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Econ 106M: The Future of US EconomyZhuo “Kenny” ChenRishab KhandelwalYangyifan “Kim” WangZhiyu “Jack” WangVandana Bhairi
The Future of US Economy 2
Table of Contents
Diagnosis
Tipping Point
Investment Strategy
The Future of US Economy 3
Table of Contents
Diagnosis
Tipping Point
Investment Strategy
The Future of US Economy 4
Diagnosis Tipping Point
Investment StrategyFederal Funds Rate
32874 33239 33604 33970 34335 34700 35065 35431 35796 36161 36526 36892 37257 37622 37987 38353 38718 39083 39448 39814 40179 40544 40909 41275 41640 420050
1
2
3
4
5
6
7
8
9
FFRPe
rcen
tage
Source: FRED
The Future of US Economy 5
Diagnosis Tipping Point
Investment StrategyEconomic Indicators
GDP
Employment
Home Sales
Inflation
Foreign Influence
The Future of US Economy 6
Diagnosis Tipping Point
Investment StrategyGDP Growth Rate
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q314000
14500
15000
15500
16000
16500
17000
17500
18000
18500
GDP
Billi
ons o
f Dol
lars
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2015Q3-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
Growth
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 7
Diagnosis Tipping Point
Investment StrategyGDP & GDP Gap
Source: International Financial Statistics
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
65
75
85
95
105
115 f(x) = 0.00473743421910714 x − 83.4725807715423
Industrial production index
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
GDP Gap (from 2008)
The Future of US Economy 8
Diagnosis Tipping Point
Investment StrategyEmployment
Jan 90Apr 9
1Jul 9
2Oct 9
3Jan
95Apr 9
6Jul 9
7Oct 9
8Jan
00Apr 0
1Jul 0
2Oct
03Jan
05Apr 0
6Jul 0
7Oct
08Jan
10Apr 1
1Jul 1
2Oct
13Jan
150.0
2.0
4.0
6.0
8.0
10.0
12.0
Unemployment Rate
Perc
enta
ge
Jan 08
Jun 08
Nov 08Apr 0
9Sep
09Feb
10Jul 1
0Dec
10
May 11
Oct 11
Mar 12
Aug 12Jan
13Jun 13
Nov 13Apr 1
4Sep
14Feb
15Jul 1
54.0
5.0
6.0
7.0
8.0
9.0
10.0
Unemployment Rate (after 2008)
Perc
enta
ge
Jan 08
May 08Oct
08Feb
09Jul 0
9Dec
09Apr 1
0Sep
10Jan
11Jun 11
Nov 11
Mar 12
Aug 12Dec
12
May 13
Oct 13Feb
14Jul 1
4
Nov 14Apr 1
5Sep
15200,000300,000400,000500,000600,000700,000800,000900,000
1,000,000Initial Claims
Source: US Bureau of Labor Statistics
Jan 08
Jun 08
Nov 08Apr 0
9Sep
09Feb
10Jul 1
0Dec
10
May 11
Oct 11
Mar 12
Aug 12Jan
13Jun 13
Nov 13Apr 1
4Sep
14Feb
15Jul 1
5127500129500131500133500135500137500139500141500143500
Non-Farm Payroll
Tho
usan
ds o
f Per
sons
The Future of US Economy 9
Diagnosis Tipping Point
Investment StrategyHome Sales
Jan 08
May 08Sep
08Jan
09
May 09Sep
09Jan
10
May 10Sep
10Jan
11
May 11Sep
11Jan
12
May 12Sep
12Jan
13
May 13Sep
13Jan
14
May 14Sep
14Jan
15
May 15Sep
153500000
3700000
3900000
4100000
4300000
4500000
4700000
4900000
5100000
5300000
5500000
Existing Home Sales
num
ber o
f sal
es
Jan 08Apr 0
8Jul 0
8Oct 0
8Jan
09Apr 0
9Jul 0
9Oct 0
9Jan
10Apr 1
0Jul 1
0Oct 1
0Jan
11Apr 1
1Jul 1
1Oct 1
1Jan
12Apr 1
2Jul 1
2Oct 1
2Jan
13Apr 1
3Jul 1
3Oct 1
3Jan
14Apr 1
4Jul 1
4Oct 1
475.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
115.0
Pending Home Sale Index
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 10
Diagnosis Tipping Point
Investment StrategyConsumer Price Index
Jan 08
May 08
Sep 08
Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Jan 11
May 11
Sep 11
Jan 12
May 12
Sep 12
Jan 13
May 13
Sep 13
Jan 14
May 14
Sep 14
Jan 15
May 15
Sep 15
210
215
220
225
230
235
240
210.228
CPI
Feb 08
Jun 08Oct
08Feb
09Jun 09
Oct 09Feb
10Jun 10
Oct 10Feb
11Jun 11
Oct 11Feb
12Jun 12
Oct 12Feb
13Jun 13
Oct 13
Feb 14
Jun 14Oct 1
4Feb
15Jun 15
-4%
-2%
0%
2%CPI growth rate
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 11
Diagnosis Tipping Point
Investment StrategyPersonal Consumption Expenditure
Feb 08
Jul 08Dec
08
May 09
Oct 09
Mar 10
Aug 10Jan
11Jun 11
Nov 11Apr 1
2Sep
12Feb
13Jul 1
3Dec
13
May 14
Oct 14
Mar 15
Aug 15
-0.0005
0
0.0005
0.001
0.0015
0.002
0.0025
0.003
0.0035Core Growth rate
Jan 08
Jun 08
Nov 08Apr 0
9Sep
09Feb
10Jul 1
0Dec
10
May 11
Oct 11
Mar 12
Aug 12Jan
13Jun 13
Nov 13Apr 1
4Sep
14Feb
15Jul 1
597.000
99.000
101.000
103.000
105.000
107.000
109.000
111.000 Core PCE
Billi
ons o
f Dol
lars
Jan 08
Jun 08
Nov 08Apr 0
9Sep
09Feb
10Jul 1
0Dec
10
May 11
Oct 11
Mar 12
Aug 12Jan
13Jun 13
Nov 13Apr 1
4Sep
14Feb
15Jul 1
59000.0
9500.0
10000.0
10500.0
11000.0
11500.0
12000.0
12500.0PCE
Billi
on o
f Dol
lars
Feb 08
Jul 08Dec
08
May 09
Oct 09
Mar 10
Aug 10Jan
11Jun 11
Nov 11Apr 1
2Sep
12Feb
13Jul 1
3Dec
13
May 14
Oct 14
Mar 15
Aug 15
-2%
0%
2%PCE Growth
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 12
Diagnosis Tipping Point
Investment StrategyForeign Influence
1/2/2006
5/22/2
006
10/9/2006
2/26/2
007
7/16/2
007
12/3/2007
4/21/2
008
9/8/2008
1/26/2
009
6/15/2
009
11/2/2009
3/22/2
010
8/9/2010
12/27/2010
5/16/2
011
10/3/2011
2/20/2
012
7/9/2012
11/26/2012
4/15/2013
9/2/2013
1/20/2
014
6/9/2014
10/27/2014
3/16/2
015
8/3/2015
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
China SSE Composite Index
Source: Yahoo Finance
Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 201570.00
75.00
80.00
85.00
90.00
95.00
100.00
105.00
110.00
Brazil Real Effective Exchange Rate Based on Consumer Price Index
The Future of US Economy 13
Diagnosis Tipping Point
Investment StrategyTable of Contents
Diagnosis
Tipping Point
Investment Strategy
The Future of US Economy 14
Diagnosis Tipping Point
Investment StrategyFederal Funds Rate Hike Probability
Source: CME
December January March
20.6% 17.6%10.1%
79.4%71.0%
48.3%
0.0%11.4%
36.8%
Federal Fund Rate Hike ProbabilityNo Hike 25 Bps 50 Bps
The Future of US Economy 15
Diagnosis Tipping Point
Investment StrategyTaylor Rule & Effective FFR
Jan-90Mar-9
1
May-92Jul-9
3Sep-94
Nov-95Jan-97
Mar-98
May-99Jul-0
0Sep-01
Nov-02Jan-04
Mar-05
May-06Jul-0
7Sep-08
Nov-09Jan-11
Mar-12
May-13Jul-1
40.001.002.003.004.005.006.007.008.009.00
Taylor Rule and Effective Federal Funds Rate
Frequency: Quarterly Effective Federal Funds RateFrequency: Quarterly Taylor Rule Suggested Interest Rate
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 16
Diagnosis Tipping Point
Investment Strategy
Capacity Utilization Rate (% Change from Previous Year) & Effective FFR
Jan 90Mar 9
1
May 92Jul 93
Sep 94Nov 95
Jan 97Mar 9
8
May 99Jul 00
Sep 01Nov 02
Jan 04Mar 0
5
May 06Jul 07
Sep 08Nov 09
Jan 11Mar 1
2
May 13Jul 14
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Capacity Utilization Rate & Effective FFR
Capacity Utilization Rate FEDFUNDS
Rate HikeRate Hike
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 17
Diagnosis Tipping Point
Investment StrategyTreasury and FFR Yield Spread
Decem
ber-89
Decem
ber-90
Decem
ber-91
Decem
ber-92
Decem
ber-93
Decem
ber-94
Decem
ber-95
Decem
ber-96
Decem
ber-97
Decem
ber-98
Decem
ber-99
Decem
ber-00
Decem
ber-01
Decem
ber-02
Decem
ber-03
Decem
ber-04
Decem
ber-05
Decem
ber-06
Decem
ber-07
Decem
ber-08
Decem
ber-09
Decem
ber-10
Decem
ber-11
Decem
ber-12
Decem
ber-13
Decem
ber-14
0.001.002.003.004.005.006.007.008.009.00
Six Month Treasury Bill Rates and Effective Federal Funds Rate
Frequency: Monthly Six Month Treasury RateFrequency: Monthly FEDFUNDS
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 18
Diagnosis Tipping Point
Investment StrategyTreasury and FFR Yield Spread
28-Jan-15
8-Feb-15
19-Feb-15
2-Mar-
15
13-Mar-
15
24-Mar-
15
4-Apr-15
15-Apr-15
26-Apr-15
7-May
-15
18-May
-15
29-May
-15
9-Jun-15
20-Jun-15
1-Jul-1
5
12-Jul-1
5
23-Jul-1
5
3-Aug-15
14-Aug-15
25-Aug-15
5-Sep-15
16-Sep-15
27-Sep-15
8-Oct-
15
19-Oct-
15
30-Oct-
150.00
0.05
0.10
0.15
0.20
0.25
0.30
Six Month Treasury Bill Rate and Effective Federal Funds Rate:2015
Frequency: Daily DTB6 Frequency: Daily FEDFUNDS
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 19
Diagnosis Tipping Point
Investment StrategyFinancial Stress Index and FFR
Jan-
94Nov
-94
Sep-
95Ju
l-96
May
-97
Mar
-98
Jan-
99Nov
-99
Sep-
00Ju
l-01
May
-02
Mar
-03
Jan-
04Nov
-04
Sep-
05Ju
l-06
May
-07
Mar
-08
Jan-
09Nov
-09
Sep-
10Ju
l-11
May
-12
Mar
-13
Jan-
14Nov
-14
Sep-
15
-2.000-1.0000.0001.0002.0003.0004.0005.0006.0007.000
Financial Stress Index and Effective Federal Funds Rate
Frequency: Monthly St. Louis Fed Financial Stress IndexFrequency: Monthly FEDFUNDS
Rate Hike
Rate Hike
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 20
Diagnosis Tipping Point
Investment Strategy
Consumer Sentiment Index (% Change from Previous Year) and FFR
Jan-90
Nov-90
Sep-
91Ju
l-92
May
-93M
ar-94
Jan-95
Nov-95
Sep-
96Ju
l-97
May
-98M
ar-99
Jan-00
Nov-00
Sep-
01Ju
l-02
May
-03M
ar-04
Jan-05
Nov-05
Sep-
06Ju
l-07
May
-08M
ar-09
Jan-10
Nov-10
Sep-
11Ju
l-12
May
-13M
ar-14
Jan-15
-40.0-30.0-20.0-10.0
0.010.020.030.040.0
University of Michigan: Consumer Sentiment Index© and Effective Federal Funds Rate
Frequency: Monthly University of Michigan: Cosumer Sentiment IndexFrequency: Monthly Effective Federal Funds Rate
Rate HikeRate Hike
Source: Economic Research, Federal Reserve Bank of St. Louis
The Future of US Economy 21
Diagnosis Tipping Point
Investment StrategyTable of Contents
Diagnosis
Tipping Point
Investment Strategy
The Future of US Economy 22
Diagnosis Tipping Point
Investment StrategyPost-financial Crisis - 2014
S&P 500 and FED Easing 2008 - 2015
Source: Bespoke Investment Research
QE Bull Market
2008 - 2014
The Future of US Economy 23
Diagnosis Tipping Point
Investment Strategy2014 - Now
QE Taper
Rate Hike
Strong Dollar
Strong US vs. Weak Global
High Volatility &Low Dispersion
The Future of US Economy 24
Diagnosis Tipping Point
Investment StrategyEquity Market & FFR
4/1/90
3/1/91
2/1/92
1/1/93
12/1/93
11/1/94
10/1/95
9/1/96
8/1/97
7/1/98
6/1/99
5/1/00
4/1/01
3/1/02
2/1/03
1/1/04
12/1/04
11/1/05
10/1/06
9/1/07
8/1/08
7/1/09
6/1/10
5/1/11
4/1/12
3/1/13
2/1/14
1/1/15
0
20
40
60
80
100
120
140
0
1
2
3
4
5
6
7
8
9
S&P 500 P/E Ratio and Federal Fund Rate
S&P 500 P/E Ratio Over the years Historical federal fund rate
1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248 261 274 287 300
-80.00%
-60.00%
-40.00%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
Change in S&P 500 P/E and Federal Funds Rate
Change of the P/E ratio Change of the federal fund rate
Source: Economic Research, Federal Reserve Bank of St. Louis; WRDS
The Future of US Economy 25
Diagnosis Tipping Point
Investment StrategyEquity & Strong Dollar
Year S&P Returns USD Index Prior Year
1982 14.76% 15.82%
1983 17.27% 12.10%
1984 1.4% 12.3%
1985 26.33% 14.93%
1993 7.06% 10.57%
1998 26.67% 13.08%
2006 13.62% 12.76%
Sector Median Change Percent of Time Positive
Consumer Discretionary
18.2% 100%
Consumer Staples 11.8% 85.7%
Financials 10.2% 100%
Technology 22.6% 85.7%
Healthcare 11.3% 85.7%
Strong Dollar & Equity Performance Sector Performance Following 10% Annual Gains in USD Index
Source: Yahoo Finance; WRDS; Bespoke Investment Research
The Future of US Economy 26
Diagnosis Tipping Point
Investment Strategy
Financial Sector & Interest Rate Hike
Source: Yahoo Finance
Name Ticker
Financial Services IYG
Financials IYF
S&P 500 ^GPSC
Three-year Treasury SHY
The Future of US Economy 27
Diagnosis Tipping Point
Investment StrategyConsumers Benefit from Strong Dollar
Source: Yahoo Finance
Name Ticker
Consumer Discretionary
XLY
Consumer Staples XLP
S&P 500 ^GPSC
US Dollar Index UUP
The Future of US Economy 28
Diagnosis Tipping Point
Investment StrategyRobust Earnings in Technology and Healthcare
Source: Yahoo Finance
Name Ticker
Information Technology
IYW
Healthcare IYH
S&P 500 ^GPSC
The Future of US Economy 29
Diagnosis Tipping Point
Investment StrategyPortfolio Allocation
Equities40%
Fixed Income
30%
Cur-rencies
30%
Portfolio CompositionPortfolio Holdings CompositionEquities 40%
Financial Services (IYG) 6.7%Financials (IYF) 6.7%
Consumer Discretionary (XLY) 6.7%Consumer Staples (XLP) 6.7%
Healthcare (IYH) 6.7%Information Technology (IYW) 6.7%
Fixed Income 30%Inflation-linked Bonds 15%
3 Year Treasury Bond 15%Currencies 30%
US Dollar Index 30%
The Future of US Economy 30
Diagnosis Tipping Point
Investment StrategyQ&A
Questions?