Economic & Stock Market Outlook - Baird Financial … · Source: Ned Davis Research Baird Economics...
Transcript of Economic & Stock Market Outlook - Baird Financial … · Source: Ned Davis Research Baird Economics...
2016 Economic & Stock Market Outlook
Strategy for an Uncertain Environment R. W. Baird & Co.
| 1
April 6, 2016
Bruce Bittles
Chief Investment Strategist
(941) 906-2830
Baird Economics and Investment Strategy | 2
Current Outlook
• Three Focus Points
Impact of Fed Tightening
Economic Resiliency
Inflation Surprises
• Headwinds
Excessive Valuations
Investor Illiquidity
Falling Commodity Prices
Excessive Debt
Election-Year Noise
2016 Outlook: Volatility Rising as 2015
Headwinds Linger
Baird Economics and Investment Strategy | 3 Source: Ned Davis Research
A Gradual Path of Tightening Historically
Not Disruptive for Stocks
Fed Missed Its Chance to Raise Rates
Baird Economics and Investment Strategy | 4
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HOT201601151B_C
Crude Oil Futures vs. Commodities Daily Data 1999-03-01 to 2016-01-14 (Log Scale)
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HOT201601151B_C
Crude Oil Futures vs. Commodities Daily Data 1999-03-01 to 2016-01-14 (Log Scale)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
10
11
13
14
16
18
20
22
25
28
32
35
40
45
50
56
63
71
79
89
100
112
126
141
158
178
Crud
e
158
168
178
188
200
211
224
237
251
266
282
299
316
335
355
376
398
422
447
473
501
531
562
596
631
668
708
750
794
CCI
Crude Oil Perpetual Futures
Continuous Commodity Index (CCI)
Source: Commodity Research Bureau, www.crbtrader.com, Commodity Systems, Inc. (CSI) www.csidata.com
Shaded areas represent CCI corrections of 20% or more.
*Correlation of 5-Day returns.
Correlation Coefficient (Since 1999) = 0.66
Correlation Coefficient (Since 1979) = 0.5
2004 2008 2012 2015
Source: Ned Davis Research
Source: Ned Davis Research Baird Economics and Investment Strategy | 5
Wage Growth Acceleration Suggests
Inflation Could Move Higher Labor Markets Strong Wages Begin to Improve for First Time in
Ten Years
Source: Ned Davis Research Baird Economics and Investment Strategy | 6
Headline growth has been choppy, but growth in domestic demand has been greater than its long-term average in 5 of 6 quarters
Beyond the Headlines, Economic Growth
Steady – Two-Tiered Economy
Real GDP Quarterly Change
Final Sales Quarterly Change
Industrial Production Weakens
Baird Economics and Investment Strategy | 7
(E202)
Monthly Data 1/31/1948 - 12/31/2015 (Log Scale)
Industrial Production When:
Gain/ %
Index Y/Y Change Is: Annum of Time
Above 4.9 5. 8 35. 7
Between -1.6 and 4.9 2. 2 48. 6
* -1.6 and Below -1. 0 15. 7
Shaded areas represent
National Bureau of
Economic Research recessions.
Source: Federal Reserve Board 15
16
18
20
22
25
28
31
35
39
43
48
53
59
66
74
82
92
102
15
16
18
20
22
25
28
31
35
39
43
48
53
59
66
74
82
92
102
Production Contracting
Production Expanding12/31/2015 = -1.8%
-12
-9
-6
-3
0
3
6
9
12
15
18
21
24
27
-12
-9
-6
-3
0
3
6
9
12
15
18
21
24
27
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Industrial Production
Industrial Production (Year-to-Year Change) -- Mode Basis
Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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U.S. Economy
INDUSTRIAL PRODUCTION
Production Expanding
Production Contracting
Source: Ned Davis Research
Service Sector Remains Vibrant
ISM Non-Manufacturing Index
Baird Economics and Investment Strategy | 8
Monthly Data 7/31/1997 - 12/31/2015
(E235)
NMI 12/31/2015 = 55.3
40
44
48
52
56
60
64
40
44
48
52
56
60
64
New Orders 12/31/2015 = 58.2
40
45
50
55
60
65
40
45
50
55
60
65
Business Activity 12/31/2015 = 58.7
40
45
50
55
60
65
70
40
45
50
55
60
65
70
Employment 12/31/2015 = 55.7
Shaded area represents National Bureau
of Economic Research recession 35
40
45
50
55
60
35
40
45
50
55
60
Supplier Deliveries 12/31/2015 = 48.5
UPS
Strike
Source: All data from Haver Analytics 45
50
55
60
65
70
45
50
55
60
65
70
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
ISM Non-Manufacturing Index (NMI) and Its Components
Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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New Orders
Business Activity
Employment
Supplier Delivery
Source: Ned Davis Research
55
Source: Ned Davis Research Baird Economics and Investment Strategy | 9
U.S. Recession Probability Low
1990 2001 2007 2016
Global Economic Growth Has Slowed and
Manufacturing Is Weak, but Recession Risk in the
U.S. Is Minimal
Headwinds for 2016
1. Valuations Stretched
2. Earnings Growth Decelerating
3. Excess Debt Globally
4. Investor Psychology Conflicting
5. Breadth of Stock Market Narrow
Baird Economics and Investment Strategy | 10
Source: Ned Davis Research Baird Economics and Investment Strategy | 11
1. Valuations Excessive - Relying on Forward
Earnings Unreliable
(DAVIS107)
Monthly Data 7/31/1980 - 1/31/2016 (Log Scale)
Price Move of:
-3.5% to Overvalued (+1SD)
-21.1% to Median Value
-38.7% to Undervalued (-1SD)
NYSE Composite Gain/Annum When:
Gain/ %
Median P/E Is: Annum of Time
* Above 20.5 -0. 8 24. 6
Between 17.5 and 20.5 6. 5 37. 5
17.5 and Below 14. 3 37. 8
1/31/2016 = 9632.71 Source: New York Stock Exchange 712
826
958
1111
1288
1494
1733
2009
2330
2703
3134
3635
4216
4890
5671
6577
7628
8846
10260
712
826
958
1111
1288
1494
1733
2009
2330
2703
3134
3635
4216
4890
5671
6577
7628
8846
10260
1/31/2016 = 23.8
Very Overvalued
Overvalued
Bargains
35.6 Year
Median = 18.7
Me
dia
n+
1 S
D
+2
SD
-1
SD
-2
SD
Source: Ned Davis Research Calculations 7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
NYSE Composite
NYSE Composite Median Price/Earnings Ratio (NDR Calculation)
NYSE Composite
Median P/E Ratio 24X 2007 1998
S&P 500 Price to Sales Ratio
Baird Economics and Investment Strategy | 12
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DAVIS208
Standard & Poor's 500 Index Monthly Data 1964-03-31 to 2016-01-31 (Log Scale)
© Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at www.ndr.com/copyright.html For data vendor disclaimers refer to www.ndr.com/vendorinfo/
DAVIS208
Standard & Poor's 500 Index Monthly Data 1964-03-31 to 2016-01-31 (Log Scale)
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
79
100
126
158
200
251
316
398
501
631
794
1,000
1,259
1,585
1,995
79
100
126
158
200
251
316
398
501
631
794
1,000
1,259
1,585
1,995
Source: S&P Dow Jones Indices
S&P 500
Gain/Annum When
S&P 500 Median P/S is:% Gain/
Annum
% of
Time
* Above 1.53 -0.24 19.94
Between 0.7 and 1.53 6.60 46.96
Below 0.7 10.22 33.11
S&P 500 Median Price/Sales Ratio
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
Median = 0.90
+1 SD = 1.39
+2 SD = 1.88
-1 SD = 0.41
2016-01-31 = 1.96 Source: S&P Capital IQ Compustat
S&P 500 Index
S&P 500 Median Price/Sales Ratio
2000 2007 2016
Source: Ned Davis Research
Stock Market Capitalization as % of Gross
Domestic Income
Baird Economics and Investment Strategy | 13
Monthly Data 12/31/1924 - 1/31/2016 (Log Scale)
(S702A)
8/31/1929 = 85.7%
6/30/1932 = 26.3%
11/30/1936 = 70.7%
4/30/1942 = 18.9%
12/31/1965 = 69.9%
11/30/1968 = 73.8%
1/31/1973 = 77.1%
9/30/1974 = 35.3%
7/31/1982 = 31.4%
10/31/1990 = 42.6%
3/31/2000 = 164.0%
5/31/2007 = 124.8%
2/28/2009 = 58.1%
5/31/2015 = 137.0%
Very Undervalued
Overvalued
Bubble Territory
NDR Estimated value of 4100 U.S. common stocks: $21. 79 trillion
U.S. Gross Domestic Income (latest figure): $17. 94 trillion
Current ratio for 1/31/2016 ( ): 121. 5 %
GDP used prior to December 1946 (NDR Estimates prior to December 1928)
Gross Domestic Income used after December 1946
Calculation uses NDR Estimated Common Stock Market Capitalization of U.S.-based Companies
Dow Jones Total Stock Market Capitalization used from January 1973 through September 1980
NYSE Market Capitalization used prior to January 1973
Sources: S&P Dow Jones Indices, Ned Davis Research,
Bureau of Economic Analysis, Department of Commerce
19
21
23
25
27
30
33
36
39
43
47
51
56
61
67
73
80
87
96
105
114
125
137
149
163
19
21
23
25
27
30
33
36
39
43
47
51
56
61
67
73
80
87
96
105
114
125
137
149
163
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Stock Market Capitalization as a Percentage of Gross Domestic Income
Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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Bubble Territory
70-Year Norm
Source: Ned Davis Research
2. S&P 500 Earnings: Far Worse Than
Advertised - Wall Street Journal
Baird Economics and Investment Strategy | 14 Source: Ned Davis Research
Wall Street Earnings Forecasts
Baird Economics and Investment Strategy | 15
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S677
Consensus Estimates for S&P 500 Operating Earnings per Share by Calendar Year
Weekly Data 2011-09-26 to 2016-02-25
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S677
Consensus Estimates for S&P 500 Operating Earnings per Share by Calendar Year
Weekly Data 2011-09-26 to 2016-02-25
Nov
2012
Jan Mar May Jul Sep Nov
2013
Jan Mar May Jul Sep Nov
2014
Jan Mar May Jul Sep Nov
2015
Jan Mar May Jul Sep Nov
2016
Jan Mar
97.5
100.0
102.5
105.0
107.5
110.0
112.5
115.0
117.5
120.0
122.5
125.0
127.5
130.0
132.5
135.0
137.5
140.0
97.5
100.0
102.5
105.0
107.5
110.0
112.5
115.0
117.5
120.0
122.5
125.0
127.5
130.0
132.5
135.0
137.5
140.0
Calendar Year 2012: 03/28/2013 = 96.83
Calendar Year 2013: 03/31/2014 = 107.3
Calendar Year 2014: 03/31/2015 = 113.03
Calendar Year 2015: 02/25/2016 = 100.88
Calendar Year 2016: 02/25/2016 = 119.17
Source: Standard & Poor's
2012
2013
2014 2015
2016
Source: Ned Davis Research
Profit Margins High
Baird Economics and Investment Strategy | 16 Source: NIPA
Source: Ned Davis Research Baird Economics and Investment Strategy | 17
High Valuations Do Not Always Immediately
Impact Prices, But Over Time, They Depress
Returns
3. Excessive Debt Globally Causing Economic Growth to Stall
Baird Economics and Investment Strategy | 18
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DAVIS214B
U.S. Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1951-12-31 to 2015-09-30
© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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DAVIS214B
U.S. Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1951-12-31 to 2015-09-30
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
32.5
35.0
37.5
40.0
42.5
5.0
7.5
10.0
12.5
15.0
17.5
20.0
22.5
25.0
27.5
30.0
32.5
35.0
37.5
40.0
42.5Nominal GDP 3-Year Rate of Change 2015-09-30 = 11.29%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
50
53
56
60
63
67
71
75
79
84
89
94
100
106
112
119
126
133
141
150
158
168
178
50
53
56
60
63
67
71
75
79
84
89
94
100
106
112
119
126
133
141
150
158
168
178 Private Domestic Non-Financial Debt as a Percentage of GDP 2015-09-30 = 147.97%
Source: Department of Commerce, Federal Reserve Board
Nominal GDP
Gain/Annum When
Debt/GDP is:% Gain/
Annum
% of
Time
* Above 131% 3.76 23.13
Between 101% and 131% 5.96 25.49
Below 101% 7.73 51.37
Concept Courtesy: Richard Vague, The Next Economic Disaster
U.S. Economy
Private Domestic Non-Financial Debt
1960 1980 2000 2015
Source: Ned Davis Research
Canadian Debt Trouble
Baird Economics and Investment Strategy | 19
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DAVIS214I
Canada Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1961-12-31 to 2015-06-30
© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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DAVIS214I
Canada Private Domestic Non-Financial Debt as a Percentage of GDP Quarterly Data 1961-12-31 to 2015-06-30
10
15
20
25
30
35
40
45
50
55
60
10
15
20
25
30
35
40
45
50
55
60Nominal GDP 3-Year Rate of Change 2015-06-30 = 10.03%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
75
79
84
89
94
100
106
112
119
126
133
141
150
158
168
178
188
200
211
75
79
84
89
94
100
106
112
119
126
133
141
150
158
168
178
188
200
211 Private Domestic Non-Financial Debt as a Percentage of GDP 2015-06-30 = 203.99%
Source: Haver Analytics, Private Debt Source: Bank for International
Settlements, Long series on credit to the private non-financial sector
Nominal GDP
Gain/Annum When
Debt/GDP is:% Gain/
Annum
% of
Time
* Above 156% 3.91 18.68
Between 112% and 156% 6.48 44.87
Below 112% 10.62 36.45
Concept Courtesy: Richard Vague, The Next Economic Disaster
Canada GDP
Private Domestic Non-Financial Debt % of GDP
1980 2000 2015
Source: Ned Davis Research
China’s Debt Explosion
Baird Economics and Investment Strategy | 20
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DAVIS214G
China Private Domestic Non-Financial Debt as a Percentage of GDPQuarterly Data 1992-12-31 to 2015-06-30
© Copyright 2015 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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DAVIS214G
China Private Domestic Non-Financial Debt as a Percentage of GDPQuarterly Data 1992-12-31 to 2015-06-30
30
40
50
60
70
80
90
100
110
120
130
30
40
50
60
70
80
90
100
110
120
130 Nominal GDP 3-Year Rate of Change 2015-06-30 = 28.90%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
84
89
94
100
106
112
119
126
133
141
150
158
168
178
188
200
211
84
89
94
100
106
112
119
126
133
141
150
158
168
178
188
200
211 Private Domestic Non-Financial Debt as a Percentage of GDP 2015-06-30 = 200.84%
Source: Haver Analytics, Private Debt Source: Bank for International
Settlements, Long series on credit to the private non-financial sector
Nominal GDP
Gain/Annum When
Debt/GDP is:% Gain/
Annum
% of
Time
* Above 131% 12.61 27.78
Between 111% and 131% 15.25 34.43
Below 111% 17.24 37.79
Concept Courtesy: Richard Vague, The Next Economic Disaster
China GDP 3-year Rate of Change
China’s Private Domestic Non-Financial Debt % of GDP
Source: Ned Davis Research
Margin Debt Hits Record High in 2015
Baird Economics and Investment Strategy | 21
(S0420)
Monthly Data 1/31/1947 - 12/31/2015 (Log Scale)
S&P 500 Index Gain Per Annum When:
(5/31/1948 - 12/31/2015)
Margin Debt to Gain/ %
GDP (%): Annum of Time
Above Avg. 10. 7 58. 7
* Below Avg. 2. 8 41. 3
Source: S&P Dow Jones Indices 16
21
28
36
47
61
79
103
134
174
226
294
382
497
646
840
1092
1419
1844
16
21
28
36
47
61
79
103
134
174
226
294
382
497
646
840
1092
1419
1844
15-Month Smoothing
( )
Margin Debt = $461.20 Billion ______________________
GDP = $18148.40 Billion
= 2.54%
0.15
0.17
0.20
0.24
0.28
0.33
0.39
0.45
0.53
0.62
0.73
0.86
1.00
1.18
1.38
1.62
1.90
2.23
2.61
0.15
0.17
0.20
0.24
0.28
0.33
0.39
0.45
0.53
0.62
0.73
0.86
1.00
1.18
1.38
1.62
1.90
2.23
2.61
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Standard and Poor's 500 Index
Margin Debt as a Percentage of GDP
Copyright 2016 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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S&P 500 INDEX
MARGIN DEBT
2000 2007 2016
Source: Ned Davis Research
4. Investor Sentiment – Excessive Pessimism AAII Investor Survey
Baird Economics and Investment Strategy | 22
S&P 500 Index
Excessive Optimism
Excessive Pessimism
Source: Ned Davis Research
5. Market Breadth Problematic
Baird Economics and Investment Strategy | 23
S&P 500 Index
S&P Industry Groups
22%
92%
Source: Ned Davis Research
Source: Ned Davis Research Baird Economics and Investment Strategy | 24
Historical Seasonal Pattern for S&P 500 in
2016 A Road Map – Best Opportunities Following Election
October
Baird Economics and Investment Strategy | 25
Fundamental Factors
• Federal Reserve Policy Neutral 0
• Economic Fundamentals Bullish +1
• Valuations Bearish -1
Technical Factors
• Investor Sentiment Neutral 0
• Seasonal Influences Bullish +1
• Tape Bearish -1
Weight of the Evidence = Neutral
Our approach balances what could be versus what is.
It is more about managing risk than making forecasts.
Forget about the headlines and tune out the noise.
Baird Economics and Investment Strategy | 26
Bottom Line (And What To Do About It)
• Intro to volatility in 2015 expected be followed by increase in
volatility in 2016.
• Fed tightening is not an impediment, but inflation could be
wildcard. Economic growth uncertain but no recession expected
• Excessive valuations and elevated equity exposure remain key
headwinds.
• Presidential election years tend to be noisy and 2016 looks to
be no different. Ear plugs may be useful.
Baird Economics and Investment Strategy | 27
What To Do About It:
• Trends continue to favor U.S. leadership, prospects in Europe
improving but global markets remain unstable – 80% allocation to
U.S. recommended
• Large-cap issues typically outperform in uncertain environment
• Sector leadership expected to be in defensive areas including
Utilities, Telecom and Consumer Staples – Industrial Sector
Improving
• In periods of volatility and illiquidity, cash is a scarce resource.
Recommend 15% to 20% cash allocation
Baird Economics and Investment Strategy / Page 28
Contact Information Bruce Bittles
Chief Investment Strategist
Robert W. Baird & Co., Inc.
(941) 906-2830
Baird Economics and Investment Strategy / Page 29
Appendix - Important Disclosures This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
The indices used in this report to measure and report performance of various sectors of the market are unmanaged and direct investment in indices is not available.
Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws.
Copyright 2016 Robert W. Baird & Co. Incorporated
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