Download Morgan - kalideco

Economic/Market Outlook
late 2007—early 2008
Penn Mutual
November 6th, 2007
1
Rob Morgan
Investment Strategist
2
• Full service Securities Broker/Dealer
• 1832, Headquartered in Philadelphia
• Regional Firm but National Client Base
• 2nd Oldest NYSE Seat
• 1,000 Financial Consultants, 2,000 Employees
• 100 Branch Offices along US East Coast
• Top 10% of all US Securities Broker/Dealers
• Primarily Private Client Focused but Active
Capital Markets/Institutional Functions
3
Serving Client Needs through
“Wealth Management”
-Individual Equities
-Individual Fixed Inc.
-Securities
-Mutual Funds
-Unit Investment Trusts
-Closed-end Funds
-Hedge Funds
-Life Insurance
-Annuities
-Exchange Traded Funds
-Financial Planning
-Trust & Estate Planning
-Investment Advisory
-Money Management
-401(k) & Qualified Plans
-Lending, Cash Management
-Business Advisory Services
-Tax Planning
-Asset Allocation
-Performance Reporting
4
The Economy
5
Economic Uncertainties-2007
• Will credit problems cause recession?
• How high will inflation go?
• How many times will Fed cut rates?
• Earnings still strong in ’07?
6
Will Credit Problems Cause Recession?
• Magnitude of the problem
• Sub prime problem and housing market
slowdown-creeping into economy?
• Resolution
7
How High Will Inflation Go?
• The Bad News—commodity prices are
skyrocketing
• The Good News—wages are not
skyrocketing
• Bottom Line—inflation trending downward.
8
How Many Times Will The Fed Cut Rates?
• We think neutral level is 4%.
• Mindset of Fed chairman and Fed
governors
• Will the Fed overshoot to the downside?
9
Earnings
• 2007 should be slower than 2006.
• 2007- still high single digit EPS
growth.
• Companies very conservative in postEnron environment.
• Even with slower growth, stocks can
advance if expectations are exceeded.
10
Equity Markets During a
Fed Pause
11
Equity Market Returns
January 2nd, 2007—October 1st, 2007
January 2nd, 2007—October 1st, 2007
Sector Returns
•Large Cap vs. Mid/Small
Cap Returns
•Mid Cap
9.49
•Small Cap
3.13
•Large cap
9.13
•Energy
•Materials
•Telecom
•Industrials
•Info Tech
•Utilities
•Staples
•Healthcare
•Discretionary
•Financials
33.62
22.98
18.35
16.79
15.84
10.54
9.52
7.24
-3.86
-5.23
Growth vs. Value
•Value
7.79
•Growth
10.54
•International vs. Domestic
•MSCI EAFE
13.56
•S&P 500
9.13
12
Equity Market Forecast 2007
• In a fairly-valued market, equity total
return should follow EPS growth.
• PE of S&P 500 approximately 15 times
2007 EPS.
• Earnings growth deceleration, but still
high single digits.
13
Equity Market Strategy
• Overweight stocks versus bonds.
• Within stocks:
• Overweight technology, basic materials and
industrials
• Underweight healthcare, consumer staples
and consumer discretionary
• Overweight large cap versus small cap
• Overweight international
• Overweight growth versus value
14
Fixed Income
15
Yield Curve
January 2nd, 2007—October 1st, 2007
16
Fixed Income Forecast 2007
• Fed is probably above neutral level now.
• 2% real rates + 2% inflation= 4%
Fed Funds.
• If inflation continues to trend lower, Fed is
too high on rates.
17
Fixed Income Strategy
• Keep duration less than benchmarks.
• Stay in higher quality names if possible.
18
Favorite Names In…
• Technology
• Basic Materials
• Industrials
19
Questions
20