Less Macroeconomic Uncertainty

Transcription

1 Less Macroeconomic Uncertainty But Lower Long Run Growth July 2018 Kurt Winkelmann, Raghu Suryanayaranan, Ferenc Szalai Navega Strategies LLC. Navega Strategies LLC is not registered with the Securities and Exchange Commission or any state securities regulator, and instead relies on exemptions from registration available under the federal and state securities laws. Therefore, you will not be afforded the protections of the provisions of those laws and related regulations. Additional disclosures are found on the last page. Why This Matters? This note takes a long run, macro view of the recent developments in US equity and bond markets, from the perspective of our models. It argues that investors have priced in a reduction in uncertainty about long run growth and a reduction in trend growth, driven by stagnant growth in TFP and the labor force. For investors who care about long horizon returns and risk, our models point to lower long run equity returns and a continuation of low real bond yields. Who Should Read This Paper? The issues in this paper are important for assessing long-term returns on assets, and should be of interest to investment strategists and asset allocators.

2 Since the beginning of 2018, equity returns have been mostly flat, and real bond yields have risen slightly but still remain low. Our models suggest that both phenomena can be accounted for by a reduction in uncertainty about long-term growth and a reduction in trend growth. In short, investors have priced in a continuation of low growth in total factor productivity (TFP) and hours worked. For investors who care about long-term returns, our models suggest that these trends point to lower longrun equity returns and a continuation of low real bond yields. And, our results suggest that investors should interpret geopolitical events and tax cuts only in the context of their impact on the fundamental drivers of returns TFP growth and hours worked. Exhibit 1 - A Flat Equity Market and Slightly Higher Real Bond Yields Real Bond Yield (Annualized, %) 1.00% Equity Market Index % % 0.25% % 95 2/Jan/18 8/Jan/18 12/Jan/18 19/Jan/18 25/Jan/18 31/Jan/18 6/Feb/18 12/Feb/18 16/Feb/18 23/Feb/18 1/Mar/18 7/Mar/18 13/Mar/18 19/Mar/18 23/Mar/18 29/Mar/18 5/Apr/18 11/Apr/18 17/Apr/18 23/Apr/18 27/Apr/18 3/May/18 9/May/18 15/May/18 21/May/18 25/May/18 1/Jun/18 US 10-Year TIPS Yield, Constant Maturity (Left Scale) S&P 500 Total Return Index (2/Jan/18=100) (Right Scale) The Exhibit shows the daily evolution of the S&P 500 total return index (Right Scale) and yield on U.S. 10-year constant maturity Treasury Inflation Protected Securities (TIPS) (Left Scale) from January 2nd to June 6th SOURCE: FEDERAL RESERVE BANK OF ST. LOUIS Exhibit 1 shows that the yield on 10-year US infla- tion-linked treasury bonds increased almost 40 bps since the start of the year, while the US stock market remained roughly flat. Increasing real yields reflect 01

3 markets expectations of improvements in long run growth and/or a decline in uncertainty about long run growth. The stock market helps differentiate between the two effects. According to our models, increases in long run real growth imply higher equity cash-flow growth and returns. By contrast, lower levels of macro uncertainty imply lower equity premia (the expected difference between return and bond yield). A flat stock market rules out an increase in long run trend growth, but can be consistent with a drop in macro uncertainty. Exhibit 2 - Lower Long Term Real Growth, Driven By Stagnation in TFP and Labor Force Growth 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Mar-1966 Jun-1967 Sep-1968 Dec-1969 Mar-1971 Jun-1972 Sep-1973 Dec-1974 Mar-1976 Jun-1977 Sep-1978 Dec-1979 Mar-1981 Jun-1982 Sep-1983 Dec-1984 Mar-1986 Jun-1987 Sep-1988 Dec-1989 Mar-1991 Jun-1992 Sep-1993 Dec-1994 Mar-1996 Jun-1997 Sep-1998 Dec-1999 Mar-2001 Jun-2002 Sep-2003 Dec-2004 Mar-2006 Jun-2007 Sep-2008 Dec-2009 Mar-2011 Jun-2012 Sep-2013 Dec-2014 Mar-2016 Jun-2017 Long Run Real GDP Growth (Model Baseline) (Annualized, %) Total Factor Productivity (TFP) Growth (Annualized, %) Change in Hours Worked (Annualized, %) The Exhibit shows the evolution of our model forecast for long term real GDP growth since March 1966 and its two contributors: total factor productivity (TFP) growth and change in hours worked. All rates are quarterly, annualized percentage rates. SOURCE: LLC RESEARCH, FEDERAL RESERVE BANK OF SAN FRANCISCO Exhibit 2 suggests that long run real growth will continue to be stagnant. The exhibit portrays the evo- lution since 1966 of our forecast for long run US real GDP growth and its two contributors: changes in total 02

4 factor productivity (TFP) and in the labor force (hours worked). TFP growth is a proxy for long-term growth per capita. It measures the impact of innovation and efficient allocation of resources on growth, after accounting for capital and labor. The principal conclu- sion is that our forecast for long run economic growth of 1.6% remains well below its 3% average from 1966 to This decline has been driven by a continued decrease and then stagnation in both TFP growth and the labor force from Exhibit 3 - Receding Macro Uncertainty Real Bond Yield (Annualized, %) 4.0% Risk/Uncertainty Index % % % 0.0% % 0 Mar-1966 Sep-1967 Mar-1969 Sep-1970 Mar-1972 Sep-1973 Mar-1975 Sep-1976 Mar-1978 Sep-1979 Mar-1981 Sep-1982 Mar-1984 Sep-1985 Mar-1987 Sep-1988 Mar-1990 Sep-1991 Mar-1993 Sep-1994 Mar-1996 Sep-1997 Mar-1999 Sep-2000 Mar-2002 Sep-2003 Mar-2005 Sep-2006 Mar-2008 Sep-2009 Mar-2011 Sep-2012 Mar-2014 Sep-2015 Mar-2017 Long Term Real Bond Yield, Model Baseline (Left Scale, Annualized, %) Uncertainty Premium Index (Right Scale, June 1967=0) Risk Premium Index (Right Scale, June 2000=0) The Exhibit shows, since March 1966, the evolution of long term real bond yields (left scale) implied by our model and our model derived risk and uncertainty indexes (right scale). SOURCE: LLC RESEARCH Exhibit 3 confirms the recent decline in macro uncertainty, as priced in by both real bond and equity markets. The Exhibit shows the real long bond yield as calculated by our models, and indexes of risk and uncertainty premia. The risk premium reflects how markets price short-term real GDP growth volatility, while 03

5 the uncertainty premium captures the valuation of long run growth uncertainty. Increases in macro uncertainty are driven by persistent declines in long run growth. More recently, as long run growth stabilized, macro uncertainty and return premia have receded. However uncertainty is narrowing around a much lower trend compared to the 1980s. Thus, although the real yield increased, it still remains low, below 1%. The combination of lower trend growth and lower macro uncertainty should lead investors to revise their expectations of long run equity return downwards. Investors who are concerned about long run solutions should focus on the long-term determinants of real growth TFP growth and labor force growth. Our models suggest that markets are pricing in lower trend real growth and lower uncertainty around that trend. Both of these effects are consistent with lower real expected equity returns going forward. Navega Strategies LLC. NewYork, USA info@navegastrategies.com Copyright (c) Navega Strategies, LLC. All rights reserved. 04

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