303 broadway suite 1200 cincinnati, oh 45202 (888) 244.8167 (513) 361.7600 fax (513) 361.7605...
TRANSCRIPT
303 Broadway • Suite 1200 • Cincinnati, OH 45202 • (888) 244.8167 • (513) 361.7600 • fax (513) 361.7605 • FortWashington.com
2014 Midyear UpdateNick SargenChief Economist
Introducing the Stanford Colts!
Investment Results (annual total returns in %)
*Includes dividends except for Emerging Markets, which is price change Source: Bloomberg
2013 2014 1st HalfEquities*
S&P 500 32.4 7.1EAFE ($) 22.8 4.8
EM($) -2.6 6.1Bonds
Treasuries -2.8 2.7Corporates -2.0 5.7High Yield 7.4 5.6EMBI ($) -5.2 8.7
For Internal Use Only 3
4
What was Priced into Markets?
♦ 2014: A Breakout Year for U.S.
♦ Improved Performances (Diminished Risks) Abroad
♦ Fed ends QE, but refrains from tightening
5
Source: Barron’s
6
Treasury Yield Curve
Source: Bloomberg
0YR 1YR 2YR 5YR 7YR 10YR 30YR
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
12/31/2013 7/31/2014
7
Federal Funds Futures Expectations
Jul-1
4
Aug-1
4
Sep-1
4
Oct-1
4
Nov-1
4
Dec-1
4
Jan-
15
Feb-1
5
Mar
-15
Apr-1
5
May
-15
Jun-
15
Jul-1
5
Aug-1
5
Sep-1
5
Oct-1
5
Nov-1
5
Dec-1
5
Jan-
16
Feb-1
6
Mar
-16
Apr-1
6
May
-16
Jun-
160.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
4/30/2014 7/5/2013 7/31/2014
Source: Bloomberg
The Fed’s Twin Objective: Inflation and Unemployment
Source: BLS, BEA
Dec-99
Jul-00
Feb-01
Sep-01
Apr-02
Nov-02
Jun-03
Jan-04
Aug-04
Mar-05
Oct-05
May-06
Dec-06
Jul-07
Feb-08
Sep-08
Apr-09
Nov-09
Jun-10
Jan-11
Aug-11
Mar-12
Oct-12
May-13
Dec-13
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Unemployment Rate (Right) Core PCE YoY (Left)
%
8
Inflation Expectations
Source: Bloomberg
9
Jul-0
5
Oct-0
5
Jan-
06
Apr-0
6
Jul-0
6
Nov-0
6
Feb-0
7
May
-07
Aug-0
7
Dec-0
7
Mar
-08
Jun-
08
Sep-0
8
Dec-0
8
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
May
-10
Aug-1
0
Nov-1
0
Feb-1
1
May
-11
Sep-1
1
Dec-1
1
Mar
-12
Jun-
12
Oct-1
2
Jan-
13
Apr-1
3
Jul-1
3
Oct-1
3
Feb-1
4
May
-14
1.75
1.95
2.15
2.35
2.55
2.75
2.95
3.15
3.35
3.55
3.75
5 Year Forward 5 Year Inflation Expectations
10
Two Views of the Economy: Real GDP Growth vs. Nonfarm Payrolls Growth
Dec-9
9
Jun-
00
Dec-0
0
Jun-
01
Dec-0
1
Jun-
02
Dec-0
2
Jun-
03
Dec-0
3
Jun-
04
Dec-0
4
Jun-
05
Dec-0
5
Jun-
06
Dec-0
6
Jun-
07
Dec-0
7
Jun-
08
Dec-0
8
Jun-
09
Dec-0
9
Jun-
10
Dec-1
0
Jun-
11
Dec-1
1
Jun-
12
Dec-1
2
Jun-
13
Dec-1
3
Jun-
14
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Real GDP QoQ % (left) NFP QoQ % (right)
Source: BEA
11
Read GDP Growth and Fiscal Drag
Source: BEA
12/1
/200
8
3/1/
2009
6/1/
2009
9/1/
2009
12/1
/200
9
3/1/
2010
6/1/
2010
9/1/
2010
12/1
/201
0
3/1/
2011
6/1/
2011
9/1/
2011
12/1
/201
1
3/1/
2012
6/1/
2012
9/1/
2012
12/1
/201
2
3/1/
2013
6/1/
2013
9/1/
2013
12/1
/201
3
3/1/
2014
6/1/
2014
90.0%
95.0%
100.0%
105.0%
110.0%
115.0%
Real GDP ex Govt Govt Spending
Business Surveys Have Improved RecentlyD
ec-9
9Ju
n-00
Dec
-00
Jun-
01D
ec-0
1Ju
n-02
Dec
-02
Jun-
03D
ec-0
3Ju
n-04
Dec
-04
Jun-
05D
ec-0
5Ju
n-06
Dec
-06
Jun-
07D
ec-0
7Ju
n-08
Dec
-08
Jun-
09D
ec-0
9Ju
n-10
Dec
-10
Jun-
11D
ec-1
1Ju
n-12
Dec
-12
Jun-
13D
ec-1
3Ju
n-14
25
30
35
40
45
50
55
60
65
ISM Manufacturing and Services
ISM Manuf ISM Non-Manuf
Source: ISM, Bloomberg
For Internal Use Only 12
13
Global Surveys Point to Moderate Economic GrowthD
ec-0
7F
eb-0
8A
pr-0
8Ju
n-08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Apr
-09
Jun-
09A
ug-0
9O
ct-0
9D
ec-0
9F
eb-1
0A
pr-1
0Ju
n-10
Aug
-10
Oct
-10
Dec
-10
Feb
-11
Apr
-11
Jun-
11A
ug-1
1O
ct-1
1D
ec-1
1F
eb-1
2A
pr-1
2Ju
n-12
Aug
-12
Oct
-12
Dec
-12
Feb
-13
Apr
-13
Jun-
13A
ug-1
3O
ct-1
3D
ec-1
3F
eb-1
4A
pr-1
4Ju
n-14
30
35
40
45
50
55
60
65
JP Morgan Global Manufacturing PMI JP Morgan Global Services PMISource: JP Morgan, Bloomberg
%
14
Tensions in the Euro-zone have Lessened….
Jul-1
0
Aug-1
0
Sep-1
0
Oct-1
0
Dec-1
0
Jan-
11
Feb-1
1
Apr-1
1
May
-11
Jun-
11
Aug-1
1
Sep-1
1
Oct-1
1
Dec-1
1
Jan-
12
Feb-1
2
Apr-1
2
May
-12
Jun-
12
Jul-1
2
Sep-1
2
Oct-1
2
Nov-1
2
Jan-
13
Feb-1
3
Mar
-13
May
-13
Jun-
13
Jul-1
3
Sep-1
3
Oct-1
3
Nov-1
3
Jan-
14
Feb-1
4
Mar
-14
May
-14
Jun-
14
Jul-1
4
0
1
2
3
4
5
6
7
8
10Y Italy 10Y Spain 10Y Germany
Source: Bloomberg
%
Government Yields
Oil Prices Have Been Steady Despite Increased Tensions
Source: Bloomberg
Sep-9
9Feb
-00
Jul-0
0Dec
-00
May
-01
Oct-0
1M
ar-0
2Aug
-02
Jan-
03Ju
n-03
Nov-0
3Apr
-04
Sep-0
4Feb
-05
Jul-0
5Dec
-05
May
-06
Oct-0
6M
ar-0
7Aug
-07
Jan-
08Ju
n-08
Nov-0
8Apr
-09
Sep-0
9Feb
-10
Jul-1
0Dec
-10
May
-11
Oct-1
1M
ar-1
2Aug
-12
Jan-
13Ju
n-13
Nov-1
3Apr
-14
$0
$20
$40
$60
$80
$100
$120
$140
$160
Brent Crude $Px
For Internal Use Only 15
16
Has China Mortgaged its Future?
♦ China withstood the Great Recession remarkably well
♦ But it deployed a tidal wave of credit
♦ Economic growth of 7% - 8% is likely to slow over time
♦ China’s leaders are embarking on a new set of policy reforms
♦ But internal political tensions are increasing
For Internal Use Only
Where are we in the Economic Cycle?
Recession Recovery
Late Cycle(inflation)
PB
PB
PS PS
Expansion
17
18
Share of Labor Income vs. Corporate Profits
Source: Bureau of Economic Analysis
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
49.0%
50.0%
51.0%
52.0%
53.0%
54.0%
55.0%
56.0%
57.0%
58.0%
59.0%
Corp Profit % GDP (Left) Labor % of GDP (Right)
19
Portfolio Positioning
♦ Maintain a tilt in favor of stocks over bonds
♦ Stocks are no longer cheap; however, the market is not frothy
♦ Stronger growth would bring the Fed into play sooner
♦ Weaker growth would imply earnings disappointment