The Anatomy of a Recession: What to Look for and ... - FPA NEO · the Bloomberg Barclays U.S....
Transcript of The Anatomy of a Recession: What to Look for and ... - FPA NEO · the Bloomberg Barclays U.S....
1Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix.
The Anatomy of a Recession: What to Look for and Where We’re Headed
First Quarter 2019
Investment Products: Not FDIC Insured • No Bank Guarantee • May Lose Value
2
Probabilities vs. PossibilitiesThe Wall of Worry
North Korea Escalation
Eurozone Breakup
Trade Wars
Dollar Strengthens
Rising U.S. Debt Burden
Fed Tightens
EM Problems Intensify
U.S. Economy Slows
Inflation Overshoot
China Hard Landing
Peak Earnings
3
S&P 500 & Panic Attacks
Data as of Dec. 31, 2018. Source: Standard & Poor’s.
1,700
1,800
1,900
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
2015 2016 2017 2018
Brent Bottoms
at $27.88
“The definition of insanity is doing the same thing over and over again and expecting a different result.”
- Attributed to Albert Einstein
Greece Sets
7/5 Vote
Renewed
Grexit
Scare
Yuan Devalued &
ETF Flash Crash
Oil Falls, Dollar Rises
Third Ave
Blows Up
Endgame
Panic
WTI
Bottoms
Brexit
Rate Hike
Scare
Japan
Goes
NIRP
Trump
Impeachment
Scare
N. Korea
Crisis
Short
Volatility
Unwind
Trade War
Escalation
Quitaly
Fears
U.S. Gov.
Shutdown
Fed
Communication
Error
4
Investment Returns
10.2%
9.7%
6.3%
5.4%
3.5% 3.5%
2.7% 2.6%
0
2
4
6
8
10
12
U.S. Stock REITs Governments
Related Bonds
International
Equities
Gold Homes Inflation Average Investor
Effects of Panic Attacks on Average Investors30 Years Annualized Returns (1987-2016)
Source: Bloomberg, Dec. 31, 2016. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the Wilshire U.S. REIT Index, U.S. Stocks are represented by the S&P 500 Index, International Equities are represented by the MSCI EAFE Index, Government-Related Bonds are represented by the Bloomberg Barclays U.S. Aggregate Bond Index, Homes are represented by U.S. existing home sales median price, Gold is represented by the U.S. dollar spot price of one troy ounce, Inflation is represented by the Consumer Price Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance is no guarantee of future results.
5
S&P 500 Market Crashes vs. PullbacksCrashes are longer, more extreme, and more likely to be followed by a recession
Market Crashes defined as decline of 20% or greater in S&P 500 lasting at least 1 year. Pullbacks defined as declines of 15% or greater in S&P 500 (no time component). 1987 decline persisted at 20% or greater loss 1 year after Aug-87 peak despite trough coming in Dec-87.Source: S&P, NBER, and Bloomberg.
Market Crashes
Peak Trough Days S&P 500 Recession
Nov. 1968 May 1970 543 -36% Yes
Jan. 1973 Oct. 1974 630 -48% Yes
Nov. 1980 Aug. 1982 621 -27% Yes
Aug. 1987 Dec. 1987 101 -34% No
March 2000 Oct. 2002 929 -49% Yes
Oct. 2007 March 2009 517 -57% Yes
Average 557 -42% 83%
Pullbacks
Peak Trough Days S&P 500 Recession
Sept. 1976 March 1978 531 -19% No
Feb. 1980 March 1980 43 -17% Yes
July 1990 Oct. 1990 87 -20% Yes
July 1998 Oct. 1998 83 -19% No
April 2010 July 2010 70 -16% No
April 2011 Oct. 2011 157 -19% No
Average 162 -18% 33%
557
162
Days
-42%
-18%
S&P 500 Drawdown
83%
33%
Recession Probability
3x longer
than
a pullback
2.3x as
severe
2.5x more
likely to
coincide with
a recession
Market Crashes Pullbacks
6
1929 vs. 1987
Black Monday: Truly an Outlier?The Great Depression: 1929
7
Strength of Economic Expansions
Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: Strategas Research Partners. U.S. economic expansions since 1948.
-10
0
10
20
30
40
50
60
0 5 10 15 20 25 30 35 40
Cu
mu
lati
ve %
Gro
wth
Number of Quarters
Current Expansion
Average Rebound: 23%
Historical Expansions
1948 - 1953
1960 - 1969
1990 - 2001
2007 - Present
1981 - 1990
2001 - 20071969 - 1973
1973 - 1980
8
Just How Long Can The Cycle Continue?
As of Dec. 31, 2018.Source: FactSet.
0 5 10 15 20 25 30
Australia (Jan 1992 - Present)
Japan (1975 - 1992)
UK (1992 - 2008)
Canada (1992 - 2008)
U.S. (1990 - 2001)
U.S. (June 2009 - Present)
Number of Years
Historical Economic Expansions
Extended economic expansions are more common outside of the U.S.
9
U.S. Recession Risk Indicators
• 12 variables have historically foreshadowed a looming recession
• Yield curve, credit spreads, money supply and commodities signal risk right now
Fin
an
cia
lIn
flati
on
Co
nsu
mer
Bu
sin
ess
Acti
vit
y
Expansion Recession Caution
Data as of Dec. 31, 2018.Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.
Fourth Quarter 2018 Third Quarter 2018
Yield Curve
Credit Spreads
Money Supply
Wage Growth
Commodities
Housing Permits
Jobless Claims
Retail Sales
Job Sentiment
ISM New Orders
Profit Margins
Truck Shipments
Overall Signal
10
U.S. Recession Risk Indicators
• 12 variables have historically foreshadowed a looming recession
• Yield curve, credit spreads, money supply and commodities signal risk right now
Data as of Dec. 31, 2018.Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.
Current 2007-2009 2001 1990-1991 1981-1982 1980 1973-1975 1969-1970
Yield Curve
Credit Spreads
Money Supply
Wage Growth
Commodities
Housing Permits
Jobless Claims
Retail Sales
Job Sentiment
ISM New Orders
Profit Margins
Truck Shipments n/a n/a
Overall
Fin
an
cia
lIn
flati
on
Co
nsu
mer
Bu
sin
ess
Acti
vit
y
Recession
Expansion Recession Caution
11
U.S. Recession DashboardCase Study: 2006-2009
Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg.
Fin
an
cia
l Yield Curve
Credit Spreads
Money Supply
Infl
ati
on
Wage Growth
Commodities
Co
nsu
mer
Housing Permits
Jobless Claims
Retail Sales
Job Sentiment
Bu
sin
ess
Acti
vit
y
ISM New Orders
Profit Margins
Truck Shipments
S&
P 5
00
1,270
1,418
1,5031,468
1,280
600
800
1,000
1,200
1,400
1,600
Q2 2006 Q4 2006 Q2 2007 Q4 2007 Q2 2008
Overall Signal:
Overall Signal:
Overall Signal:
12
Yield Curve Spread10-Year Treasury Bonds Minus 3-Month T Bills
Data as of Dec. 31, 2018. BPS = Basis Points, one hundredth of one percent.Source: Fed Reserve Bank of St. Louis, retrieved from FRED. Compiled: econpi.com
Yield curve spread less than zero (inverted)
occurs prior to recessions.
0
50
100
150
200
250
300
350
400
450
500
-300
-200
-100
0
100
200
300
400
500
1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
Recession Yield Curve Spread
Basi
s P
oin
ts (
BP
S)
13
S&P 500 Returns by Yield Curve SteepnessEquities Have Done Well Following a Flatter Yield Curve
Data from 1962-Dec. 31, 2018. Source: Federal Reserve, S&P, Bloomberg, and FactSet.Note: Forward 12 and 24-month annualized returns for S&P 500 based on level of 3-Month vs. 10-Year yield curve and change in 3-Month vs. 10-Year yield curve over prior 3 months during periods where the yield curve flattened over the prior 3 months.
0 to 50 BPS
Yield Curve
Steepness
0.9
5.3
10.9
13.5
9.8
2.2
5.0
7.6
11.4
10.2
0%
2%
4%
6%
8%
10%
12%
14%
16%
< 0 0 - 50 50 - 100 100 - 200 > 200
Basis Points
12 Month Annualized Returns 24 Month Annualized Returns
A flattening yield curve traditionally provides positive returns over
the following one and two years.
Investor returns drop substantially once the yield curve inverts.
14
Job Openings vs. Unemployed
Data as of Nov. 30, 2018; most recent available as of Dec. 31, 2018.Source: FactSet, DOL, NBER.
0
2
4
6
8
10
12
14
16
18
2001 2003 2005 2007 2009 2011 2013 2015 2017
Th
ou
san
ds
Recession
Job Openings, Non-Farm, US, Level, In Thous, SA, JOLTS - United States
Unemployment, Thous Persons - United States
At the peak in 2009, there were seven unemployed people for every job opening.
Today, the ratio is less than 1:1.
7:1
Ratio
1:1
Ratio
15
Households Assets vs. Liabilities
1As of Date: Sept. 30, 2018, latest available as of Dec. 31, 2018.Source: Federal Reserve.Assets vs. Liabilities of households and nonprofit organizations.
Other Liabilities
Real Estate
Deposits
Equities
Pensions
Other
$0
$25
$50
$75
$100
$125
$ T
rill
ion
s
Total Assets:
$125 TrillionTotal Liabilities:
$16 Trillion
American households are in a strong financial position with robust balance sheets.
Household leverage is the lowest it has been since 1Q 1985.
U.S. Households Leverage1
0%
5%
10%
15%
20%
25%
1952 1959 1966 1973 1981 1988 1995 2002 2010 2017
% o
f T
ota
l A
ssets
Consumer Credit
Home Mortgages
U.S. Households Assets
16
Market Outlook: Where We’re Headed
17
20
02
20
00 20
18
20
08 19
94
19
77 20
05
20
04
19
87
20
11
20
10
19
79
19
81 19
76
19
84
20
07
19
88
19
78
19
90
19
93
19
92
20
15
20
06
19
83
19
95
19
80
20
16
20
14
20
01
20
12
20
17
19
99
19
86
19
97
19
82
20
03
19
89
19
85
20
13 20
09
19
91 19
98 19
96
-6
-4
-2
0
2
4
6
Third Greatest Decline in P/Es in Past 40 Years
Data as of Dec. 31, 2018.Source: Credit Suisse, S&P and FactSet.
S&P 500 valuations are much more compelling after the market derating.
Near term recession risks remain muted. This should support returns in 2019.
18
Two Important Historical Analogues
*Projected NTM EPS.**Projected NTM P/E.Data as of Dec. 31, 2018. Returns and
economic data source: FactSet. Dashboard: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council,
American Trucking Association, Conference Board, and Bloomberg. S&P 500 data: Total Price Return.
Fin
an
cia
lIn
flati
on
Co
nsu
mer
Bu
sin
ess
Acti
vit
y
Indicators
Yield Curve
Credit Spreads
Money Supply
Wage Growth
Commodities
Housing Permits
Jobless Claims
Retail Sales
Job Sentiment
ISM New Orders
Profit Margins
Truck Shipments
Overall (Year End)
Real GDP YoY 7.3%
Earnings 21%
P/E Contraction (2.0x)
1984
1.4%
26.3%
1985
Expansion
Recession
Caution
S&P 500 Annual Returns, Recession Risk Indicators, and Select Economic Data as of December 31
• Both 1984 and 1994 saw strong earnings, a robust economy, and P/E contraction that led to
disappointing market performance.
• In each case, the following year did not see a recession and markets rallied substantially.
4.0%
19%
(3.0x)
1994
-1.5%
34.1%
1995
3.0%
19%*
(3.6x)**
2018
-6.2%
2019
???
19
Buybacks Should Drive Markets Into Year-EndS&P 500 Companies
Data as of Dec. 31, 2018.Source: JPMorgan.
0
100
200
300
400
500
600
700
800
900
1,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
$ B
illi
on
Announced Executed
$938
The $331 billion gap between announced and executed buybacks in
2018 should help drive markets higher over the next several months.
$331
Billion
Gap
$607
20
Post-Midterm Election PerformanceMidterm Year Since 1950
Source: FactSet, S&P.
0%
5%
10%
15%
20%
25%
30%
35%
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
S&P Price Return
In the 12 months following a midterm election, the S&P 500 has
been up 15.3% on average, historically.
Every period historically has had a positive return.
Average: 15.3%
21
U.S. vs. International Equity Performance
S&P 500 vs. MSCI EAFE.Data as of Dec. 31, 2018.Source: FactSet.
Geographic leadership tends to persist for multiple years.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1978 1983 1988 1993 1998 2003 2008 2013 2018
Dif
fere
nces
Betw
een
In
dexes
77.9%
174.9%
112.5%U.S.
Outperformed
International
Outperformed
390.5%
95.8%
U.S
.
Ou
tperf
orm
ed
U.S.
Outperformed
International
Outperformed
22
Chinese Stimulus
Sources: JP Morgan, National Statistics Bureau of China, Bloomberg, Societe Generale and Macquarie.*Note: China Monetary Conditions Index advanced six months.Chinese Monetary Conditions data as of Sept. 30, 2018. China GDP data as of Nov. 30, 2018. Both are most recent available as of Dec. 31, 2018. Fiscal Stimulus data as of Dec. 31, 2018.
Similar to 2015-16, China is taking steps to stimulate their economy including:
• Lower interest rates (Shibor -100 bps , 250 bps cuts of RRR)
• Yuan devaluation
• Looser credit standards: New bank loans +10% in Q4, +30% in Q3
• Fiscal stimulus (Government spending, tax cuts)
• Capital injections via medium term lending facility (MLF) and expansion of MLF scope
4%
8%
12%
16%
20%
24%
50%
70%
90%
110%
130%
150%
170%
2008 2010 2012 2014 2016 2018
Chinese Monetary Conditions lead GDP*
China Monetary Conditions (Adv 6 Mo) (LHS)
China Nominal GDP YoY (RHS)
2.1
4.75
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
U.S. China
% o
f G
DP
2018-19 Fiscal Stimulus
125%
Larger
23
One Year OutlookThemes That Will Drive the Market Over the Next 12 Months
Trump’s
Presidential Agenda
U.S. Dollar
Interest RatesEarnings
$
ValuationsDebt
International
Oil
24
Trump’s Presidential Agenda
25
Presidential Cycle: The Economy
Source: Strategas Research Partners.
7
1
0
3
0
1
2
3
4
5
6
7
8
Year 1 Year 2 Year 3 Year 4
Number of Recessions Starting Per Year of the Presidential Cycle
1948 – 2016
Since 1948, no recession
has started in the 3rd year
of a presidential
administration.
26
Presidential Cycle: The Stock Market
Source: Strategas Research Partners.
7.0%6.4%
16.1%
6.7%
4.8%
3.3%
19.2%
11.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Year 1 Year 2/Midterm Year 3 Presidential Election Year
S&P 500 Annual Performance by Presidential Term Year
Inclusive of First & Second Term vs. First Term Only, Since 1949
S&P Price Return - Inclusive of First and Second Term S&P Price Return - Only First Term Performance
S&P Historical Average
Since 1949: 9.0%
Current
Period
27
RepatriationUnremitted Foreign Earnings: S&P 500
Data as of Dec. 31, 2017. Source: Standard & Poor’s and Bloomberg.
0 100 200 300 400 500 600 700 800 900
Information Technology
Health Care
Consumer Staples
Financials
Industrials
Energy
Consumer Discretionary
Materials
Utilities
Real Estate
Telecommunication Services
$ Billion
Unremitted Foreign Earnings
19.7% of market value
18.4% of market value
28
Fiscal Stimulus > Trade ConcernsTariffs vs. Fiscal Policy
Data as of Dec. 31, 2018. Source: Strategas Research Partners.
$0
$50
$100
$150
$200
$250
$300
$350
$400
Estimated Tariffs Fiscal Policy
Bil
lio
ns
Auto Tariffs: $40 B
Existing China Tariffs: $44 B
China 301/Retaliation (3rd Round): $111 B
China 301/Retaliation (2nd Round): $50 B
$251 BillionIncremental Tariffs
$372 BillionIncremental Fiscal Stimulus
Repatriation: $250 B(estimated)
Spending: $52 B
Tax Cuts: $70 B
Steel & Aluminum Tariffs: $6.3 B
29
Business and Consumer ConfidenceConfidence Remains Elevated Despite Ongoing Trade Tensions
Source: NFIB, Conference Board, and Bloomberg.Data as of Dec. 31, 2018.
Business and consumer confidence are each near their highest level
in over a decade.
50
60
70
80
90
100
110
120
1985 1990 1995 2000 2005 2010 2015
University of Michigan Consumer Sentiment
80
85
90
95
100
105
110
1985 1990 1995 2000 2005 2010 2015
NFIB - Small Business Optimism
Data as of Dec. 31, 2018. Data as of Nov. 30, 2018.
30
Earnings
$
31
Manufacturing PMI and S&P 500 EPS
Data as of Dec. 31, 2018. Source: Bloomberg.
-50
-40
-30
-20
-10
0
10
20
30
40
50
30
35
40
45
50
55
60
65
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
ISM Manufacturing PMI, 12 Month Moving Average, Shifted 6 Months Forward (Left)
S&P 500 EPS Year over Year % Change, 4 Quarter Average (Right)
32
Buybacks & Dividends
S&P 500 as of Dec. 31, 2018. Remainder as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: Credit Suisse, S&P, Bloomberg.
0
500
1,000
1,500
2,000
2,500
3,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
S&
P 5
00
($)
Bil
lio
n
Dividends (Left Axis) Buybacks (Left Axis) S&P 500 (Right Axis)
33
-10%
0%
10%
20%
30%
2011 2012 2013 2014 2015 2016 2017 2018
Revenue Earnings Tax Impact
-10%
0%
10%
20%
30%
S&P 500 Revenue & Earnings Growth
Source: Credit Suisse. YoY growth.Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.
Revenue and earnings growth are at the strongest level since the early part of the recovery.
Earnings growth is quite robust, even excluding the 8% boost from tax reform.
Fastest Earnings Growth Since 2011
Fastest Revenue Growth Since 2011
34
Peak Earnings A Reason To Sell?S&P 500 Returns Following Peak EPS Growth Since 1962
Note: Peak EPS based on YoY trailing EPS growth.Source: Credit Suisse, S&P, NBER, and Bloomberg.
EPS Peak (S&P 500) Recession # Months S&P 500 Return (%)
3Q62 4Q69 87 63.6
1Q66 4Q69 45 3.2
4Q68 4Q69 12 -11.4
4Q73 4Q73 -1 1.7
4Q76 1Q80 37 6.2
3Q79 1Q80 4 4.4
3Q81 3Q81 -2 -11.3
2Q84 3Q90 73 132.5
2Q88 3Q90 25 30.2
3Q93 1Q01 90 152.8
2Q95 1Q01 69 113.0
1Q97 1Q01 48 53.3
1Q00 1Q01 12 -22.6
3Q02 4Q07 63 80.1
1Q04 4Q07 45 30.4
3Q06 4Q07 15 9.9
Average (1962-2006) 39 39.8
4Q10 - 96 99.3
2Q14 - 54 27.9
3Q18? - - -
Average Including Current Cycle (1962-Present) 43 42.4
Peak earnings do not
necessarily mean the
end of the economic
or market cycle.
35
International
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
36
Home Country Bias
Morningstar Category Assets as of Nov. 30, 2018. GDP as of Dec. 31, 2017. MSCI World Index as of Dec. 31, 2018.Source: Morningstar, IMF, FactSet. Data most recent available as of Dec. 31, 2018.
U.S.
International U.S.
International
U.S.
International
Investors tend to over-allocate to their home country.
% Assets% GDP % Market Cap
The U.S. represents 75% of
U.S. investor portfolios
The U.S. represents only
32% of Global GDP
The U.S. represents 40% of
Global Market Cap
37
International Roadmap
Data as of Dec. 31, 2018.Source: Standard & Poor’s, Moody's, MSCI, FactSet, and Bloomberg.Note: United States P/E and EPS growth is S&P 500, all others are MSCI Country/Region Index.
Economic Government Financial Currency
GDP
Growth
(%, YoY)
Economic
Momentum
Central Bank
Policy
Sovereign Credit
Rating
P/E
Ratio
(x)
EPS
Growth
(%, YoY)
North America 3.3 Accelerating Neutral & Hiking AAA 14.3 7.8 Stable
Europe ex-UK 1.6 Decelerating Easy & Stable AA- 12.1 9.2 Weakening
United Kingdom 1.5 Stable Easy & Hiking AA 11.4 5.0 Weakening
Asia ex-Japan 2.7 Decelerating Easy & Stable AAA 11.2 6.4 Weakening
Japan -2.5 Decelerating Easy & Stable A 11.2 2.6 Stable
Emerging Markets 4.8 Stable Neutral & Hiking BBB+ 10.6 8.0 Weakening
Positive
Positive
Caution
Neutral
Neutral
Neutral
38
Europe vs U.S. Retail Sales and Unemployment
Source: FactSet, U.S. Census Bureau, DOL, Eurostat.Retail Sales data as of Nov. 30, 2018. Unemployment data as of Nov. 30, 2018, latest available.
90
95
100
105
110
140
160
180
200
2007 2009 2011 2013 2015 2017
$ M
illi
on
Retail Sales
U.S. Retail Sales (LHS) Eurozone Wholesale and Retail Sales (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
2007 2009 2011 2013 2015 2017
Unemployment
U.S. Unemployment Rate Eurozone Unemployment Rate
Europe is earlier in their economic cycle than the U.S.
39
Proportion of Revenues from Emerging Markets
Source: Bloomberg, J.P. Morgan.
8%
19%
0%
5%
10%
15%
20%
U.S. Europe
European equities are more exposed to Emerging Markets than U.S. equities.
40
Interest Rates
The U.S. Treasury Department is responsible for issuing all Treasury bonds, notes and bills; it is responsible for the revenue of the U.S. government.
41
Treasury Borrowing Set to SurgeBigger Deficits, Fed QE Unwind Boost Financing Needs
Source: Treasury, primary dealer estimates. Data as of Dec. 31, 2018.Estimates and forecasts are inherently limited and should not be relied upon as indicators of actual or future results.
1,273
1,080
1,014
779
2021
2020
2019
2018
Actual
Estimate
Estimate
Estimate
30.2% Increase vs. 2018
Net marketable borrowing in billions of dollars per fiscal year
42
European Rates Poised to Move Higher
Data as of Dec. 31, 2018.Source: US Treasury, BofA Merill Lynch, Fed Fred database, Haver Analytics.
0
5
10
15
20
25
30
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
%
Recession U.S. 10-Yr. Treasury Yield ICE BofA ML Euro High Yield - YTM
43
Treasury Positioning
As of Dec. 25, 2018, most recent data available as of Dec. 31, 2018.Source: CFTC and Bloomberg.
-1,000
-800
-600
-400
-200
0
200
400
600
800
2001 2003 2005 2007 2009 2011 2013 2015 2017
Nu
mb
er
of
Co
ntr
acts
(T
ho
usa
nd
s)10-Year Treasury Net Speculative Futures Positioning
The record short Treasury futures positioning has begun to reverse itself which
has helped bring down long term yields.
Further unwind may be needed in order for rates to move higher in 2019.
44
Oil
45
Global Oil Supply vs. Demand
Source: Energy Intelligence & Bloomberg.Note: 6-Month Moving Average. Data as of Dec. 31, 2018.
0
20
40
60
80
100
120
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015 2016 2017 2018
Cru
de O
il P
rice (
NY
M $
/bb
l)
Mil
lio
n B
arr
els
/Day
Deficit (Left Axis) Surplus (Left Axis) Crude Oil Inverted (Right Axis)
Surplus
Deficit
The oil market has shifted back to a (modest) surplus, which has
weighed on oil prices in recent months.
Importantly, the surplus remains much smaller than in 2015,
suggesting WTI may be close to finding support at current levels
46
OPEC Spare Capacity
As of Dec. 31, 2018.Source: EIA.
0%
1%
2%
3%
4%
5%2009
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
2015
2015
2016
2016
2016
2016
2017
2017
2017
2017
2018
2018
2018
2018
2%
1%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
OPEC spare capacity has been in secular decline since the 1980s.
Tight spare capacity means the impact from any supply disruptions would be magnified.
47
U.S. Retail Gasoline Price
Data as of Dec. 31, 2018. Source: EIA, FactSet.*Average 2018 oil price year-to-date.
1.5
2.0
2.5
3.0
3.5
4.0
2010 2011 2012 2013 2014 2015 2016 2017 2018
($)
2018 Average:
$2.72
Current:
$2.29
-15.8%
YoY
Assuming current oil prices, the US consumer is in line to receive a $121B boost this year
due to lower gas ($61B) and tax reform ($60B).
It would take $3.14 gas on average over the course of 2019 to eliminate the boost from
tax cuts. This would be a 37% increase from current levels.
48
Energy Relative to Market
Data as of Dec. 31, 2018. Source: FactSet.S&P 500 GICS Energy Sector Holdings vs. S&P 500 Index from Jan. 1990 through Dec. 2018.
0.5
1.0
1.5
2.0
1967 1969 1972 1974 1977 1979 1982 1985 1987 1990 1992 1995 1998 2000 2003 2005 2008 2010 2013 2016 2018
Recession Energy Sector Relative Total Return
The energy sector has outperformed the market in the later
stages of every economic cycle going back to the 1960s.
%
49
U.S. Dollar
50
U.S. Dollar Cycle
As of Dec. 31, 2018.Source: Federal Reserve Bank of St. Louis, Federal Reserve and FactSet.Major Currencies, Index Mar 1973=100, Monthly, Not Seasonally Adjusted.
60
70
80
90
100
110
120
130
140
150
1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
Ind
ex
Mar
19
73
=1
00
U.S. dollar cycles typically last approximately 15 years.
The dollar’s peak in 2016 may have started a longer downtrend.
17 years 14 years
Trade-Weighted U.S. Dollar
14 years
51
-20
0
20
40
60
80
100
2016 2017 2018
Nu
mb
er
of
Co
ntr
acts
(T
ho
usa
nd
s)
U.S. Dollar Net Speculative Futures Positioning
75
80
85
90
95
100
Tra
de W
eig
hte
d U
.S.
Do
llar
Ind
ex
Trade Weighted U.S. Dollar Index (RHS) Series2
U.S. Dollar Positioning
• U.S. dollar positioning today vs. start of year
• Investor sentiment has shifted
As of Dec. 31, 2018.Source: CFTC and Bloomberg.
Dollar positioning has changed from net short to net long, suggesting
much of the dollar’s appreciation may have already occurred.
Dollar
Weakness
Net Short
Position
Dollar
Strength
U.S. Dollar (LHS)
Dollar
Weakness
Dollar
Strength
52
Twin Deficits: Budget and Trade
Data as of Sept. 30, 2018, most recent available as of Dec. 31, 2018.Source: BEA, Federal Reserve, FactSet.
-8.0
-5.5
-3.0
-0.5
2.0
4.5
7.0
9.5
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Tw
in D
efi
cit
s -
5 Y
ear
Ch
an
ge
Real
Tra
de W
eig
hte
d D
oll
ar
-5
Year
Ch
an
ge
Real Trade Weighted Dollar (Lagged 2 Years, Left Axis) Twin Deficits as a % of GDP (Right Axis)
Twin deficits show the dollar should modestly weaken over the next several years.
53
Foreign Sales as % of Total SalesS&P 500 Sectors
As of Dec. 31, 2018.Source: FactSet.
55.9
53.1
43.5
41.7
36.6
36.1
34.9
34.0
20.2
13.3
3.1
0 10 20 30 40 50 60
Information Technology
Materials
Consumer Staples
Energy
Health Care
Industrials
Consumer Discretionary
Communication Services
Financials
Real Estate
Utilities
(%)
54
Debt
55
Student Loans Not a Macro Issue
• There are 44 million student loans outstanding
• 84% have a balance smaller than $50k
• 16% hold 56% of outstanding student loan balances
Data as of Dec. 31, 2017. Source: New York Fed Consumer Credit Panel/Equifax.
Less than 5k
20%
5k-10k
17%
10k-25k
28%
25k-50k
19%
50k-75k
8%
75k-100k
3%
100k-200k
4%200k+
1%
Less than 5k
2% 5k-10k
4%
10k-25k
15%
25k-50k
23%
50k-75k
16%
75k-100k
10%
100k-200k
19%
200k+
11%
Borrower Distribution by
Outstanding Balance in 2016
Debt Distribution by
Outstanding Balance in 2016
56
Corporate Debt Maturity Wall?S&P 500 Percent of Debt Due by Maturity
Data as of Dec. 31, 2018. Source: Strategas Research Partners.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050+
Weig
hte
d A
vera
ge Y
ears
to
Matu
rity
Corporations have taken advantage of low rates and have termed out their debt.
The weighted average maturity for S&P 500 companies is 10 years.
57
U.S. Credit Quality Deterioration
As of Dec. 31, 2018.Source: Strategas and Bloomberg/Barclays.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
AAA
9.2%
AA
10.3%
A
36.1%
BAA
44.4%
In 1973, only 9% of credits were rated BAA versus over 44% today.
58
U.S. is the Only Country with Growing Debt Levels
As of Dec. 31, 2018.Source: IMF Forecasts, Haver Analytics, Deutsche Bank Research.
-40
-30
-20
-10
0
10
20
Gre
ece
Cyp
rus
Po
rtu
gal
Germ
an
y
Malt
a
Icela
nd
Irela
nd
Neth
erl
an
ds
Au
stri
a
Lit
hu
an
ia
Can
ad
a
Sw
ed
en
Slo
vak R
ep
ub
lic
Cze
ch R
ep
ub
lic
Slo
ven
ia
Belg
ium
New
Zeala
nd
Sw
itze
rlan
d
Au
stra
lia
Italy
Latv
ia
Den
mark
Sp
ain
Fin
lan
d
Un
ited
Kin
gd
om
Lu
xem
bo
urg
Jap
an
Fra
nce
Est
on
ia
Isra
el
Ho
ng
Ko
ng
SA
R
No
rway
Sin
gap
ore
Ko
rea
Un
ited
Sta
tes
Change in Government Debt-to-GDP Ratio
2018 - 2023
59
Valuations
60
65
14 14
20
34
0
5
10
15
20
25
30
35
<-20% -20% - 10% -10% - 0% 0% - 10% 10% - 20% >20%
Years
S&P 500 Annual Total Return Ranges
Market Annual Returns Distribution of S&P 500 Total Returns Since 1926
As of Dec. 31, 2018. Source: Strategas Research Partners.
1927
1928
1933
1935
1936
1938
1942
1943
1945
1950
1951
1954
1955
1958
1961
1963
1967
1975
1976
1980
1982
1983
1985
1989
1991
1995
1996
1997
1998
1999
2003
2009
2013
2017
1930
1931
1937
1974
2002
2008
1941
1957
1966
1973
2001
1929
1932
1934
1939
1940
1946
1953
1962
1969
1977
1981
1990
2000
2018
1947
1948
1956
1960
1970
1978
1984
1987
1992
1994
2005
2007
2011
2015
1926
1944
1949
1952
1959
1964
1965
1968
1971
1972
1979
1986
1988
1993
2004
2006
2010
2012
2014
2016
61
Strength of U.S. Bull Markets
Data as of Dec. 31, 2018.Source: Bloomberg, FactSet.
11.9%
14.1%
14.2%
15.0%
16.2%
17.6%
20.0%
20.0%
20.0%
20.1%
23.3%
26.7%
0% 5% 10% 15% 20% 25% 30%
1946-48
1974-80
2009 - Present
2002-07
1957-61
1962-66
1949-56
1990-2000
1966-68
1987-90
1970-73
1982-87
S&P 500’s Annual Rate of Change
The current bull market is the tenth strongest since WW2.
62
Price/Earnings Is Not The Only Indicator To Watch
Data as of Dec. 31, 2018.Source: Bloomberg.
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Recession S&P 500 Price/Earnings Ratio
Sept. 2009
23.2
Dec. 2007
17.5
63
-6%
-4%
-2%
0%
2%
4%
6%
8%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Earnings Price YieldInterest Rates: S&P 500 Minus YTM of 10-Year Treasuries
Source: FactSet. Data as of Dec. 31, 2018.YTM: Yield to maturity. E/P Yield: The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share.
Quarter E/P YieldYTM 10-Year
Treasuries Spread
Q4 1968 5.5% 6.2% -0.7
Q2 1990 6.4% 8.4% -2.0
Q1 2000 3.6% 6.0% -2.4
Current 5.8% 2.7% 3.1
Valuation levels at end of the three longest U.S. economic
cycles based on quarter end values:
64
New Secular Bull Market?
Data as of Dec. 31, 2018. Source: Standard & Poor’s and Bloomberg.
1
5
25
125
625
3125
1930 1940 1950 1960 1970 1980 1990 2000 2010
S&P 500
1950-1970
All-Time Highs: 365
Cumulative Return: 451.9%
1930-1950
All-Time Highs: 0
Cumulative Return: -22.2%
1970-1980
All-Time
Highs: 35
Cumulative
Return:
17.2%
2000-2010
All-Time
Highs: 13
Cumulative
Return:
-24.1%
2010-Present
All-Time Highs:
207
Cumulative
Return: 125%
1980-2000
All-Time Highs: 500
Cumulative Return:
1,261.2%
S&
P 5
00
In
dex
(Lo
g-S
cale
)
65
Bull Market Top Checklist
Source: Strategas Research Partners.
2000 2007 Current Comments
Blow-off top Few signs of panic buying or speculative excess in public equity markets.
S&P is currently below its 200-day MA after peaking in January.
Heavy inflows into equity
market funds
Net inflows into equity mutual funds and ETFs is underwhelming while
inflows into bond funds remain robust.
Big pick-up in M&A activity M&A activity has picked up significantly this year from years in the past.
In absolute dollar terms, activity is near historical highs.
IPO activity Despite some high-profile new issues in 2017, deal volume and assets
raised remain far below the pace exhibited in 2015.
Rising real interest rates Real rates have moved higher and although not yet worrisome, they are
worth watching.
Weakening upward
earnings revisions Upward earnings revisions remain at elevated levels.
Erosion in number of
stocks making new highs The numbers of companies making 52-week highs peaked in January.
Shift towards
defensive leadership
Since the February 2016 low, cyclical shares have outperformed for the
past two years. It is worth noting in the past month there has been a
shift toward defensive shares.
Widening credit spreads High-yield and investment grade credit spreads have moved higher
recently but compared to a longer-term history are still contained.
66
Name and PositionIndustry
Experience
ClearBridge
TenureEducation, Experience and Professional Designations
Biographies
Jeffrey Schulze, CFA 14 years • • Member of the CFA Institute
• Lord Abbett & Co., LLC – Portfolio Specialist
• BS in Finance from Rutgers University
Joined ClearBridge
in 2014Director, Investment Strategist
Josh Jamner, CFA 9 years • • Member of the CFA Institute
• RBC Capital Markets - Assistant Vice President, Associate Strategist
- U.S. Equity
• Bessemer Trust - Assistant Vice President, Client Portfolio Analyst
• BA in Government from Colby College
Joined ClearBridge
in 2017Vice President,
Investment Strategy Analyst
67
Glossary of TermsBunds: Bonds issued by Germany's federal government. Bunds are available in 10- and 30-year maturities.
Duration: Years to receive bond’s true cost, including present value of all future coupon and principal payments.
ECB: European Central Bank
EPS: Earnings Per Share
GDP: Gross Domestic Product
ICE BofA ML Euro High Yield Index: Tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro
domestic or Eurobond markets.
P/E Ratio: Price/Earnings ratio
PMI: Purchasing Manager’s Index
Quantitative easing (QE): Monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the
direct purchase of debt securities.
Yield Curve: Comparison of interest rates at a point in time of bonds with equal credit quality but different maturity dates.
YoY: Year Over Year
U.S. Treasurys: Direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the
principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the
federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when
the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the
market value of these securities.
Case-Shiller Home Price Indexes: A group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a
constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain
metropolitan statistical areas (MSA) as well as a national index.
NASDAQ Composite Index: A market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and includes
over 3,000 stocks.
NIKKEI 225: Price-weighted index composed of Japan’s top 225 blue-chip companies on the Tokyo Stock Exchange.
S&P 500 Index: Unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
Shibor: (The Shanghai Interbank Offered Rate) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other
banks in the Shanghai wholesale (or "interbank") money market.
RRR: The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the
minimum amount of reserves that must be held by a commercial bank.
68
Additional Important Information
Past performance is no guarantee of future results.
©2019 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments, LLC are subsidiaries of
Legg Mason, Inc.
All opinions and data included in this presentation are as of December 2018 unless noted otherwise and are subject to change. The opinions and views
expressed herein are of the presenter and may differ from other managers, or the firm as a whole, and are not intended to be a forecast of future events,
a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics
have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither
ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.
All investments involve risk, including loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular
investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a
recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding
the appropriateness of investing in any securities or investment strategies should consult their financial professional.
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