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Transcript
Economic & Financial Market Outlook
James W. Paulsen, Ph.D.
Chief Investment Strategist
WELLS CAPITAL MANAGEMENT
Recession risk???
 Policies
 Leading indicators
 Excesses
 Balance sheets
 Confidence
WELLS CAPITAL MANAGEMENT
2
Back to full employment!!!?
Broad U-6 U.S. unemployment rate
Atlanta Fed wage growth tracker
Three-month moving average
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Average hourly earnings ─ annual growth
Three-month moving average
3
Core inflation …. A change in tone!?!
Core Consumer Price Index ─ annual growth
Three-month moving average
PCE Core Consumer Price Index ─ annual growth
Three-month moving average
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Core Consumer Services Price Index ─ annual growth
Three-month moving average
4
Crossing the threshold of full employment ?!?
When unemployment rate reaches 5% or less …
 Stock returns are about 45% lower and bond returns are
about 70% lower
 Stock falls 20% more frequently and bond yields rise about
60% of the time
 Bonds provide less diversification benefits
 On average, a recession is only 1.77 years away versus 4.18
years when unemployment rate is above 5%
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5
U.S. faces “supply-side” economic challenges!!!
Annualized U.S. working age population
growth by economic recovery
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Annualized U.S. productivity growth
by economic recovery
6
U.S. productivity needs to be rescued!?!
Detrended U.S. Productivity Index*
*Percent by which U.S. productivity index is above or below its post-war trend line average
WELLS CAPITAL MANAGEMENT
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The problem is lack of INVESTMENT!!?
Productivity vs. public sector
real investment spending
Left scale – Detrended U.S. Productivity Index (Solid)
Right scale – Detrended U.S. Real Government Investment Spending
(i.e., percent above or below its post-war trend line average) (Dotted)
WELLS CAPITAL MANAGEMENT
Productivity vs. private sector
real investment spending
Left scale – Detrended U.S. Productivity Index (Solid)
Right scale – Detrended U.S. Real Private Sector Investment Spending
(i.e., percent above or below its post-war trend line average) (Dotted)
8
Ample capability to drive investment!!?
Public sector investment spending as a percent
of real GDP
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U.S. corporate net cash flow as a percent
of nominal GDP
9
Is economic growth understated by 1%???
U.S. Productivity Index vs. U.S.
real wage rate
Percent above / below long-term trendline average
Solid ─ Detrended U.S. Productivity Index
Dotted ─ Detrended U.S. real wage rate
WELLS CAPITAL MANAGEMENT
Annualized growth in real GDP above recovery
growth in real investments,
real consumption, and real job creation
10
Is economic growth understated by 1%???
Nominal GDP vs. nominal income growth
Solid ─ Annual growth in the U.S. nominal GDP
Dotted ─ Annual growth in the U.S. nominal income,
(total hours worked times compensation per hour)
WELLS CAPITAL MANAGEMENT
Nominal GDP vs. nominal income
annualized Growth
2009 to 2016 economic recovery
11
U.S. growth sustaining near 2.5%!!
Annual U.S. real GDP growth
4-Quarter Moving Average
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Still capacity to grow?!?
 Leverage
 Restored household strength
 Housing
 Capital spending
 Better global growth
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Credit cycle only a couple years old??!
U.S. household debt as a percent
of total assets
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U.S. revolving consumer credit
outstanding
14
Pent-up demands???!
Personal consumption of motor vehicles
as a percent of disposable personal income
Four-quarter moving average
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Millennials look happy!!?!
U.S. millennials employment
(25 to 34 year olds)
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U.S. consumer confidence (conference board)
Millennials vs. baby boomers
Solid ─ Under 35 years old
Dotted ─ Over 55 years old
16
Will cap spending recover???
Annual growth in real U.S. capital spending
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Utilization rate bounce should help!?!
Utilization rate and capital spending
Solid (left) ─ U.S. total industry capacity utilization rate
Dotted (right) ─ U.S. real non-residential investment spending, log scale
WELLS CAPITAL MANAGEMENT
U.S. capacity utilization rates
Finished goods vs. crude goods
Solid ─ U.S. capacity utilization rate, finished stage of processing
Dotted ─ U.S. capacity utilization rate, crude state of processing
18
Better growth could help??!
Relative demand/supply growth
vs. business capital spending
Solid (left) ─ Real PCE annual growth less annual growth in productivity
Dotted (right) ─ Annual growth in U.S. non-residential real
investment spending
Global real GDP vs. U.S. capital spending
Solid (left) ─ Annual global real GDP growth. 2016 through 2018
based on consensus private sector forecasts
Dotted (right) ─ Annual growth in U.S. non-residential
real investment spending
Consensus
forecast
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Everyone is pushing up on economic growth!!?
U.S. M2 money supply growth
Japan central bank balance sheet ── Total assets
ECB central bank balance sheet ── Total assets
China 10-year government bond yield
Annualized six-month rates
Natural log scale
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Natural log scale
20
Global economy bouncing?!!?
OECD global leading economic indicator
Six-month annualized growth
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21
Commodity price collapse is stimulative!!?
S&P GSCI Spot Commodity Price Index
Annual core consumer price inflation rate
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U.S. 10-year Treasury bond yield
22
Chinese policy officials have only recently began
easing!!??
Chinese one year benchmark lending rate
Annual Chinese M1 money supply growth
Chinese – U.S. exchange rate
Shanghai Stock Exchange Composite Index
Price of one U.S. dollar per yuan
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Natural Log
23
China bouncing??!?
China ― Nominal GDP growth
vs. PPI inflation
MNI China PMI overall business conditions
Solid ─ Annual nominal China GDP growth
Dotted ─ Annual PPI inflation rate (quarterly average pushed
forward, leading by one year)
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Japan … Better than advertised?!?
Japan real GDP growth
Japan nominal GDP
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Japan unemployment rate
25
Eurozone showing signs of life!?!
Euro area real gross domestic product
annual growth
European business and consumer surveys
Eurozone economic sentiment and Eurozone retail trade confidence
Euro area real household consumption
expenditure annual growth
Eurozone foreign trade balance
Trailing 12-month average trade balance
Solid(left Scale) – Eurozone economic sentiment
Dotted(right scale) – Eurozone retail trade confidence
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Eurozone following U.S. economy?!?
Unemployment rates
Eurozone vs. U.S.
Solid – Eurozone unemployment rate
Dotted – U.S. unemployment rate
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Is U.S. dollar peaking??!?
U.S. Major World Currency Index (DXY Index)
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JP Morgan Emerging Market Currency Index
28
Higher interest rates = a lower dollar!!?
U.S. Dollar Index vs. Fed funds rate
Solid – Trade weighted U.S. Dollar Index
Dotted – Fed funds target interest rate
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When will commodity prices bottom?
U.S. commodity prices vs. U.S. Dollar Index
Solid Line (left scale) – S&P GCSI Spot Commodity Price Index, natural log scale
Dotted Line (right scale) – U.S. Real Broad Trade-Weighted Dollar Index, inverted natural log scale
WELLS CAPITAL MANAGEMENT
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Rest of the world outpaces U.S. in balance of
recovery???
U.S. nominal GDP as a percent of ex-U.S. nominal GDP
in U.S. dollars
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Wall Street crossroad …… Slack to tightness??
 Full employment
 Economic power switches to labor owner
 Cost push pressures/wages & price pressures/margin erosion
 Forced to realign interest rates
 Unfriendly policy officials
 An aging U.S. earning cycle
 Inflationary undertone
 Capital spending leads
 Reliance on productivity
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A bull, a bear, or a bunny?
S&P 500 Composite Stock Price Index
Natural log scale with recessions in grey
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How to play the bunny
 Some mild bunny-hop timing
 Increased value of active management
 International stocks
 Real assets
 Hedged approaches
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Stock market and rising yields
Earnings growth vs. Treasury yield
Solid ─ Annual growth in trailing S&P 500 per share
Dotted ─ 10-year U.S. Treasury bond
WELLS CAPITAL MANAGEMENT
S&P 500 risk-return profile since 1950
when bond yield rise
and Earnings-Yield Indicator is…
35
Median P/E = 14.5 and seldom above 20 P/E !?!
U.S. stock market trailing 12-month price-earnings ratio
WELLS CAPITAL MANAGEMENT
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U.S. stocks still cheap relative to post-war trend?!?!
S&P 500 Composite Stock Price Index
Price index vs. post-war trend
Total U.S. stock market
Total return index vs. post-war trendline
Solid line ─ S&P 500 price index, natural log scale
Dotted line ─ Slope of trendline is 7.2%, natural log scale
Last data point is August 2016. Source: Bloomberg
Solid line ─ Total return index of all NYSE, AMEX and
NASDAQ stocks, natural log scale
Dotted line ─ Slope of trendline is 10.9%, natural log scale
Last data point is June 2016. Source: Kenneth R. French online database
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E.P.S. are still on trend!!?
S&P 500 composite trailing earnings
per share
Earnings per share vs. post-war trendline
Solid line ─ S&P 500 EPS, natural log scale
Dotted line ─ Slope of trendline is 6.4%, natural log scale
Last data point is August 2016. Source: Bloomberg and Shiller
WELLS CAPITAL MANAGEMENT
Total U.S. corporate profits
with IVA and CCA
Total profits vs. post-war trendline
Solid line ─ Total U.S. corporate profits, natural log scale
Dotted line ─ Slope of trendline is 6.8%, natural log scale
Last data point is June 2016. Source: Bloomberg and BEA
38
Assume ….
 Recovery last four more years until 2020
 EPS end 2016 at $120
 EPS grow at 5% annualized to $145 by 2020
 2020 U.S. stock market at $145 EPS x 17ish PE yield a fair
value of about 2500
 About 6% buy and hold through 2020?!?
WELLS CAPITAL MANAGEMENT
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Investment themes—BONDS?
 10-year needs to reprice to between 4% to 5%
 Bullet now & barbell as Fed gets in game
 Stay below average duration
 Overweight lower quality (junk)
 Buy some TIPS
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Repricing bond yields?!?!
Real 10-year Treasury bond yield*
*10-year bond yield less core consumer price inflation rate
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Why bond yields could finally rise???
 U.S. at full employment
 Core inflation rising about the globe
 Everyone is pushing up on economic growth
 Divergences are extreme
 A mantra of “lower for longer”
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Core inflation is rising globally!!?
U.S. annual core consumer
price inflation rate
Eurozone annual core
consumer price inflation rate
WELLS CAPITAL MANAGEMENT
Japan annual core consumer
price inflation rate
Canada annual core
consumer price inflation rate
Great Britain annual core consumer
price inflation rate
China annual core consumer
price inflation rate
43
Extreme divergences!?!
Real 10-year Treasury bond yield
*10-year yield less annual core consumer price inflation rate
10-year Treasury bond yield relative to wage inflation
Real 10-year Treasury bond yield and commodity prices
Solid (left) ─ U.S. 10-year Treasury bond yield
Dotted (right) ─ JOC – ECRI Industrial Commodity Price Index
WELLS CAPITAL MANAGEMENT
*10-year yield less annual core consumer price inflation rate
Treasury bond yield and nominal GDP growth
Solid ─ U.S. 10-year Treasury bond yield
Dotted ─ Trailing five-year annualized growth
in U.S. nominal GDP
44
Does this make sense … ???
U.S. government bond yield
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45
Buy some JUNK???
U.S. Junk Bond Yield Spread*
*Chase High Yield Bond Spread
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46
Buy some TIPS???
U.S. 10-year TIPS embedded expected inflation rate
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47
Investment themes -- Stocks?
 Maximize overweight to international stocks
 Overweight mid and small caps
 Add some real asset exposure
 Emphasize manufacturing, commodity, energy, technology
and financials
 Raise proceeds on rallies from consumer discretionary,
consumer staples, utilities, and health care
 De-bond your stock portfolio
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48
Overweight overseas!?!
 Under owned
 Better relative values
 Hospitable policy officials
 No negative full employment fallout
 Companies in younger part of earnings cycle
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Stock market leadership shift??!
Core consumer prices vs. core crude producer prices
Natural log scale
Solid: Core Consumer Price Index
Dotted: Core Crude Producer Price Index
(Crude non food materials less energy)
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Go international and industrial!?!
U.S. / ex-U.S. total return stock performance vs.
CPI/PPI Ratio
Solid (left natural log scale): MSCI relative total stock market return:
U.S. stock market vs. global ex-U.S. stock market in U.S. dollars
Dotted (right natural log scale): Ratio of Core Consumer Price Index
divided by Core PPI Index for crude non food materials less energy
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Consumer / industrial total return stock
Performance vs. CPI/PPI Ratio
Solid (left natural log scale): Relative total return performance of consumer
sectors vs. industrial sectors. Data from Kenneth French 12 sector U.S. universe.
Consumer sectors include consumer non durables, consumer durables, telecom,
utilities and shops (retail). Industrial sectors include manufacturing, energy and
chemicals. Sectors are equal weighted.
Dotted (right natural log scale): Ratio of Core Consumer Price Index divided
by Core PPI Index for crude non food materials less energy
51
A cascade of change?!?
Relative S&P 500 dividend Aristocrat stock performance
and commodity prices
Relative foreign stock performance and commodity prices
Solid (left scale) – Relative stock price performance.
S&P 500 Dividend Aristocrat Index compared to S&P 500 Composite Index.
Dotted (right scale) – S&P GCSI Spot Commodity Price Index, natural log scale.
Relative producer to consumer stock performance and commodity prices
Solid (left scale) – Performance of transports, materials, energy, and industrial sectors
relative to consumer discretionary, consumer staples, and health care sectors.
Dotted (right scale, log) – SPGS Commodity Price Index
WELLS CAPITAL MANAGEMENT
Solid (left scale) – MSCI World Ex. U.S. Stock Price Index relative to S&P 500 Index.
Dotted (right scale, log) – SPGS Commodity Price Index.
Relative small cap to large cap
stock performance and commodity prices
Solid (left scale) – Relative small cap (Russell 2000 Index) to
large cap (S&P 500 Index) performance
Dotted (right scale, log) – SPGS Commodity Price Index.
52
De-bond your stock portfolio!!?
S&P 500 Dividend Aristocrats Index total return
vs. 10-year U.S. Treasury bond yield
Solid (left) ― S&P 500 Dividend Aristocrats Relative Total Return Index
Dotted (right) ― 10-year U.S. Treasury bond yield, inverted scale
S&P 500 Consumer Staples Index relative total return
vs. 10-year U.S. Treasury bond yield
Solid (left) ― S&P 500 Consumer Staples Index
Dotted (right) ― 10-year U.S. Treasury bond yield
WELLS CAPITAL MANAGEMENT
S&P 500 Utilities Index relative total return
vs. 10-year U.S. Treasury bond yield
Solid (left) ― S&P 500 Utilities Index relative total return
Dotted (right) ― 10-year U.S. Treasury bond yield
Dow Jones REIT Index relative return total
vs. 10-year U.S. Treasury bond yield
Solid (left) ― Dow Jones REIT Index
Dotted (right) ― 10-year U.S. Treasury bond yield
53
S&P 500 Anti-bond Dividend Index!!!?
S&P 500 Anti-bond Dividend Index* relative total return
vs. 10-year U.S. Treasury bond yield
Solid (left) ― Equal-weighted relative return total index comparing S&P 500 financials, energy and industrial sectors
Dotted (right) ― 10-year U.S. Treasury bond yield
WELLS CAPITAL MANAGEMENT
54
The “expectations bar” is low!!?
 U.S. economic growth
 Global economic growth
 Productivity
 Capital Spending
 Housing
 EPS growth
 Oil and commodity prices / U.S. dollar
 Millennials
 Debt / money velocity
 Animal spirit behaviors
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55
Questions?
WELLS CAPITAL MANAGEMENT
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Disclosures
Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo &
Company. WFAM includes Affiliated Managers (Galliard Capital Management, Inc.; Golden Capital Management, LLC; and The
Rock Creek Group); Wells Capital Management, Inc. (also includes First International Advisors, LLC; and ECM Asset
Management Ltd.); Wells Fargo Funds Distributor, LLC; Wells Fargo Asset Management Luxembourg S.A.; and Wells Fargo
Funds Management, LLC.
Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank,
N.A. WellsCap provides investment management services for a variety of institutions. The views expressed are those of the
author at the time of writing and are subject to change. This material has been distributed for educational/informational
purposes only, and should not be considered as investment advice or a recommendation for any particular security, strategy
or investment product. The material is based upon information we consider reliable, but its accuracy and completeness cannot
be guaranteed. Past performance is not a guarantee of future returns. As with any investment vehicle, there is a potential for
profit as well as the possibility of loss. For additional information on Wells Capital Management and its advisory services,
please view our web site at www.wellscap.com, or refer to our Form ADV Part II, which is available upon request by calling
415.396.8000.
WELLS CAPITAL MANAGEMENT
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