Economic and Market Outlook

Transcription

1 Economic and Market Outlook Third Quarter 2018 Investment Products: Not FDIC Insured No Bank Guarantee May Lose Value Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix. 1

2 Strength of Economic Expansions Cumulative % Growth Average Rebound: 23% Number of Quarters Historical Expansions Current Expansion Data as of March 31, 2018, most recent available as of June 30, Source: Strategas Research Partners. U.S. economic expansions since

3 U.S. Recession Risk Indicators 12 variables have historically foreshadowed a looming recession Only corporate profit margins signal risk right now Second Quarter 2018 First Quarter 2018 Financial Inflation Yield Curve Credit Spreads Money Supply Wage Growth Commodities Housing Permits Consumer Business Activity Jobless Claims Retail Sales Job Sentiment ISM New Orders Profit Margins Truck Shipments Overall Signal Expansion Caution Recession Data as of June 30, Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 3

4 U.S. Recession Risk Indicators 12 variables have historically foreshadowed a looming recession Only corporate profit margins signal risk right now Recession Current Financial Inflation Yield Curve Credit Spreads Money Supply Wage Growth Commodities Housing Permits Consumer Business Activity Jobless Claims Retail Sales Job Sentiment ISM New Orders Profit Margins Truck Shipments n/a n/a Overall Expansion Caution Recession Data as of June 30, Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 4

5 U.S. Recession Dashboard Case Study: ,600 1,418 1,503 1,468 1,400 1,270 S&P 500 1,200 1,280 1, Overall Signal: Overall Signal: Overall Signal: 600 Q Q Q Q Q Financial Inflation Consumer Business Activity Yield Curve Credit Spreads Money Supply Wage Growth Commodities Housing Permits Jobless Claims Retail Sales Job Sentiment ISM New Orders Profit Margins Truck Shipments Source: BLS, Federal Reserve, Census Bureau, ISM, BEA, American Chemistry Council, American Trucking Association, Conference Board, and Bloomberg. 5

6 Yield Curve Spread 10-Year Treasury Bonds Minus 3-Month T Bills 500 Yield curve spread less than zero (inverted) occurs prior to recessions. 500 BPS Recession Yield Curve Spread Data as of June 30, Source: Fed Reserve Bank of St. Louis, retrieved from FRED. Compiled: econpi.com 6

7 Strong EPS Growth Leads to Strong Gains Calendar Year S&P 500 EPS Growth Annual Data beginning % % % 60 5% 7.0% % 10%+ EPS Growth All Other 0 Data as of Dec. 31, Source: Bloomberg. 7

8 Midterm Election Year Performance Average S&P 500 Performance in Midterm Years Since % The market hasn t made much progress until October in midterm election years. Average Performance S&P 500 in Midterm Year 106% 104% 102% 100% 0% 98% -2% 96% -4% 94% -6% 92% -8% Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec. Data as of June 1, Source: Strategas Research Partners. 8

9 Market Correction During Years of Midterm Elections 80% Average Recovery: 31% 60% 58 40% 20% Recovery: Market Performance 1 Year After Correction 0% -20% -40% -60% Average Correction: 19% Drawdown: Market Correction During Year of Midterm Elections Source: Standard & Poor s and Bloomberg. 9

10 Price/Earnings Is Not The Only Indicator To Watch S&P 500 Price/Earnings Ratio Recession 25 June June Data as of June 30, Source: Bloomberg. 10

11 Earnings Price Yield Interest Rates: S&P 500 Minus YTM of 10-Year Treasuries 8% 6% 4% 2% 0% -2% -4% -6% Valuation levels at end of the three longest U.S. economic cycles based on quarter end values: Quarter E/P Yield YTM 10-Year Treasuries Spread Q % 6.2% -0.7 Q % 8.4% -2.0 Q % 6.0% -2.4 Current 4.7% 2.8% 1.9 Source: FactSet. Data as of June 30, YTM: Yield to maturity. E/P Yield: The earnings yield refers to the earnings per share for the most recent 12-month period divided by the current market price per share. 11

12 New Secular Bull Market? S&P 500 Index (Log-Scale) All-Time Highs: 0 Cumulative Return: -22.2% All-Time Highs: 365 Cumulative Return: 451.9% S&P All-Time Highs: 35 Cumulative Return: 17.2% All-Time Highs: 500 Cumulative Return: 1,261.2% All-Time Highs: 13 Cumulative Return: -24.1% Present All-Time Highs: 202 Cumulative Return: 136.8% Data as of June 30, Source: Standard & Poor s and Bloomberg. 12

13 Bull Market Top Checklist Current Comments Blow-off top x Few signs of panic buying or speculative excess in public equity markets. S&P is currently only 4% above 200-day MA after peaking in January. Heavy inflows into equity market funds x Net inflows into equity mutual funds and ETFs is underwhelming while inflows into bond funds remains robust. Big pick-up in M&A activity x IPO activity x Rising real interest rates x M&A activity has picked up significantly this year from years past. In absolute dollar terms, activity is near historical highs. Despite some high-profile new issues in 2017, deal volume and assets raised remain far below the pace exhibited in Real rates have moved higher, but relative to historical levels they are low. Weakening upward earnings revisions Erosion in number of stocks making new highs x Upward earnings revisions remain at elevated levels. x The numbers of companies making 52-week highs peaked in January. Shift towards defensive leadership x Since the February 2016 low, cyclical shares have outperformed for the past two years. Changes here is an item to watch going forward. Widening credit spreads x High-yield and investment grade credit spreads remain compressed and are not worrisome at the moment. Source: Strategas Research Partners. 13

14 International Outlook Past performance is no guarantee of future results. Financial term and index definitions are available in the appendix. 14

15 The World Economy Has Never Been in Better Shape 100 Number of Countries in the World in a Recession IMF forecast: Smallest number of countries in recession ever Data as of April 2017, most recent available as of June 30, Source: IMFWEO, Haver Analytics, DB Global Markets Research. 15

16 International Roadmap Overall GDP Growth (%, YoY) Economic Government Financial Currency Economic Momentum Central Bank Policy Sovereign Credit Rating P/E Ratio (x) EPS Growth (%, YoY) Neutral Positive Neutral Positive Neutral Neutral North America 1.9 Stable Neutral & Hiking AAA Stable Canada 1.4 Decelerating Easy & Hiking AAA Weakening United States 2.0 Stable Neutral & Hiking AAA Stable Europe ex-uk 2.4 Stable Easy & Stable AA Stable France 2.2 Accelerating Easy & Stable AA Stable Germany 2.3 Stable Easy & Stable AAA Stable Italy 1.4 Stable Easy & Stable BBB Stable Spain 3.0 Stable Easy & Stable A Stable United Kingdom 1.2 Decelerating Easy & Stable AA Stable Asia ex-japan 3.7 Accelerating Easy & Stable AAA Weakening Australia 3.1 Accelerating Easy & Stable AAA Weakening Hong Kong 4.7 Accelerating Easy & Hiking AA Stable Japan -0.6 Decelerating Easy & Stable A Stable Emerging Markets 5.3 Stable Neutral & Hiking BBB Weakening Brazil 1.2 Accelerating Easy & Cutting BB Weakening China 6.8 Stable Neutral & Stable A Stable India 7.7 Accelerating Neutral & Hiking BBB Weakening South Korea 2.8 Stable Easy & Stable AA Stable Taiwan 3.0 Stable Easy & Stable AA Stable Data as of June 30, Source: Standard & Poor s, Moody's, MSCI, and Bloomberg. Note: United States P/E and EPS growth is S&P 500, all others are MSCI Country/Region Index. 16

17 China s Share of World GDP Continues to Grow Rest of World 10% Other G20 Countries 10% United States 31% Japan 15% Other G20 Countries 15% Rest of World 14% United States 25% Japan 6% European Union 26% China 4% European Union 22% China 15% Mexico 2% Canada 2% Mexico 1% Canada 2% Data as of Dec. 31, Source: The World Bank. Past performance is no guarantee of future results. 17

18 Difference Between Real U.S. & EU GDP Growth 1.0% EU GDP Faster 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% U.S. GDP Faster -3.5% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 Real GDP: Gross Domestic Product, adjusted for inflation. Note: YoY Change. Source: Bloomberg. 18

19 U.S. vs. International Equity Performance U.S. Outperformed U.S. Outperformed 174.9% U.S. Outperformed 115.2% % % International Outperformed % 0.0 International Outperformed Geographic leadership tends to persist for multiple years. S&P 500 vs. MSCI EAFE. Data as of June 30, Source: FactSet. 19

20 Additional Important Information Past performance is no guarantee of future results Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments, LLC are subsidiaries of Legg Mason, Inc. All opinions and data included in this presentation are as of March 2018 unless noted otherwise and are subject to change. The opinions and views expressed herein are of the presenter and may differ from other managers, or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information. 20