2014 Mid Year Economic & Financial Market Outlook. Scott D. Knapp, CFA Director of Investment Strategy

Transcription

1 2014 Mid Year Economic & Financial Market Outlook Scott D. Knapp, CFA Director of Investment Strategy

2 Agenda 1. Review Recent Data 2. Look Forward to Remainder of Long-Term Outlook: Reaching a Fork in the Road

3 Disclaimer The only function of economic forecasting is to make astrology look respectable. John Kenneth Galbraith

4 Review Recent Data

5 1Q 2014 GDP = Ouch! Silver lining: Signs of acceleration toward the end of the quarter.

6 Signs of Life in the Job Market

7 Improving Unemployment Rate Currently 6.1%

8 Asset Class % Returns as of June 30, 2014 Index 3 Mos. YTD 1 Year 3 Year 5 Year U.S. Large-Cap Stock U.S. Mid-Cap Stock U.S. Small-Cap Stock International Stock Emerging Market Stock Investment Grade Bond High Yield Bond

9 Home Prices Up Very regionalized growth rates.

10 Household Debt is Down Assets are up, liabilities are down.

11 Wealth Effect $10 trillion increase in household net worth in Gains are attributable to rising asset values and deleveraging.

12 Looking Forward to the Remainder of 2014

13 2014 Outlook Pros Strong momentum Improving economy Valuations for U.S. large-cap stocks Continued easy monetary policy Near-term fiscal policy is more certain Positive wealth effect Cons Lowest quality stocks have outperformed Economy is still vulnerable to shocks Slow start due to weather Rising interest rates Volatility will return at some point Too much optimism?

14 The Conference Board s May 2014 Index of Leading & Coincident Economic Indicators The current recovery appears sustainable. 14

15 History of the S&P 500 s Trailing Price/Earnings Ratio Long-term average: 15.52x

16 Volatility Will Return 2013 volatility was unusually low.

17 Rising Interest Rates Key questions: How high? How fast? Why? 17

18 Long-Term Outlook: Reaching a Fork in the Road 18

19 Renaissance in Energy, Technology, Capital Goods, and Manufacturing 19

20 Renaissance in Energy, Technology, Capital Goods, and Manufacturing 20

21 Renaissance In Energy, Technology, Capital Goods and Manufacturing Reflects a structural shift in the economy. 21

22 Energy is Our Future Lemons turned into lemonade. 22

23 Falling U.S. Budget Deficit What happens after 2024? 23

24 Unsustainable Federal Spending Focus: Medicare & Medicaid, Social Security, Military, Interest on Debt 24

25 Unsustainable Federal Spending What happens when interest rates normalize? 25

26 Summary 2014 is off to a slow start, but should accelerate as the year passes. We believe the economic recovery is intact in spite of softness during the first quarter. Stock markets have once again posted solid returns. Stock markets are likely to be volatile and experience meaningful corrections. We see no evidence of a 1990s-style speculative bubble. Interest rates should rise as expectations for the economy improve. Long-term prospects for the economy are very positive. Unsustainable fiscal policies in the U.S. and other industrialized nations must be addressed. 26

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