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Growing Business, Growing Smart
Investing in the Economic Health of Chester County
Its People
Places
& Prosperity
11th Annual Economic Outlook
January 23rd 2015
Growing Business, Growing Smart
Investing in the Economic Health of Chester County
Its People
Places
& Prosperity
Welcome Mike Grigalonis
COO, CCEDC
www.vista2025.com
Chester County’s
Economic Development Strategy
Visionary Partners
www.vista2025.com
Executive Alliance Advantage Building & Facility Services, LLC
Aqua America Arcelor Mittal Ar-Joy Farms
Bentley Systems Brandywine Health Foundation
CCATO CC Community Foundation
CC Intermediate Unit CC Conference and Visitors Bureau
CCCB&I CCEDC Chairman Chester County
Chester County Historical Society Chester County Hospital Communidad Hispana
Country Fresh Mushroom CTDI
Delaware County Community College Devault Foods
DNB First
E. Kahn Development EvolveIP
Fox Rothschild Herr Foods
IDA Liberty Property Trust The Lincoln University
Longwood Gardens Meridian Bank
Natural Lands Trust NuPathe
PAC Strapping Products, Inc. PECO
Penn State Great Valley Surrey Services for Seniors
The Hankin Group United Way of Chester County
Vanguard Group West Chester University
Y Prime
www.vista2025.com
VISTA 2025 • Released in October 2014
• Community Outreach Efforts
– Chambers of Commerce
– Conservancies
– CCATO
• Implementation Planning Sessions
• Org Structure that will assure:
– Public/Private balance
– Volunteer engagement
www.vista2025.com
GET INVOLVED!!!!
www.vista2025.com
Chester County’s
Economic Development Strategy
ECONOMIC OVERVIEW
JANUARY 23, 2015
David B. Hanson, CPA, CFA
Chief Executive Officer
WORLD POPULATION COMPARISON
Rest of the World
Source: CIA World Factbook
11
GLOBAL GDP COMPARISON (PURCHASING POWER PARITY)
Rest of the World
Source: CIA World Factbook 10.14
12
13
Source: CIA World Factbook 10.14
World Average
GLOBAL GDP PER CAPITA COMPARISON
GLOBAL GDP PER CAPITA COMPARISON 1870 – 2014 14
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
United States
Japan
Western Europe
Eastern Europe Latin America
Middle East
China
India, Asia, Africa
19
90
Inte
rnat
ion
al G
eary
-Kh
amis
do
llars
Source: Angus Maddison
GLOBAL MOMENTUM 15
(10.0)
(8.0)
(6.0)
(4.0)
(2.0)
-
2.0
4.0
6.0
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
Q2
09
Q3
09
Q4
09
Q1
10
Q2
10
Q3
10
Q4
10
Q1
11
Q2
11
Q3
11
Q4
11
Q1
12
Q2
12
Q3
12
Q4
12
Q1
13
Q2
13
Q3
13
Q4
13
Q1
14
Q2
14
Q3
14
Third quarter GDP growth came in at 5.0%. This was well above expected growth of 3.0%.
Positive contributions for third quarter real GDP came from personal consumption expenditures (3.2%), exports (4.5%), nonresidential fixed investment (8.9%), and spending from federal, state, and local governments.
Many economists have revised their 2015 GDP growth forecasts to 3%.
QUARTERLY GDP
2008 2009 2010 2011 2012
16
2013 2014
CONSUMERS ARE LESS DEPRESSED – AND LESS FRAGILE 17
Impact of Fiscal Cliff
Impact of Debt Ceiling
Impact of Gov’t Shutdown
AND IN GOOD FINANCIAL SHAPE 18
Source: Bloomberg, FFA Investment Management
8.8mm jobs lost
8.8mm jobs gained thru 8/31/14
10MM thru 12/31/14
Source: Bloomberg, FFA Investment Management
EMPLOYMENT 19
.
.
The U.S. economy fills ~ 50 million employees
jobs each year
7.7mm jobs
gained
EMPLOYMENT 20
.
Source: Bloomberg, FFA Investment Management
Since respective peaks: - 4.2% drop in unemployment rate - 3.5% drop in labor participation rate
EMPLOYMENT – VALUE OF EDUCATION 21
.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
$30,627
$56,665
$84,852
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
High School Graduate Bachelor's Degree Advanced Degree
Average Annual Earnings by Highest Degree Earned Full - time workers aged 18 and older, 2012, USD
+26K
+28K
Unemployment Rate by Education Level
Source: BLS , Census Bureau, FactSet , J.P. Morgan Asset Management .
Unemployment rates shown are for civilians aged 25 and older.
Guide to the Markets – U.S.
Data are as of 9/30/14.
Sep. 2014: 2.9%
Sep. 2014: 5.4%
Sep. 2014: 5.3%
Sep. 2014: 8.4%
Less than High School Degree
High School No College
Some College
College or Greater
HOUSING STARTS 22
Housing starts have hovered around 1 million units since last Fall. Average since 1958 is 1.45 million.
About 2/3 of homebuilders from 2007 remain out of business
The recent increase in average 30 year fixed mortgage rates may slow purchases – and regulatory changes make mortgages hard to get
In 1980, 30 year mortgage rates were 18.6% and we built 873k houses
Worst month since 1958
S&P 500 INDEX INFLECTION POINTS 23
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200 Index level 1,527 1,565 2,059 P/E ratio ( fwd.) 25.6x 15.2x 16.2x Dividend yield 1.1 % 1.8% 1.9%
10 - yr. Treasury 6.2% 4.7 % 2.2%
Source: Standard & Poor’s, First Call, Compustat , FactSet, J.P. Morgan Asset Management.
- 49%
Oct. 9, 2002
P/E ( fwd.) = 14.1x
777
Mar. 24, 2000
P/E ( fwd.) = 25.6x
1,527
Dec. 31, 1996
P/E ( fwd.) = 16.0x
741
P/E ( fwd.) = 16.2x
2,059
+101%
Oct. 9, 2007
P/E ( fwd.) = 15.2x
1,565
- 57%
Mar. 9, 2009
P/E ( fwd.) = 10.3x
677
+204%
Characteristic Mar - 2000 Oct - 2007 Dec - 2014
+106%
VALUATIONS ARE MODERATE, NOT CHEAP 24
Source: Bloomberg, FFA Investment Management
S&P 500 Index: Forward P/E Ratio
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14
8x
10x
12x
14x
16x
18x
20x
22x
24x
26x
Average: 15.6x
Current: 16.2x
S&P 500 EARNINGS AND REVENUES PER SHARE 25
The estimated earnings growth rate for Q4 2014 is 1.1%.
The Telecom Services sector is expected to report the highest growth in earnings for the quarter, while the Energy sector is expected to report the largest decline in earnings for the quarter.
Source: Bloomberg, FFA Investment Management
2,086 2,234 2,415
2,577 2,684 2,777 2,977
3,147 3,326
3,556 3,704 3,861
1,147 1,174 1,150 1,195 1,227 1,246 1,270 1,292 1,321 1,350 1,381 1,414
221 223 251 318 393 480 563 635 697 761 827 886
- 2 (4) (65) (84) (91) (95) (97) (97) (44) (28) -
(500)
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Mandatory Discretionary Net Interest Other (Sequestration)
Federal Budget (billions)
2013 2014 2015 Revenue $2,755 $3,022 $3,337 Expense $3,455 $3,651 $3,901 Deficit $ 680 $ 649 $ 564 % of GDP 4.1% 3.7% 3.1% Debt % of GDP 65.7% 66.8% 66.6%
THE DEFICIT IS STILL A HUGE CHALLENGE… 26
Source: www.whitehouse.gov – Budget of the United States Government, Fiscal Year 2015, Summary Tables S-1 and S-4
2013 U.S. Federal Revenue (billions): Personal Income $1,316 Corporate Income $ 274 SS, Medicare, FUT $ 947 Excise, Duties, T&E, etc. $ 238
Total $2,775
5.6% CAGR
1.9% CAGR
22%
37%
48%
69%
89%
11%
38%
59%
70%
86%
97%
3%
22.8% 21.0% 19.2% 16.4%
14.3%
3.3% $434,682 $175,817 $125,195 $73,354 $36,055
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
0%
20%
40%
60%
80%
100%
Top 1% Top 5% Top 10% Top 25% Top 50% Bottom 50%
% of Income (Total $7.4T) % of Taxes (Total $949B) Average Tax Rate Income Splits
DOES THE ANSWER LIE IN “FAIRER” INCOME TAXES? 27
Source: Tax Foundation, Data reflects 2012 U.S. Federal Tax returns
A WEE BIT OF GOOD NEWS: U.S. PATENT GRANTS 28
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
U.S.
U.S. % of World Total
MACROECONOMIC AND INVESTMENT STRATEGY OVERVIEW 29
• US economy accelerating
• World economies remain fragile
• Best 6 months job growth since early 2006
• Labor participation remains at historically low levels
• Wage growth has been lackluster
• Oil price decline due to oversupply
• Decline in oil could support consumer spending
• Monetary policy in US in transit
• Global monetary policy uncertain but remains accommodative
• Consensus estimates for increase in Fed funds rate in 2nd half of 2015
• Increased volatility in global equity markets
• Expectation for normalized rate of return in US equities based on earnings growth
• Bond Valuations at elevated levels
• Risks: U.S. political risk, Inflation, Europe, Oil, China growth, Geopolitical risk, cyber risk
Scenario: In Transition Recovery
• Focus on strong risk adjusted returns
• Emphasis on active management (attractive excess return potential)
• Overweight Large cap domestic
• Focus on multinational equities
• Focus on Dividend growth
• Underweight on developed international and emerging market equities
• Willing to take more credit risk than duration risk
• Overweight core alternatives
• Neutral on commodities
• Defensive duration posture
Portfolio Positioning : Disciplined Diversification
Over/underweights relative to MSCI ACWI
Patricia C. Brennan CFP®, CFS January, 2015
Key Financial, Inc. 1045 Andrew Drive, Suite A
West Chester, PA 19380
Ph. 610-429-9050
Fax. 610-429-9279
E-Mail: pbrennan@keyfinancialinc.com
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Insurance services
offered through Patricia Brennan are independent of Royal Alliance Associates, Inc. Advisory services
offered through Key Financial, Inc., a registered investment advisor not affiliated with Royal Alliance
Associates, Inc.
YTD Returns as of 12/31/14
Dow Jones 7.52%
S&P500 11.39%
NASDAQ 14.75%
Russell 2000 4.89%
MSCI EAFE -7.35%
NYSE Composite 4.22%
Barclays U.S. Corp Bond 2.36% Source: Wall St Journal 1-1-2015
[1] An Index is a hypothetical portfolio of specific securities (common examples are the Dow Jones Industrial and the S&P 500).
The performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged
portfolios and should only be compared with securities with similar investment characteristics and criteria. Investors cannot invest directly in
an Index. MSCI EAFE: This Europe, Australia, and Far East index is a market capitalization-weighted index of 21 non-U.S. industrialized
country indexes. Past performance does not guarantee future results.
Head Fake
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Google (-5.4%)
Halliburton (-22.5) Phillip Morris (-6.5%)
IBM (-14.5%)
Citigroup 3.8%
Dow Chemical 2.7% MasterCard 3.1%
Chevron (-10.2)
Ford .5% McDonalds (-3.4%)
Met Life .3%
Verizon (-4.3%)
Pfizer 1.7% Coca Cola 2.2%
EBay 2.3%
Not everything went up:
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Source: A Wealth of Wisdom July 31st, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
How Framing Affects Decisions
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Framing……Continued
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Europe – Try to Avoid Recency Bias
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Conference Board US Consumer Confidence Index
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Sentix Eurozone Economic Sentiment Index- Survey Based on 4500
private and institutional investors
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Global diversification: Accepting good enough to avoid terrible
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Stock Returns After a Period of Above Average Performance:
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
The ten year numbers are still spread out, but are more clustered than the
5 year results as the extreme gains and losses are reduced:
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
The 10 year returns show more consistency in the range of outcomes:
Source Wells Capital Management-Economic and Market Perspective October 10, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
US Treasury 10 Year Bond Yield
Natural log scale
Source Wells capital Management, December 9, 2014
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment.
They do not include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
What does the bursting of a Bond “Bubble” look like?
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific
investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many
instances, taxes.
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific
investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many
instances, taxes.
1981 – 2014
10 yr Treasury Yield 15.8% → 2.01%
Return Lost through active management 14%
Is Active Management Dead?
Source: Barron’s – Return of the stock pickers 1/12/2015
Is Active Management Dead?
Active Management Excess Return on the S&P 500
1962 – 1981
10 yr Treasury Yield 3.85% → 15.8%
Median excess return 62%
3.2% per year
Excess Return on $10,000 = $13,000
Source: Barron’s – Return of the stock pickers 1/12/2015
Shiller Cape Ratio
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific
investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many
instances, taxes.
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific
investment. They do not include consideration of the time value of money, inflation, fluctuation in principal or in many
instances, taxes.
Figures quoted are for illustrative purposes only and are not necessarily indicative of past or future results of any specific investment. They do not
include consideration of the time value of money, inflation, fluctuation in principal or in many instances, taxes.
Lessons from the Financial Crisis
The Great Financial Crisis might be this
generation’s Great Depression.
Panicking is not a strategy.
One of the few things you can count on
with near certainty — markets are
cyclical.
Envy might be an investor’s worst enemy.
The herd usually piles in at the wrong time.
Understand your sources of financial advice.
Main street is different from Wall Street.
Pessimism is easier to buy into than optimism.
It’s OK to be wrong, just don’t stay wrong.
Investing is hard
Planning can make all the difference
The views expressed are not necessarily the opinion Royal Alliance Associates Inc, and should not be construed directly or
indirectly, as an offer to buy or sell any securities mentioned herein. Individual circumstances vary. Investing is subject to
risks including loss of principal invested. No strategy can assure a profit against loss. Foreign investments involve special
risks including greater economic, political, and currency fluctuation risks, which may be even greater in emerging markets.
Indices cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses. Due to volatility
within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be
reliable; however, their accuracy or completeness cannot be guaranteed.
You can’t predict, you can only prepare.
Let’s Do a Pre-Mortem
• What will I do and how will I feel if stocks reverse from
these levels and fall 10%, 20% or 30%?
• What will I do and how will I feel if stocks continue to rise
another 10%, 20% or 30%?
• How much money am I willing to lose in my portfolio
before I become uncomfortable and act irrationally?
The Pre-Mortem
• How will I react if my future portfolio performance is
lower than expected?
• How will I react if my future portfolio performance is
higher than expected?
• Does my investment plan take into account the fact that I
will be wrong from time to time?
The Pre-Mortem (continued)
Thank You for Your
Time and Attention
Key Financial, Inc.
Patricia C. Brennan CFP®, CFS
1045 Andrew Drive, Suite A
West Chester, PA 19380
Ph. 610-429-9050
Fax. 610-429-9279
E-Mail: pbrennan@keyfinancialinc.com
Securities offered through Royal Alliance Associates, Inc., member FINRA/SIPC. Insurance services offered
through Patricia Brennan are independent of Royal Alliance Associates, Inc. Advisory services offered
through Key Financial, Inc., a registered investment advisor not affiliated with Royal Alliance Associates, Inc.
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