the 2018 outlook: an aging expansion & bull market · the 2018 outlook: an aging expansion...
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This data is provided for information only and is not intended for trading purposes.
The 2018 Outlook:
An Aging Expansion & Bull Market Mark Keller
December 2017
This data is provided for information only and is not intended for trading purposes.
The Base Case
No Recession in 2018
─ Real GDP +2.25%, core PCE remains under 2.0%
S&P 500 of 2739.20
─ Earnings of $129.82
─ P/E of 21.1x
─ Potential to exceed this forecast
10-year Treasury range of 2.25% to 2.50%
─ 3 rate hikes this year
2
This data is provided for information only and is not intended for trading purposes.
The Economy
Growth Continues
This data is provided for information only and is not intended for trading purposes. 4
Source: NBER, CIM
This data is provided for information only and is not intended for trading purposes. 5
-4
-3
-2
-1
0
1
2
-4
-3
-2
-1
0
1
2
70 75 80 85 90 95 00 05 10 15
CFNAI, 6-mo Avg Recession Point
CHICAGO FED NATIONAL ACTIVITY INDEX
IND
EX
Sources: Chicago FRB, CIM
Current Reading=+0.052
This data is provided for information only and is not intended for trading purposes. 6
This data is provided for information only and is not intended for trading purposes. 7
-1
0
1
2
3
4
5
6
NET EXPORTS GOVERNMENT
INVESTMENT FIXED INVESTMENT
CONSUMPTION GDP
AVERAGE CONTRIBUTION TO REAL
GDP DURING EXPANSIONS
1960-69 1971-73 1975-80 1980-81 1983-90
% O
F G
DP
GR
OW
TH
1991-00 2002-07 2009-16
Sources: Haver Analytics, CIM
This data is provided for information only and is not intended for trading purposes. 8
-4
0
4
8
12
16
20
45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 20
CONSUMER PRICE INDEX10.0% 3.0%1.1%1.5% 4.5% 8.0%11.4%2.4% 3.7% 2.8% 2.7% 1.6%
Sources: Haver Analytics, CIM
This data is provided for information only and is not intended for trading purposes. 9
-60
-40
-20
0
20
40
60
-60
-40
-20
0
20
40
60
70 75 80 85 90 95 00 05 10 15
PHILADELPHIA FED
BUSINESS OUTLOOK INDEX
Source: Philadelphia FRB, CIM
CURRENT READING =
+23.40
This data is provided for information only and is not intended for trading purposes.
80
84
88
92
96
100
104
108
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
NFIB SMALL BUSINESS OPTIMISM
IND
EX
Sources: Bloomberg, CIM
10
This data is provided for information only and is not intended for trading purposes. 11
This data is provided for information only and is not intended for trading purposes.
Risks to the Expansion
Tightening Monetary Policy,
Fiscal Expansion, Geopolitical Risk
This data is provided for information only and is not intended for trading purposes. 13
-4
-2
0
2
4
6
8
10
12
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
MANKIW USING EMPLOYMENT/POPULATION
MANKIW USING UNEMPLOYMENT RATE
MANKIW USING PART TIME AS % OF LABOR FORCE
MANKIW USING Y/Y% WAGE CHG FOR NON-SUPERVISORY WORKERS
TARGET
MANKIW RULE(CIM VARIATION)
MANKIW WITH EMPLOYMENT/POPULATION = 0.89%
MANKIW WITH PART TIME = 2.67%
MANKIW WITH UNEMPLOYMENT RATE = 3.18%
MANKIW WITH WAGES = 0.94%
Sources: Greg Mankiw, Haver Analytics, CIM
FED
FU
ND
S
This data is provided for information only and is not intended for trading purposes. 14
0
2
4
6
8
10
-1
0
1
2
3
4
5
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
IMPLIED LIBOR RATE, 2-YEARS OUT
FED FUNDS TARGET
IMPLIED LIBOR RATE LESS FED FUNDS
FED FUNDS AND IMPLIED LIBOR RATES
SP
RE
ADR
AT
E
Sources: FRED, Bloomberg, CIM
This data is provided for information only and is not intended for trading purposes. 15
all 2017 2018 2018 New
Yellen 3 3 3 Powell 3
vacant 3 3 El Erian 3
Brainard 4 4 4 Brainard 4
Powell 3 3 3 Taylor 1
Quarles 2 2 2 Quarles 2
vacant Goodfriend 2
vacant vacant
Dudley 3 3 3 Dudley 3
Evans 4 4 Evans
Bullard 5 Bullard
George 1 George
Mullinix 1 1 Barkin 2
Bostic 3 3 Bostic 3
Williams 2 2 Williams 2
Mester 2 2 Mester 2
Rosengren 2 Rosengren
Kashkari 5 5 Kashkari
Kaplan 3 3 Kaplan
Harker 2 2 Harker
2.81 3.20 2.60 2.45
This data is provided for information only and is not intended for trading purposes. 16
-4
-3
-2
-1
0
10
2
4
6
8
10
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
CFNAI, 6-mo Avg FED FUNDS TARGET
FED FUNDS TARGET AND
THE CHICAGO FRB NATIONAL ACTIVITY INDEX
FED FU
ND
S TARG
ETC
FNAI
Sources: Chicago FRB, Haver Analytics, CIM
This data is provided for information only and is not intended for trading purposes. 17
-15
-10
-5
0
5
10
15
1950 1960 1970 1980 1990 2000 2010
PRIVATE GOVERNMENT FOREIGN
NET SAVINGS BALANCES
% G
DP
% G
DP
Sources: FRB, CIM
This data is provided for information only and is not intended for trading purposes.
Geopolitical Risks
The Waning U.S. Superpower Role
Chinese Deleveraging
European Politics
─ Italian Elections
─ PM Corbyn?
2nd Korean War
South American Populism
─ Populists polling well in Brazil, Mexico
Middle East Turmoil
U.S. Domestic Politics
─ 2018 Mid-terms 18
This data is provided for information only and is not intended for trading purposes.
Equities
Modest Earnings Growth, High Multiples
This data is provided for information only and is not intended for trading purposes.
Equities
S&P 500 of 2739.20
─ Earnings of $129.82
─ P/E of 21.1x
─ Potential to exceed this forecast
Growth outpaces Value
Moderate bias toward foreign
20
This data is provided for information only and is not intended for trading purposes. 21
0.9
1.0
1.1
1.2
1.3
1.4
20
40
60
80
100
120
140
94 96 98 00 02 04 06 08 10 12 14 16
THOMSON/S&P OPERATING EARNINGS RATIO
THOMSON-REUTERS OPERATING EARNINGS (4Q ROLLING)
S&P OPERATING EARNINGS (4Q ROLLING)
RATIO, THOMPSON-REUTERS, S&P
OPERATING EARNINGS
RA
TIO
, TH
OM
SO
N-R
EU
TER
S/S
&P
Sources: Haver Analytics, Bloomberg, CIM
OP
ER
ATIN
G E
AR
NIN
GS
,
RO
LLING
4Q
This data is provided for information only and is not intended for trading purposes. 22
200.0
20.0
2.0
0.2
20 30 40 50 60 70 80 90 00 10
4Q TRAILING GDP EARNINGS FORECASTBOTTOM TOP
EARNINGS AND GDP
4-Q
RO
LLIN
G E
ARNI
NGS,
LOG
SCA
LE
Sources: Haver Analytics, Philadelphia FRB, I/B/E/S, CIM
GREEN AREA =
FORECAST
This data is provided for information only and is not intended for trading purposes. 23
-1
0
1
2
3
4
5
6
7
96 98 00 02 04 06 08 10 12 14 16 18
S&P EARNINGS/GDP FORECAST
MARGIN MODEL
RATI
O
Sources: Haver Analytics, Philadelphia Fed, CIM
This data is provided for information only and is not intended for trading purposes. 24
-8
-4
0
4
8
0
5
10
15
20
25
30
60 65 70 75 80 85 90 95 00 05 10 15
DEVIATION 4Q TRAILING P/E FAIR VALUE
P/E MODEL(35-54 Age Cohort, AAA bond yield, consumer sentiment, fed funds, trend CPI)
P/E
DE
VIA
TIO
N
Sources: Haver Analytics, CIM
This data is provided for information only and is not intended for trading purposes. 25
-15
-10
-5
0
5
10
15
5
10
15
20
25
30
50 55 60 65 70 75 80 85 90 95 00 05 10 15
DIFFERENCE P/E (4-Q TRAILING) RULE P/E
RULE OF 20(20-CPI)
P/E
Sources: Haver Analytics, CIM
DIF
FE
RE
NC
E
This data is provided for information only and is not intended for trading purposes. 26
0
4
8
12
16
0
5
10
15
20
25
30
90 00 10 20 30 40 50 60 70 80 90 00 10 20
4Q TRAILING P/E
ROLLING 5-YR STANDARD DEVIATION OF CPI
TRAILING P/E WITH CPI DEVIATION LINES
Sources: Robert Shiller, Haver Analytics, CIM
P/E
& C
PI
This data is provided for information only and is not intended for trading purposes. 27
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
S&P (LOG) TRENDLINE +1.0 ST DEV +0.5 ST DEV
+2.0 ST DEV -1.0 ST DEV -0.5 ST DEV -2.0 ST DEV
LONG-TERM S&P TREND
LO
G S
CA
LE
Sources: Bloomberg, CIM
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
S&P (LOG) TRENDLINE +1.0 ST DEV +0.5 ST DEV
+2.0 ST DEV -1.0 ST DEV -0.5 ST DEV -2.0 ST DEV
LONG-TERM S&P TREND
LO
G S
CA
LE
Sources: Bloomberg, CIM
Year-end +0.5 Stdev = 2733.37
2018 +1.0 Stdev = 3300.93
This data is provided for information only and is not intended for trading purposes. 28
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
70 75 80 85 90 95 00 05 10 15
D-MARK PARITY
EURO PPP MODEL
$ P
ER
DM
95%
95%
66%
66%
EURO FAIR VALUE = $1.3012
Sources: OECD, BLS, FRB, CIM
98%
98%
0.8
1.2
1.6
2.0
2.4
2.8
3.2
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
$/£ EXCHANGE RATE PPP FAIR VALUE
GBP PPP MODEL
PARITY = $1.6317
US
D P
ER
GB
P
Sources: Haver Analytics, CIM
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
CAD PER USD PARITY: C$1.1335
CANADIAN PPP MODEL
CA
D P
ER
US
D
Sources: Haver Analytics, CIM
-100
0
100
200
300
400
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Yen per dollar Parity
YEN PPP MODEL
PARITY = 58.96 ¥/$
Sources: Haver Analytics, CIM
This data is provided for information only and is not intended for trading purposes. 29
This data is provided for information only and is not intended for trading purposes.
Fixed Income
Mostly Steady Rates
This data is provided for information only and is not intended for trading purposes. 31
-3
-2
-1
0
1
2
3
0
4
8
12
16
60 65 70 75 80 85 90 95 00 05 10 15
DEVIATION10-YR CONSTANT MATURITY YIELD
FAIR VALUE
TEN-YEAR T-NOTE MODEL
%D
EV
IATI
ON
FAIR VALUE RATE =
2.26%
Sources: Haver Analytics, CIM
(WITH YEN, OIL PRICES & GERMAN BONDS)
This data is provided for information only and is not intended for trading purposes. 32
0
2
4
6
8
0
4
8
12
16
20
30 40 50 60 70 80 90 00 10
BAA-T-NOTE SPREAD BAA-T-NOTE AVERAGE
-1 STANDARD DEVIATION +1 STANDARD DEVIATION
10-YR T-NOTE YLD BAA YIELD
T-NOTE/Baa CORPORATES
Sources: Haver Analytics, FRB, CIM
This data is provided for information only and is not intended for trading purposes. 33
0
5
10
15
20
25
0
5
10
15
20
25
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
AVERAGE SPREAD
HIGH YIELD LESS 5-YR CONSTANT MATURITY T-NOTE
BofA ML HIGH YIELD MASTER II (EFFECTIVE)
5 YR TREASURY
HIGH YIELD SPREADS
YIELDS
SPR
EAD
Sources: Haver Analytics, FRED, CIM
This data is provided for information only and is not intended for trading purposes.
We look for another good year for financial assets and the economy
─ However, risks of a policy error or a geopolitical event are rising
─ The risks will be higher in 2019
This will be a “stay tuned” year
─ We may see increasing volatility as the mid-term elections near
34
In Conclusion
This data is provided for information only and is not intended for trading purposes.
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