economic and market outlook - s3.us-east-2.amazonaws.com · august 28, 2012 russell t price, cfa...

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Brokerage, investments and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients. © 2012 Ameriprise Financial, Inc. All rights reserved.

August 28, 2012

Russell T Price, CFA®, Senior Economist Ameriprise Financial

Economic and Market Outlook

Agenda:

1. Economic growth outlook

2. U.S. debt / deficit problems

3. Investment Implications

4. Q&A

2

Economic Overview

European concerns have caused a sharp deceleration in global economic activity. Regaining momentum will be very difficult.

• Job growth is critical to the U.S. recovery, and the recent apprehension on the part of hiring managers has materially negative consequences for intermediate-term growth prospects.

• On the positive side, energy prices should remain a modest counterbalance and stimulus efforts in China, Brazil, Australia, India and elsewhere should eventually offer a similar, modest benefit.

• Weak economic growth, combined with government sector deleveraging, will likely keep interest rates well anchored near historically low levels for quite some time.

3 4

Global Economic Outlook:

Source: World Bank, June 2012

World Bank Global Economic Projections: Real GDP

2010 2011 2012 2013 2014

World 4.1 2.7 2.5 3.0 3.3

United States 3.0 1.7 2.1 2.4 2.8

Euro Region (17) 1.8 1.6 -0.3 0.7 1.4

Japan 4.5 -0.7 2.4 1.5 1.5

Developing Asia 9.7 8.3 7.6 8.1 7.9

China 10.4 9.2 8.2 8.6 8.4

India 9.6 6.9 6.6 6.9 7.1

Russia 4.3 4.3 3.8 4.2 4.0

Brazil 7.5 2.7 2.9 4.2 3.9

Projections

The European Equation

There is no quick, “magic” solution.

The only equation that works:

Deficit Reduction + Market Reforms * Time

In the interim:

• Better banking system integration

• Protect sovereign borrowing costs (to a limit) just long enough to get deficits under control

5 6

European Debt…a long road ahead

Source: European Commission, Ameriprise Financial Services, Inc.

For the 17 member Euro Zone: debt totaled €8.2T ($10.8T), or 87% of GDP.

At the end of 2011, U.S. debt was 70% of GDP.

2

7

The European problem…

Source: eurostat, Ameriprise Financial Services, Inc.

Most European countries have been making some fiscal progress despite recession.

But this is not about spending cuts alone!

8

Euro Zone Gross Domestic Product (GDP)

Source: Bloomberg

Still likely in the early stages of recession.

9

U.S. Gross Domestic Product (GDP)

Source: Commerce Dept., Ameriprise Financial Services, Inc.

European fears have caused a sharp deceleration of U.S. economic activity.

Momentum will be difficult to recover.

The Consumer…spending reliant on job growth

Consumer spending dependent on income growth.

Income growth dependent on job growth.

Source: U.S. Labor Dept., Ameriprise Financial Services, Inc.

10

-800

-600

-400

-200

0

200

400

Sep

-07

No

v-0

7Jan-0

8M

ar-

08

May-0

8Jul-08

Sep

-08

No

v-0

8Jan-0

9M

ar-

09

May-0

9Jul-09

Sep

-09

No

v-0

9Jan-1

0M

ar-

10

May-1

0Jul-10

Sep

-10

No

v-1

0Jan-1

1M

ar-

11

May-1

1Jul-11

Sep

-11

No

v-1

1Jan-1

2M

ar-

12

May-1

2

(,000s)

U.S. Private Sector Non-farm Payrolls

Mo/mo change

3 Mo moving avg.

11Source: Thomson Baseline, U.S. Census Bureau

Michigan generally doing a bit better….

12

Source: Michigan Dept. of Treasury

3

Stimulus factors are weak, but so are potential negatives

13

Many of the typical imbalances that could push us into a new,

material contraction are not evident in our view….

• Inventory levels tight, not bloated.

• Workforces stretched thin, not fat.

• Housing affordability high, not low.

• Consumer deleveraging well along.

• Corporate balance sheets are strong, not weak.

• Banks lending again.

• Stock market valuations appear very reasonable (in sharp contrast to their 2001 highs).

14

In Q2:

Existing homes: Sales up 9% yr/yr.

Median prices up 6% yr/yr.

Source: National Association of Realtors.

Housing fundamentals are solidifying

Source: Commerce Department, Ameriprise Financial Services, Inc.

0

100

200

300

400

500

600

700

Th

ou

san

ds

New Home Sales, annualized

New Homes available for sale

Housing: still struggling…but no longer a drag

15

Source: Federal Housing Finance AgencyYr/yr price change for single property units as calculated by the U.S. Federal Housing Finance Agency

Housing: still struggling…but no longer a drag

16

According to FHFA Home Price Index:

Michigan home prices peaked in Q3-2005

The U.S. Index peaked in Q1-2007

Source: Federal Housing Finance AgencyYr/yr price change for single property units as calculated by the U.S. Federal Housing Finance Agency

-35

-30

-25

-20

-15

-10

-5

0

5

United States Michigan

Home Prices: MI versus rest of US

Q1-2012 Yr/yr

Since Peak

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Debt and Deficits(some good news, some bad)

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Debt in the United States (Q1-2012)

Source: U.S. Federal Reserve, Ameriprise Financial Services, Inc.

Debt is huge…but absolute dollar amounts do not tell the whole story.

Mortgage,

$9.8

Consumer

Credit, $2.5

Business

sector, $11.6

Federal Govt,

$10.5

State and

Local, $3.1

Total: $38.1 Trillion

All figures in trillions $

Numbers may not add up due to rounding

4

19

Total U.S. Debt over time

Source: U.S. Federal Reserve, Ameriprise Financial

Government,+Business,+Consumer

0

5

10

15

20

25

30

35

40

45

19

52

Q1

19

54

Q3

19

57

Q1

19

59

Q3

19

62

Q1

19

64

Q3

19

67

Q1

19

69

Q3

19

72

Q1

19

74

Q3

19

77

Q1

19

79

Q3

19

82

Q1

19

84

Q3

19

87

Q1

19

89

Q3

19

92

Q1

19

94

Q3

19

97

Q1

19

99

Q3

20

02

Q1

20

04

Q3

20

07

Q1

20

09

Q3

20

12

Q1

tril

lio

ns,

$$

Total U.S. Debt

20

Total U.S. Debt over time


Government,+ Business,+Consumer

0%

50%

100%

150%

200%

250%

300%

19

52

Q1

19

54

Q3

19

57

Q1

19

59

Q3

19

62

Q1

19

64

Q3

19

67

Q1

19

69

Q3

19

72

Q1

19

74

Q3

19

77

Q1

19

79

Q3

19

82

Q1

19

84

Q3

19

87

Q1

19

89

Q3

19

92

Q1

19

94

Q3

19

97

Q1

19

99

Q3

20

02

Q1

20

04

Q3

20

07

Q1

20

09

Q3

20

12

Q1

To

tal d

eb

t /

No

min

al

GD

P

Total U.S. debt ratio

21




Mortgage,

$9.8

Consumer

Credit, $2.5

Business

sector, $11.6

Federal Govt,

$10.5

State and

Local, $3.1




22

Corporate Balance Sheets


Their best condition in more than 60 years.

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1952Q

1

1956Q

1

1960Q

1

1964Q

1

1968Q

1

1972Q

1

1976Q

1

1980Q

1

1984Q

1

1988Q

1

1992Q

1

1996Q

1

2000Q

1

2004Q

1

2008Q

1

2012Q

1

Ratio of financial assets to total liabilities for U.S. corporations

23

Financial Obligations

Ratio: Required mortgage, rent, auto lease, consumer debt, home ins., and property tax payments…as a % of Disposable Income.

Source: Federal Reserve

Consumer deleveraging closer to an end

Source: Thomson Baseline

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Mortgage,

$9.8

Consumer

Credit, $2.5

Business

sector, $11.6

Federal Govt,

$10.5

State and

Local, $3.1




5

25

Significant ongoing constraint / problem: Government Debt

Source: Congressional Budget Office

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Source: Congressional Budget Office, Ameriprise Financial Services, Inc.

This gap is simply unsustainable.

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Source: Congressional Budget Office

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Investment Implications

S&P 500: It has been a tough 15 years

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Standard & Poor's 500® Index (S&P 500®) is comprised of 500 stocks representing major U.S. industrial sectors. S&P 500 is a registered service mark of The McGraw-Hill Companies, Inc. It is not possible to invest directly in an index.

30

Market Valuations: S&P 500 Trailing P/E

Valuations appear attractive in comparison to historical averages.

Source: Thomson Baseline as of August 7, 2012

6

31

Corporate earnings have rebounded

Source: U.S. Bureau of Economic Analysis via Thomson Baseline

After-tax Economic profits showing strong recovery.

32

Corporate Balance Sheets


Their best condition in more than 60 years.

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1952

Q4

1955

Q4

1958

Q4

1961

Q4

1964

Q4

1967

Q4

1970

Q4

1973

Q4

1976

Q4

1979

Q4

1982

Q4

1985

Q4

1988

Q4

1991

Q4

1994

Q4

1997

Q4

2000

Q4

2003

Q4

2006

Q4

2009

Q4

Ratio of financial assets to total liabilities for U.S. corporations

33

Important to understand bond dynamics

Yields have little room to move lower.

“Hold to Maturity” likely to be important.


34

Likes, Dislikes….

Source: Ameriprise Financial Senior Market Strategist, Marc. A. Zabicki

U.S. equity markets Large cap / GrowthDividend payersHealth CareConsumer StaplesTelecomCash

Investment Grade Corp. BondsMunicipal Bonds

U.S. Small cap / ValueFinancialsConsumer DiscretionaryMaterialsIndustrials

Latin AmericaEurope Ex-U.K.U.S. Treasuries

Overweight Underweight

Neutral

Developed Intl. Markets Emerging Markets Developed Intl. Markets Emerging Markets High Yield BondsCommodities

Wrapping it all up….

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• Economic growth is likely to remain weak over the intermediate-term as near-term challenges weigh on prospects.

• The global economy’s “corrective phase”, however, seems to be nearing an end. (Although this does not mean something can not still go wrong!)

• Most U.S. economic fundamentals now in position to support growth rather than hinder it.

• Inflation should remain generally contained.

• European problems are a lesson for the U.S.

Key Risks: still many!

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• Euro-zone Sovereign debt / austerity measures.

• Wildcards: Iran, N. Korea, natural disasters.

• Action needs to be taken SOON to address future U.S. deficits.

• U.S.: Employment. Employment. Employment.

• Commodity prices – oil and food most notably.

• Ongoing unrest in the Middle East / North Africa.

• Corporate earnings fail to maintain uptrend.

• Momentum is important. Monetary and fiscal policy measures are exhausted. Interest rates have little room to go lower and further government deficit spending no longer a viable option.

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Questions???

• Global allocations?

• Oil / gasoline prices?

• Municipals? State and Local debt?

• European Sovereign debts?

• Housing?

• U.S. Federal Government debt?

• The U.S. budget outlook?

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• Inflation?

• Gold?

• Interest rates? QE3?

• Unemployment?

• Markets?

• Trade?

Disclosures

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The views featured in this presentation reflect the personal views of the Ameriprise Financial Services, Inc. analyst(s)authoring and delivering the presentation. Further, Ameriprise Financial Services, Inc. analyst compensation is neitherdirectly nor indirectly related to the specific recommendations or views contained in this presentation. For importantdisclosures on securities mentioned in this analysis, please review available third party research reports and charts withapplicable disclosures on our website at ameriprise.com, or through your financial advisor, or by submitting a writtenrequest to Ameriprise Financial Services, Inc., 1441 W. Long Lake Road, Suite 250, Troy MI, 48098.

Except for the historical information contained herein, certain matters in this presentation are forward-looking statementsor projections that are dependent upon certain risks and uncertainties, including but not limited to, such factors andconsiderations as general market volatility, global economic and geopolitical impacts, fiscal and monetary policy,liquidity, the level of interest rates, and historical sector performance relationships as they relate to the business andeconomic cycle.

This summary is based upon financial information and statistical data obtained from sources deemed reliable, but in noway is warranted by Ameriprise Financial Services, Inc. as to accuracy or completeness. This is not a solicitation byAmeriprise Financial Services, Inc. of any order to buy or sell securities. This Summary is based exclusively on ananalysis of general current market conditions, rather than the suitability of a specific proposed securities transaction. Wewill not advise you as to any change in figures or our views. Past performance is no guarantee of future performance.

Continued on next page...

Disclosures… (continued)

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There are risks associated with fixed income investments, including credit risk, interest rate risk, and prepaymentand extension risk. In general, bond prices rise when interest rates fall, and vice versa. The effect is morepronounced for longer-term securities.

Investments in small-capitalization companies involve greater risks and volatility than investments in larger, moreestablished companies.

International investing involves increased risk and volatility due to political and economic instability, currencyfluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularlysignificant in emerging markets.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed byany financial institution, and involve investment risks including possible loss of principal and fluctuationin value.

Neither Ameriprise Financial, nor any of its advisors or representatives, provides tax advice.

© 2012 Ameriprise Financial, Inc. All rights reserved.

economic and market outlook - s3.us-east-2.amazonaws.com · august 28, 2012 russell t price, cfa...

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