Presentation to Economic Outlook and Revenue Assessment ... · Presentation to Economic Outlook and...
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Presentation to Economic Outlook and Revenue Assessment Committee
CAPITAL MARKET OUTLOOK
Robert MaynardChief Investment Officer
January 7, 2016
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ECONOMIC EXPECTATIONSProjected 2015 Actual 2015 Projected 2016
Real GDP 3.0% 2.5% 2.5%
Nominal GDP 4.7% 3.5% 4.2%
Core CPI Inflation 1.5% 0.2% 1.7%
Real Consumption 2.9% 3.1% 2.9%
Real Bus Spend 5.8% 3.2% 4.3%
Pre-Tax Corp Profit 7.3% -0.6% 3.3%
Real Ind. Product 3.5% 1.6% 1.8%
Unemployment 5.5% 5.0% 4.8%
Housing Starts 1,118,000 1,110,000 1,260,000
Europe Real GDP 1.1% 1.5% 1.7%
Europe Inflation 0.7% 0.1% 1.0%
China Real GDP 7.0% 6.9% 6.5%
China Inflation 2.1% 1.5% 1.7%
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MARKET EXPECTATIONS
2015Predict
2015 Actual
2016 Predict
Exp.Return
ActualReturn
Predict Return
Real GDP 3.0% 2.5% 2.5%Inflation 1.5% 0.2% 1.7%Unemployment 5.5% 5.0% 4.8%Cash (1M Lib) 0.8% 0.4% 1.0% 0.3% 0.1% 0.9%10 Y TIPS 0.4% 0.8% 0.9% 2.0% -1.7% 1.4%10Y Treasury 2.5% 2.3% 2.4% -1.3% 0.6% 1.0%10Y Corp A 3.3% 3.5% 3.6% -0.7% -1.2% 3.2%S&P 500 2244 2043 2127 11% 1.4% 7.3%
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BASIC CAPITAL MARKET CONCEPTS
EXPECTATIONS Not Current Conditions Current Economic Expectations Moderate
RELATIVE VALUE Not absolute value in itself What are people willing to pay for expected earnings Current alternative – bonds – unattractive
PROFITS Not general economy Good balance sheets, lean operating conditions, little
current pressure on labor costs
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10YR Bond Yields
US 2.30
Ger 0.68
Fra 1.01
UK 1.95
Italy, 1.68Spain 1.76
Port 2.58
Jap 0.30
Pol 3.07
Swiss -0.12
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.505/
29 6/5
6/12
6/19
6/26 7/
3
7/10
7/17
7/24
7/31 8/
7
8/14
8/21
8/28 9/
4
9/11
9/18
9/25
10/2
10/9
10/1
6
10/2
3
10/3
0
11/6
11/1
3
11/2
0
11/2
7
12/4
12/1
1
US Ger Fra UK Italy Spain Port Jap Pol Swiss
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Expected Inflation and Current Yield Curves
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Inflation 0.2% 0.5% 0.9% 1.2% 1.3% 1.5% 1.5% 1.6% 1.6% 1.7% 1.7% 1.9% 1.9% 2.0% 2.0%
Treasury 0.5% 0.6% 0.7% 1.0% 1.3% 1.5% 1.7% 2.0% 2.1% 2.2% 2.3% 2.5% 2.6% 2.8% 2.9%
AAA 0.2% 0.2% 0.3% 0.5% 0.7% 1.0% 1.2% 1.8% 2.2% 2.4% 2.7% 3.4% 3.8% 3.9% 4.0%
A 0.9% 1.0% 1.1% 1.5% 1.9% 2.2% 2.5% 2.9% 3.1% 3.3% 3.4% 4.0% 4.3% 4.3% 4.3%
BBB 1.3% 1.4% 1.5% 1.9% 2.3% 2.7% 3.0% 3.5% 3.6% 3.8% 4.0% 4.6% 4.8% 4.8% 4.8%
3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y
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Current and Expected Yield Curves in 5 Yrs
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Current TIPS 0.2% 0.2% 0.2% 0.4% 0.3% 0.3% 0.4% 0.6% 0.7% 0.7% 0.7% 1.0% 1.3%
Current Treasury 0.5% 0.6% 0.7% 1.0% 1.3% 1.5% 1.7% 2.0% 2.1% 2.2% 2.3% 2.6% 2.9%
TIPS in 5 0.9% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.1% 1.1% 1.1% 1.3% 1.5%
Treasury in 5 2.3% 2.4% 2.5% 2.5% 2.6% 2.6% 2.7% 2.8% 2.8% 2.8% 2.8% 2.9% 2.9%
Current Breakever 0.3% 0.4% 0.5% 0.6% 1.1% 1.2% 1.3% 1.4% 1.4% 1.5% 1.5% 1.6% 1.7%
Breakeven in 5 1.5% 1.5% 1.5% 1.5% 1.6% 1.6% 1.6% 1.7% 1.7% 1.7% 1.7% 1.5% 1.4%
3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y 20Y 30Y
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MARKET EXPECTATIONS
2015Predict
2015 Actual
2016 Predict
Exp.Return
ActualReturn
Predict Return
Cash (1M Lib) 0.8% 0.4% 1.0% 0.3% 0.1% 0.9%10 Y TIPS 0.4% 0.8% 0.9% 2.0% -1.7% 1.4%10Y Treasury 2.5% 2.3% 2.4% -1.3% 0.6% 1.0%10Y Corp A 3.3% 3.5% 3.6% -0.7% -1.2% 3.2%S&P 500 2244 2078 2200 11% 1.2% 7.6%
S&P 500
Dividend 2.1%Stock Buyback 2.2%Corporate Profit 3.3%
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Expected 10 Year Stock Return and Sources(Assumes Current P/E and Corp Profit Share of GDP remains the same)
2.5%
1.8%2.2% 2.3%
8.7%
9.5%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Real GDP Inflation Dividend Buy Back Total WAC Equty
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S&P 500 Current PE
17.0
10
12
14
16
18
20
22
24
26
28
Oct-90
Oct-92
Oct-94
Oct-96
Oct-98
Oct-00
Oct-02
Oct-04
Oct-06
Oct-08
Oct-10
Oct-12
Oct-14
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Information Technology, Utilities and Energy 29% of Stock Market vs. 8% of GDPOne-Third of Revenue from international sources
Consumer20%
Energy5%
Finance/RE22%
Health Care15%
Industrials11%
Info Tech18%
Utilities/Tele6%
Materials/Ag3%
Consumer25%
Energy2%
Finance/RE19%
Health Care11%
Industrials11%
Info Tech4%
Utilities/Tele2%
Materials/Ag5%
Other/Gov/Ed22%
S&P 500 OperatingEarnings
US GDP
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Dollar’s Recent
Rise Hit
S&P 500 Earnings
But Not
Historically
Overvalued
HISTORIC DOLLAR (DXY)
60
70
80
90
100
110
120
130
N-95 N-96 N-97 N-98 N-99 N-00 N-01 N-02 N-03 N-04 N-05 N-06 N-07 N-08 N-09 N-10 N-11 N-12 N-13 N-14 N-15
US DOLLAR PPP VALUE (.PPPUSD G INDEX)
-8
-50
-40
-30
-20
-10
0
10
20
30
D-9
5
D-9
6
D-9
7
D-9
8
D-9
9
D-0
0
D-0
1
D-0
2
D-0
3
D-0
4
D-0
5
D-0
6
D-0
7
D-0
8
D-0
9
D-1
0
D-1
1
D-1
2
D-1
3
D-1
4
% O
ver/U
nder
Val
ued
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Commodities since 1981 (crb has no energy or precious metals)
0
100
200
300
400
500
600
700
800
900
1000A
-82
A-8
4
A-8
6
A-8
8
A-9
0
A-9
2
A-9
4
A-9
6
A-9
8
A-0
0
A-0
2
A-0
4
A-0
6
A-0
8
A-1
0
A-1
2
A-1
4
gsci crb
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ZSCORES VS US GDP SINCE 1987
TECH
HOMESGOLD
OILCRB
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
D-88 D-90 D-92 D-94 D-96 D-98 D-00 D-02 D-04 D-06 D-08 D-10 D-12 D-14
TECH HOMES GOLD OIL CRB
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