Washington & The Investment Landscape Daniel Clifton February 2019 Macro Research

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1 Washington & The Investment Landscape Daniel Clifton February 2019 Macro Research Investment Strategy Economics Policy Research Quantitative Research Technical Research Fixed Income Research Industry Surveys Bespoke Research Conferences Sales & Trading

2 Economic Volatility Is Translating Into Political Volatility 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Trend vs. Actual GDP Real GDP at 3.1% Growth Rate Actual Real GDP '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14 $3.0TN Gap Something Just Broke In 2008 & The US Has Transitioned From A 3% to a 2% Growth Rate. Voters Know There Is Something Wrong Source: Bureau of Economic Analysis, Strategas 2

3 Voters Have Removed The Party In Power In 6 of the Past 7 Elections 3

4 Fiscal Policy Is Taking Over From Monetary Policy To Get More Growth Post Crisis: Monetary Policy Stimulus Fiscal Policy Austerity Lower Nominal GDP Growth Strong Equity Market Low Productivity, Low Inflation Subdued Volatility Higher Debt Levels Geopolitical Stress Below Historic Levels of Growth Leads To Greater Populism Looking Ahead: Fiscal Policy Stimulus Monetary Policy Austerity Faster Nominal GDP Normalized Equity Returns Higher Productivity, Higher Inflation More Volatility De-Leveraging Geopolitical Conflict? Faster Nominal Growth Lead To A More Normal Political Environment? 4

5 US Is Outpacing The World Regional GDP Growth Rates (IMF) Changes In The IMF GDP Forecast Since October 8% 7% 6% 5% 4% 3% 2% 1% 0% 2.9% 2.7% 2.2% % 2018 Est Est. 1.9% 1.6% 1.9% 1.8% 1.5% 1.3% 0.9% 0.9% 6.9% 6.6% US Eurozone Japan UK China 6.2% Japan China Italy France Germany Euro US World Source: International Monetary Fund, Estimates Subject To Change 5

6 Neighbor Envy: The Rest of the World Is Looking To Follow The US Lead 55% 50% 45% Statutory Corporate Tax Rates & US Inversions Combined Federal + Subnational Tax Rates (Source: Mercatus) United States, LHS # of US Inversions, RHS % 35% 30% 25% 20% 15% 10% Organization for Economic Cooperation and Development, Ex-US, LHS '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '

7 Was An Exceptional Year For Annual Change In S&P 500 Cap Ex $BN Housing Bubble Tech Bubble 1-Year 100% Expensing 76.5 The US Economy % 2.00% 1.50% % Change in Non-Farm Payroll Employment Year over Year Tax Reform Passes % % -150 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: Standard & Poor s Dow Jones, Bureau of Labor Statistics, Strategas 0.00% Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 7

8 Wages Are Accelerating, Especially For Lowest Wage Workers 3.50% Average Hourly Earnings: Production and Nonsupervisory Workers (December, YoY%, SA,$/Hr) 3.32% Usual Weekly Earnings Bottom 10th Percentile: Y/Y % Chg, Full Time Wage & Salary Workers (BLS) 3.00% 7% 2.50% 2.00% 1.50% 1.00% 0.50% 2.50% 2.51% 2.49% 2.43% 2.26% 2.02% 1.92% 1.77% 1.69% 6% 5% 4% 3% 2% 1% 0% 0.00% '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bureau of Labor Statistics, Strategas -1% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 8

9 The Bad News: Global Policy Uncertainty Surged In 4Q Global Policy Uncertainty Index Source: Baker, Bloom & Davis 0 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 US Monetary Policy China Slowdown EU Economic Woes Trade Wars Brexit Lower Profit Revisions US Budget Deficit Gov t Shutdown Low Oil Prices Credit Spreads 2020 Election 2020 Recession? The Index is a GDP weighed average of policy uncertainty indices for 20 countries 9

10 The Good News: Stocks Usually Rally After Heightened Policy Uncertainty 20% 18% 16% 14% S&P 500 Returns Following Spikes In Global Policy Uncertainty (Source: S&P Dow Jones, Strategas) 17.4% 16.3% Financial markets have been working as a vigilante in recent years to get the political system to act. 12% 10% 8% Uncertainty Over 200 Uncertainty Over % 7.4% 6% 4% 2% 0% 3.6% 3.0% 0.2% 0.4% 1mo Return 3mo Return 6mo Return 1yr Return Source: S&P Dow Jones & Strategas For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that stocks will rally after heightened uncertainty going forward even if they have so historically. 10

11 S&P 500 Has Not Declined In The 12 Months Following Midterm Since Midterm Elections Usually Produces Gridlock 2. President s Worry About Their Own Re- Election And Push New Stimulus Source: S&P Dow Jones & Strategas For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that stocks will rally after midterm elections going forward even if they have so historically. 11

12 Still More US Fiscal Policy Stimulus Coming Down The Pipeline 2.50% 2.00% Fiscal Policy Stimulus, % of GDP CY % Year To Date Individual Tax Refunds, $BN Through February 14th % 1.32% 1.38% % 0.85% % % Sources: Joint Committee On Taxation, Bureau of Economic Analysis, Treasury, Strategas 12

13 But Investment Has Slowed Due To Heightened Trade Tensions Source: Institute for Supply Management 13

14 De-Regulation Is Also Helping The US Economy Source: Department of Labor, Office of Management & Budget 14

15 A China Trade Deal Is The Most Impactful Stimulus For Trump 16% Average Tariff Rate, 2017 (WTO) 14% 13.7% 12% 10% 9.8% 8% 6.9% 6% 4% 3.4% 4.0% 5.1% 2% 0% US Canada EU Mexico China S. Korea Source: World Trade Organization 15

16 But Without A Trade Deal, Tariffs Will Begin To Outpace Fiscal Policy Boost Breakdown of CY 2019 Tax Cuts, Stimulus & Tariffs, $BN 250 Incremental 2019 Fiscal Stimulus: $122bn Incremental 2019 Tariffs: $60-283bn China Round 3 at 25%: $237bn China Round 3 at 10%: $157bn China Round 2 at 25%: $104bn Tax Cuts Spending Steel & Aluminum Tariffs Source: US Trade Representative, Strategas China Tariffs Global Tariffs (Incl'd Retaliation) Auto Tariffs (Ex-Can, Mex, Japan, S Korea, China) 16

17 Auto Tariffs Remain A Big Risk To The Global Outlook Source: International Trade Commission, Bureau of Economic Analysis, Tax Foundation 17

18 What Will Matter In Congress: Debt Ceiling/Sequestration Federal Government Surplus/Deficit (12 Mo. Rolling, $BN) Last Click: Dec= -873 BN '01 '03 '05 '07 '09 '11 '13 '15 '17 18

19 Muller Is Closing In: There Are 17 Active Investigations of Trump 60 Betting Odds: Will Trump Be Impeached In His First Term? (PredictIt) Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 19

20 Equity Market Is Starting To Price In A Democratic Government In % 60% 50% 40% 30% 20% 10% 0% Will President Trump Win Reelection (Strategas Policy Conf Survey) 01/08/2019) 39% 61% Yes No Betting Odds: Which Party Will Win The 2020 Election? (PredictIt) Democratic Republican 20 10/5/ /4/ /4/2018 1/3/2019 Strategas surveyed investors at their Annual Policy Conference on January 8,

21 How Are We Investing During These Uncertain Political Times? Strategas' Real-Time Lobbying Index Performance, Annualized Returns (As of 02/12/2019) 24% 20% Lobbying TR S&P 500 TR 16% 12% 8% 4% 0% MTD QTD YTD 1 Year 3 Years 5 Years 10 Years For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that companies engaged in lobbying with outperform going forward even if they have so historically. 21

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