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Market
Snapshot
Liz Ann Sonders
Senior Vice President
Chief Investment Strategist
Charles Schwab & Co., Inc.
March, 2015
Global central banks’ massive QE programs
ECB Monetary Base
BoJ Monetary Base
4.5
480
4.0
430
3.5
380
3.0
330
2.5
280
2.0
230
1.5
180
1.0
130
0.5
2008
80
2010
2012
2014
BoJ (¥, trillions)
Fed ($, trillions) & ECB (€, trillions)
Fed Monetary Base
2016
As of 1/15. Dotted lines represent projections (2/15-12/16). Source: Bank of Japan (BoJ), Bloomberg, European Central Bank (ECB), FactSet, Federal Reserve.
1
Divergences in QEs’ sizes are notable
Ratios of QE to Bond Issuance
3.0
ECB QE
2.5
2.0
BoJ 2014
1.5
BoJ 2013
1.0
0.5
Fed QE2
Fed QE3
0.0
2016 Projected Monetary Base as % of Nominal GDP
100
BoJ
80
60
40
Fed
ECB
20
0
As of 1/15. QE=quantitative easing. QE3=1/13-10/14. QE2=10/10-6/11. ECB QE=3/15-9/16. Source: Bank of Japan (BoJ), Bloomberg, European Central Bank (ECB), FactSet, Federal Reserve,
GavekalDragonomics, International Monetary Fund (IMF).
2
Global economic surprises tilting toward non-US
Citigroup Economic Surprise Index
US
Eurozone
China
Japan
75
50
25
0
-25
-50
-75
-100
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
As of 2/27/15. The Citigroup Economic Surprise Index measures the amount that economic activity surprised or disappointed relative to analyst expectations. It’s defined as weighted historical
standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have on balance beating
consensus. The index is calculated daily in a rolling three-month window. Source: FactSet.
3
(0215-1604)
US GDP slows down … temporarily?
% of
real GDP
2Q14
annualized
Q/Q % change
3Q14
annualized
Q/Q % change
4Q14
annualized
Q/Q % change
Consumer spending
68.2%
2.5%
3.2%
4.2%
Government spending
17.8%
1.7%
4.4%
(1.8%)
(0.9%)
9.9%
(7.5%)
3.4%
1.1%
2.0%
(0.3)*
0.8*
(1.2)*

Federal: 6.9%

State/local: 10.9%
Net exports of goods & services
(2.9%)

Exports: 13.0%
11.1%
4.5%
3.2%

Imports: (15.9%)
11.3%
(0.9%)
10.1%
9.5%
7.7%
4.5%
Fixed investment
16.4%

Nonresidential: 13.3%
9.7%
8.9%
4.8%

Residential: 3.1%
8.8%
3.2%
3.4%
1.4*
0.0*
0.1*
4.6%
5.0%
2.2%
Change in private inventories
-Real GDP
 2.3% (“new normal”) = average real GDP since June 2009 recession end
 3.2% (“old normal”) = average private sector real GDP since June 2009 recession end
As of 4Q14. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. Source: Bureau of Economic Analysis, FactSet.
4
(0215-1604)
Closer to “escape velocity” than recession in US
“Escape
Velocity”
level
Key
recession
level
Current
level
NDR Recession Probability Model
5
50
0.3
Breadth of Philly Fed State Leading Indexes
95
52
98
NDR Economic Timing Model
17
0
20
NDR Composite Leading Model
3.4%
-2.6%
3.3%
National Financial Conditions Index
-0.7
0.9
-0.7
350,000
500,000
294,500
Conference Board’s Consumer Confidence Index
98.2
63.2
96.4
Conference Board’s Business Confidence Index
61
43
60
ISM Manufacturing Index
55.0
48.0
52.9
ISM Non-Manufacturing Index
55.2
51.4
56.7
Indicator
Initial unemployment claims (4-week average)
Escape velocity refers to economic growth returning to potential after a recession, and activity is
self-sustaining, i.e., it no longer needs the support of fiscal/monetary accommodation
*As of 3/2/15. Green means indicator is above “escape velocity” level. Lighter green means indicator is getting close to “escape velocity” level. ISM=Institute for Supply Management. Source: Ned
Davis Research (NDR), Inc. Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.
5
(0215-1604)
Inflation rates converging to sub-target?
US Inflation
Japan Inflation
Eurozone Inflation
2% Target Inflation Rate
6
y/y % change
4
2
0
-2
-4
2008
2009
2010
2011
2012
2013
2014
2015
As of 1/15. US Inflation=Consumer Price Index (CPI). Eurozone Inflation= Eurostat Eurozone Core Monetary Union Index of Consumer Prices. Japan Inflation=Consumer Price Index (CPI).
Source: FactSet.
6
Inflation risk low while velocity remains low
Monetary Base ($, billions)
4,500
3,500
Fed flooded system
2,500
1,500
500
2007
2008
2009
2010
2011
2012
2013
2014
2015
M2 to Monetary Base Ratio
10
8
But “velocity” of money
remains depressed
6
4
2
2007
2008
2009
As of 2/15. Source: FactSet, Federal Reserve.
2010
2011
2012
2013
2014
2015
7
Low inflation generally bullish for US stocks
Reuters CRB Continuous Commodity Index (y/y % change)
3-week moving average
200
180
160
140
High Inflationary Pressures (Bearish)
120
100
80
Low Inflationary Pressures (Bullish)
60
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
1/19/1968-2/20/2015
We are here
Reuters CCI index
DJIA annualized gain
> 108.2
-0.9%
96-108.2
7.2%
< 96
15.5%
As of 2/20/15. The Reuters CRB (Commodity Research Bureau) Continuous Commodity Index (CCI) represents a geometric average of 17 commodity futures prices. DJIA=Dow Jones Industrial
Average. Source: FactSet, Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.).
8
Unemployment saying Fed’s too patient?
Unemployment Rate, 1Y % point difference (left-inverted scale)
Fed Funds Target Rate, 1Y % point difference (right)
-3
4
0
0
3
-4
6
1985
-8
1989
1993
1997
2001
2005
2009
2013
Yellow-shaded areas indicate Fed tightening periods
As of 1/15. Source: FactSet, High Frequency Economics, Ltd.
9
Lower US unemployment leads higher wages
Unemployment Rate
Average When Wages Bottomed
10
9
8
7
6.6
6
5
5.6
5.4
4
3
1986
1990
1994
1998
2002
2006
2010
2014
y/y % change, 3m moving average
Average Hourly Earnings of Production & Nonsupervisory Employees
5
4
3
2
1
1986
As of 1/15. Source: Department of Labor, FactSet.
1990
1994
1998
2002
2006
2010
2014
10
US job openings have surged
Job Openings (JOLTS) - thousands
5,500
Average nonfarm
payroll employment
change = +267k
5,000
4,500
4,000
3,500
3,000
Average nonfarm
payroll employment
change = +122k
2,500
2,000
2004
2006
2008
2010
2012
2014
As of 12/14. Job Openings and Labor Turnover Survey (JOLTS) is a monthly survey of private nonfarm establishments and local government entities which provides information on the total number
of job openings, hires, and separations (voluntary quits and layoffs/discharges). Source: Department of Labor, FactSet, ISI Group LLC.
11
Long-term US unemployment has plunged
Long-Term Unemployment Rate (more than 27 weeks)
Short-Term Unemployment Rate (less than 5 weeks)
5
4
3
2
1
0
1948
1958
As of 1/15. Source: Department of Labor, FactSet.
1968
1978
1988
1998
2008
12
Market’s expectations way under Fed’s
September 2014 Median FOMC Fed Funds Rate Projections
December 2014 Median FOMC Fed Funds Rate Projections
Fed Funds Futures Rate (market expectations)
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2014
2015
As of 2/15. FOMC=Federal Open Market Committee. Source: Bloomberg, Federal Reserve.
2016
2017
13
Volatility up across all asset classes
Average Daily Move in 10-Year Treasury Yield (bps)
Average Daily Move in S&P 500 (%)
8.5
2.0
7.5
1.6
6.5
1.2
5.5
4.5
0.8
3.5
0.4
0.0
2011
2.5
2012
2013
2014
2015
1.5
2011
2012
2014
2013
2015
JPM Global FX Volatility Index
Average Daily Move in WTI Crude Oil Price (%)
30
3.5
3.0
25
2.5
20
Asian financial
crisis/Russia default
Mexican
peso crisis
Global
financial
crisis
Peak of
euro crisis
2.0
15
1.5
10
1.0
5
0.5
0.0
2011
2012
2013
2014
2015
0
1992
1995
1998
2001
2004
2007
2010
2013
As of 2/27/15. Average Daily Move=50-day moving average of absolute daily change. bps=basis points. WTI=West Texas Intermediate. JPM Global FX Volatility Index is an index of global foreignexchange volatility that tracks options on currencies of major and developing nations in percentage points. Source: Bespoke Investment Group (B.I.G.), Bloomberg.
14
Big lag from 1st hike to trouble historically
Fed tightenings ahead of US bear markets and recessions
Date of 1st
Fed rate hike
Bear market
start
# months to
bear market
Recession
start
# months to
recession start
4/15/1955
8/2/1956
16
8/1957
28
9/12/1958
12/12/1961
39
4/1960
19
7/17/1963
2/9/1966
31
n/a
n/a
11/20/1967
11/29/1968
12
12/1969
25
1/15/1973
1/11/1973
0
11/1973
10
8/31/1977
n/a
n/a
1/1980
29
9/26/1980
11/28/1980
2
7/1981
10
9/4/1987
8/28/1987
-1
7/1990
34
2/4/1994
n/a
n/a
n/a
n/a
6/30/1999
3/24/2000
9
3/2001
21
6/30/2004
10/9/2007
40
12/2007
42
Mean
16
Mean
24
Median
12
Median
25
Bear market defined as 20+% drop in S&P 500. See last slide for definition of recession. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright
2015(c) Ned Davis Research, Inc. All rights reserved.).
15
US stocks tend to rally into/after initial rate hike
S&P 500 Around Starts of Fed Tightening Cycles
112
110
Average of 13 cases since 1928
108
106
104
102
100
Start of Tightening Cycle
98
-6
-5
-4
-3
-2
-1
0
1
2
3
Months Prior | Months Post
4
5
6
1928-2014. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2015 (c) Ned Davis Research, Inc. All rights reserved.)
16
Longer-term US performance during rising rates
Economic & market performance during rising interest rate periods
(based on Fed tightening cycles)
% Gain per annum
Coincident
index
3.0%
Nonfarm
payrolls
2.5%
Start date
4/30/1955
Fed rate
1.75%
End date
7/31/1957
Fed rate
3.00%
S&P 500
total return
15.1%
9/30/1958
2.00%
8/31/1959
3.50%
24.8%
13.8%
3.9%
7/31/1963
3.50%
11/30/1965
4.00%
16.2%
5.4%
3.8%
11/30/1967
4.50%
3/31/1969
5.50%
9.2%
4.4%
3.6%
1/31/1973
5.00%
3/31/1974
7.50%
-13.9%
2.2%
3.0%
8/31/1977
5.75%
1/31/1980
12.00%
12.6%
3.5%
3.8%
9/30/1980
11.00%
4/30/1981
13.00%
15.5%
2.7%
2.1%
9/30/1987
6.00%
1/31/1989
6.50%
-2.4%
4.0%
3.3%
2/28/1994
3.25%
1/31/1995
5.50%
3.6%
4.6%
3.6%
6/30/1999
5.00%
4/30/2000
6.00%
8.3%
4.2%
2.6%
6/30/2004
1.25%
5/31/2006
5.00%
7.6%
2.6%
1.7%
Median
9.2%
4.0%
3.3%
Mean
8.8%
4.6%
3.1%
Gain per annum over entire history
11.3%
2.5%
1.7%
Tightening cycle defined as at lest 3 consecutive rate increases without an intervening easing cycle. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission.
Copyright 2015(c) Ned Davis Research, Inc. All rights reserved.).
17
Higher US rates more a positive than negative
Demand Deposits at Commercial Banks
1,200
$, billions
1,000
800
600
400
200
1990
1995
2000
Household Interest Income
2005
2010
2015
Household Interest Expense
1,600
$, billions
1,200
800
400
0
1990
1995
2000
2005
2010
2015
As of 1/15. Demand Deposits are funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution.
Source: Bureau of Economic Analysis, Cornerstone Macro, FactSet, Federal Reserve.
18
Disclosures
The information provided here is for general informational purposes only and should
not be considered an individualized recommendation or personalized investment
advice. The investment strategies mentioned here may not be suitable for everyone.
Each investor needs to review an investment strategy for his or her own particular
situation before making any investment decision.
We believe the information obtained from third-party sources to be reliable, but
neither Schwab nor its affiliates guarantee its accuracy, timeliness, or
completeness. The views, opinions and estimates herein are as of the date of the
material and are subject to change without notice at any time in reaction to shifting
market conditions.
Past performance is no guarantee of future results and the opinions presented
cannot be viewed as an indicator of future performance.
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19
Index definitions
Indexes are unmanaged, do not incur management fees, costs and expenses (or
"transaction fees or other related expenses"), and cannot be invested in directly.
The Breadth of Philly Fed State Leading Indexes are produced monthly by the
Federal Reserve Bank of Philadelphia, and designed to predict the 6-month growth
rate of each state's coincident index. The components of the leading indexes are:
state coincident indexes, state-level building permits, state initial unemployment
insurance claims, delivery times from the ISM manufacturing survey, and the
interest rate spread between the 10-year Treasury bond and the 3-month Treasury
note.
The Business Confidence Index is a quarterly survey by the Conference Board of
approximately 100 CEOs in a wide variety of industries, details Chief Executives'
attitudes and expectations regarding the overall state of the economy as well as
their own industry.
The Chicago Fed's National Financial Conditions Index (NFCI) provides a weekly
view of U.S. financial conditions in money markets, debt and equity markets, and
the traditional and "shadow" banking systems.
©2015 Charles Schwab & Co., Inc. All rights reserved. Member SIPC
20
Index definitions
Indexes are unmanaged, do not incur management fees, costs and expenses (or
"transaction fees or other related expenses"), and cannot be invested in directly.
The Conference Board's Coincident Economic Index (CEI) is a composite average
of four individual economic indicators (employees on nonagricultural payrolls,
personal income less transfer payments, industrial production, and manufacturing
and trade sales) designed to capture turning points in aggregate economic activity
better than any individual component.
The Consumer Confidence Index is a survey by the Conference Board that
measures how optimistic or pessimistic consumers are with respect to the economy
in the near future.
The Institute for Supply Management (ISM) Manufacturing Index is an index based
on surveys of more than 300 manufacturing firms by the Institute of Supply
Management. The ISM Manufacturing Index monitors employment, production
inventories, new orders and supplier deliveries.
The Institute for Supply Management (ISM) Non-manufacturing Index is an index
based on surveys of more than 400 non-manufacturing firms by the Institute of
Supply Management. The ISM Non-manufacturing Index monitors employment,
production inventories, new orders and supplier deliveries.
©2015 Charles Schwab & Co., Inc. All rights reserved. Member SIPC
21
Index definitions
Indexes are unmanaged, do not incur management fees, costs and expenses (or
"transaction fees or other related expenses"), and cannot be invested in directly.
The S&P 500 Index is a capitalization-weighted index of 500 stocks from a broad
range of industries. The component stocks are weighted according to the total
market value of their outstanding shares.
(0315-1739)
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22