
20
02
Q1
20
02
Q4
20
03
Q3
20
04
Q2
20
05
Q1
20
05
Q4
20
06
Q3
20
07
Q2
20
08
Q1
20
08
Q4
20
09
Q3
20
10
Q2
20
11
Q1
20
11
Q4
20
12
Q3
20
13
Q2
20
14
Q1
20
14
Q4
20
15
Q3
20
16
Q2
20
17
Q1
20
17
Q4
20
18
Q3
Ho
use
ho
ld N
et W
ort
h (
$)
74
Student loans are 10.8% of total household debt.
Consumer balance sheets
Household liabilities
Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, February 2019.
Mortgages
Consumer Credit
Other
75
Student loan delinquencies are high but have been stable since 2012.
Consumer balance sheets
Delinquencies
Source: Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, February 2019.
Mortgages
Consumer Credit
Other
76
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be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and
should not be relied upon as the sole factor in an investment making decision. As with all investments
there are associated inherent risks. Please obtain and review all financial material carefully before
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The opinions expressed are those of the author, are based on current market conditions and are subject
to change without notice.
These materials may contain statements that are not purely historical in nature but are “forward-looking
statements.” These include, among other things, projections, forecasts, estimates of income, yield or
return or future performance targets. These forward-looking statements are based upon certain
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substantially differ from those assumed. All forward-looking statements included herein are based on
information available on the date hereof and Fritz Meyer assumes no duty to update any forward-
looking statement. Accordingly, there can be no assurance that estimated returns or projections can be
realized, that forward-looking statements will materialize or that actual returns or results will not be
materially lower than those presented.
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