Point of View. Economy Markets Investment Strategy

Transcription

1 Point of View Economy Markets Investment Strategy August 2017 Prepared by: George W. Robertson, CFP, CRPS, AIF Chartered Retirement Plans Specialist KMS Financial Services, Inc th Avenue NW, Suite 10 Issaquah, WA (425)

2 Important Information The views and opinions expressed are those of the speaker and are subjectto change based on factors such as market and economic conditions. These views and opinions are not an offer to buy a particular security and should not be relied upon as investment advice. Past performance cannot guarantee comparable future results. 2

3 Important Information Performance quoted is past performance and cannot guarantee comparable future results; current performance may be higher or lower. Results shown assume the reinvestment of dividends. An investment cannot be made directly in an index. Investments with higher return potential carry greater risk for loss. Investing in small companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. Foreign securities have additional risks, including exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards. Investing in emerging markets involves greater risk than investing in more established markets such as risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates, adverse political developments and lack of timely information. Fluctuations in the price of gold and precious metals often dramatically affect the profitability of the companies in the gold and precious metals sector. Changes in political or economic climate for the two largest gold producers, South Africa and the former Soviet Union,mayhave adirecteffect onthepriceofgoldworldwide. 3

4 Point of View August 2017 Stock Market record highs driven by earnings surge following the anniversary of $USD surge and higher energy prices stocks are fully-, but not over-valued margins are likely sustainable Fed is still accommodative inflation is tame lack of irrational exuberance 4

5 Stock market Record highs Source: The Wall Street Journal, August 4,

6 Stock market Predictions from one year ago so much for the experts McCain on the media Soros, Icahn, Druckenmiller, Gundlach, Gross: Wisdom from McCain: Source: Barron s, August 8, 2016; July 31,

7 Stock market S&P 500 S&P /19/16 Blackrock says U.S stocks will return 5% or less over the next five years. GMO says U.S. large-caps will return an average -2.3% per year after inflation over the next seven years. 1 12/16/15 Fed rate hike 7/30/16 Gundlach says "sell everything" 2 7/8/16 Strong June jobs report 3/1/17 Trump's "conciliatory" speech to Congress 2/9/17 Trump says "phenomenal" tax plan coming 11/30/16 OPEC production cut 11/9/16 Trump win +16% since election 4/24/17 French vote /29/15 Greek vote 8/24/15 flash crash; China devaluation, global slowdown worries -11.2% 12/11/15 Third Avenue suspends redemptions 6/24/16 Brexit -5.3% 2/11/16 China, global slowdown worries, oil hit bottom -12.0% 9/9/16 Eric Rosengren suggests September rate hike 11/4/16 Election polls tighten -4.8% Jul-17 Jun-17 May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16 May-16 Apr-16 Mar-16 Feb-16 Jan-16 Dec-15 Nov-15 Oct-15 Sep-15 Aug-15 Jul-15 Jun-15 May-15 Apr-15 Mar-15 Feb-15 Jan-15 Dec-14 Source: Standard & Poor s. data through August 3, Investment News, April 19, 2016, by John Waggoner. 2 Reuters, July 30, Barron sreported in its August 8, 2016 issue that George Soros, Stan Druckenmiller, Carl Icahn and Bill Gross were also negative on stocks. 7

8 Stock market S&P 500 and crises S&P 500 Index (logarithmic scale) Cuban missile crisis +6.8% CAGR Penn Central 1973 Oil embargo 1974 Franklin National 12/5/96 "But how do we know when irrational exuberance has unduly escalated asset values...? -Alan Greenspan 1980 Silver bubble 1979 Oil price spike 1984 Continental Illinois 1982 Drysdale Securities & Mexico default 1990 Persian Gulf war S&L crisis 1987 Stock market crash 1998 LTCM/Russian default crisis 1997 Pacific Rim crisis 1994 Mexican peso crisis 2001 WTC attack September 2002: With DJIA at 7600 Bil Gross wrote "Dow 5000" Subprime mortgage meltdown 2002 Accounting scandals 2008 Lehman bankruptcy 2010 Sovereign debt crisis 2/16 China slowdown worries 8/5/11 S&P U.S. debt downgrade Jan-17 Jul-15 Jan-14 Jul-12 Jan-11 Jul-09 Jan-08 Jul-06 Jan-05 Jul-03 Jan-02 Jul-00 Jan-99 Jul-97 Jan-96 Jul-94 Jan-93 Jul-91 Jan-90 Jul-88 Jan-87 Jul-85 Jan-84 Jul-82 Jan-81 Jul-79 Jan-78 Jul-76 Jan-75 Jul-73 Jan-72 Jul-70 Jan-69 Jul-67 Jan-66 Jul-64 Jan-63 Jul-61 Jan-60 Jul-58 Jan-57 Source: Standard and Poor s. Monthly data through July Compound annual growth rate. 8

9 Stock market arithmetic Total return = 7.3% earnings-driven price + 2.2% dividends reinvested S&P 500 Index (6/30/91 = 100) S&P 500 w/ dividends reinvested % 1 growth path +9.5% per year S&P 500 total return over the last 25 years is right in line with the stock market s longterm returns going back to 1926, or back even further to % 1 growth path S&P 500 price index 0 The Wall Street Journal December 12, 2016 Source: Standard and Poor s. Data through August 3, Compound annual growth rate. 2 S&P 500 total return index. 3 per Professor Jeremy Siegel s seminal Stocks for the Long Run, first published in

10 Stock market arithmetic +7.3% earnings growth has driven +7.3% stock price gains S&P 500 Earnings % growth path S&P 500 Earnings per Share ($) Q4 2018Q1 8/4/ Q4 2016Q1 2015Q2 2014Q3 2013Q4 2013Q1 2012Q2 2011Q3 2010Q4 2010Q1 2009Q2 2008Q3 2007Q4 2007Q1 2006Q2 2005Q3 2004Q4 2004Q1 2003Q2 2002Q3 2001Q4 2001Q1 2000Q2 1999Q3 1998Q4 1998Q1 1997Q2 1996Q3 1995Q4 1995Q1 1994Q2 1993Q3 1992Q4 1992Q1 1991Q (estimated) and 2018 (estimated) bottom-up S&P 500 operating earnings per share as of July 31, 2017: for 2017(e), $131.12; for 2018(e), $ Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from Standard and Poor s for actual operating earnings data through 2014.

11 Valuation S&P 500 vs. actual and estimated earnings S&P 500 (right axis) S&P 500 Earnings ($) S&P 500 Earnings (left axis) S&P 500 Index Q3 2017Q3 2016Q4 2015Q4 2014Q4 2013Q4 2012Q4 2011Q4 2010Q4 2009Q4 2008Q4 2007Q4 2006Q4 2005Q4 2004Q4 2003Q4 2002Q4 2001Q4 2000Q4 1999Q4 1998Q4 1997Q4 1996Q4 1995Q4 1994Q4 1993Q4 1992Q4 1991Q4 1990Q4 1989Q4 1988Q (estimated) and 2018 (estimated) bottom-up S&P 500 operating earnings per share as of July 31, 2017: for 2017(e), $131.12; for 2018(e), $ Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from Standard and Poor s for index prices and actual operating earnings data through

12 Valuation S&P 500 vs. 17X and 19X actual and estimated earnings This is not a forecast or prediction. It s simply a calculation of 17X and 19X consensus earnings forecasts. 19X S&P 500 actual and estimated earnings S&P 500 Index S&P X S&P 500 actual and estimated earnings Q4 1996Q1 1995Q2 1994Q3 1993Q4 1993Q1 1992Q2 1991Q3 1990Q4 1990Q1 1989Q2 2005Q1 2004Q2 2003Q3 2002Q4 2002Q1 2001Q2 2000Q3 1999Q4 1999Q1 1998Q2 1997Q3 2014Q1 2013Q2 2012Q3 2011Q4 2011Q1 2010Q2 2009Q3 2008Q4 2008Q1 2007Q2 2006Q3 2005Q4 2018Q2 2017Q3 2017Q1 2016Q2 2015Q3 2014Q (estimated) and 2018 (estimated) bottom-up S&P 500 operating earnings per share as of July 31, 2017: for 2017(e), $131.12; for 2018(e), $ Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S for actual and estimated operating earnings from Standard and Poor s for index prices and actual operating 14

13 Economic data U.S. Dollar index $USD Index (March 1973 = 100) % $USD +39% +35% -2.0% y/y Whereas the dollar s surge created a headwind for S&P 500 earnings in , that s no longer the case. no model projecting directional movements in exchange rates is significantly superior to tossing a coin. --Alan Greenspan Source: Federal Reserve major currencies index. Monthly data through July Federal Reserve, Remarks by Chairman Alan Greenspan before the Economic Club of New York, March 2, The Wall Street Journal, August 8,

14 Valuation S&P 500 P/E ratio vs. inflation Personal Consumption Expenditures Deflator (y/y % change) S&P 500 P/E ratio (right axis) Inflation (left axis) 18.8X S&P 500 P/E Ratio The S&P 500 s latest P/E ratio (8/4/17) on trailing 12- months operating earnings is 19.8X. It is 18.9X on consensus bottom-up 2017 estimated operating earnings Dec-16 Dec-14 Dec-12 Dec-10 Dec-08 Dec-06 Dec-04 Dec-02 Dec-00 Dec-98 Dec-96 Dec-94 Dec-92 Dec-90 Dec-88 Dec-86 Dec-84 Dec-82 Dec-80 Dec-78 Dec-76 Dec-74 Dec-72 Dec-70 Dec-68 Dec-66 Dec-64 Dec-62 Dec Sources: Standard & Poor s Corporation and Thomson Reuters I/B/E/S earnings estimates, BEA. Stock price data through August 4, 2017; inflation data through June Top panel, latest data point: 2477 trailing operating earnings of $ through 6/30/17 = 19.78X. 14

15 Consumer balance sheets Household net worth 9.0E E+07 Household net worth has fully recovered Household Net Worth ($) 7.0E E E E E E+07 Real estate and stock market bubble Stock market bubble Household trendline CAGR net worth 1 = 5.6% Households financial and other net assets All other household net assets Household Net Worth but, not into bubble territory. Consumer credit 1.0E E Q1 2016Q2 2015Q3 2014Q4 2014Q1 2013Q2 2012Q3 2011Q4 2011Q1 2010Q2 2009Q3 2008Q4 2008Q1 2007Q2 2006Q3 2005Q4 2005Q1 2004Q2 2003Q3 2002Q4 2002Q1 2001Q2 2000Q3 1999Q4 1999Q1 1998Q2 1997Q3 1996Q4 1996Q1 1995Q2 1994Q3 1993Q4 1993Q1 1992Q2 1991Q3 1990Q4 1990Q1 Source: Federal Reserve. Data through March 2017, released June 8, Compound annual growth rate. $9.0E+07 = $90 trillion. 15

16 Point of View August 2017 Fed policy significant change in tone March 3, 2017 targeting steady hikes to 3% fed funds rate the Fed manages the yield curve the Fed has created every recession since the 1950s first rate hikes have signaled stock market lift-off the Great Unwinding: bond yields set to start rising 16

17 Federal Reserve policy Dual mandate 18 U-6 Fed s dual mandate: full employment 2% inflation U-3 In March, 2017 the Fed significantly changed it s tone, saying they ve achieved their dual mandate. 8.6% % Unemployment rate (%) PCED Fed s June 2017 central tendency forecast % +1.2% 1.0 See footnotes in the notes to the slide. Core PCED Shaded band represents recession. 0.5 Price Index for Personal Consumption Expenditures 12-month percent change (%) 0.0 Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan Se Ma Jan 20

18 Federal Reserve policy Fed s key policy lever is the yield curve Fed's "projected appropriate policy path" Shaded bands represent recessions. 0 Nov-19 Jul-18 Mar-17 Nov-15 Jul-14 Mar-13 Nov-11 Jul-10 Mar-09 Nov-07 Jul-06 Mar-05 Nov-03 Jul-02 Mar-01 Nov-99 Jul-98 Mar-97 Nov-95 Jul-94 Mar-93 Nov-91 Jul-90 Mar-89 Nov-87 Jul-86 Mar-85 Nov-83 Jul-82 Mar-81 Nov-79 Jul-78 Mar-77 Nov-75 Jul-74 Mar-73 Nov-71 Jul-70 Mar-69 Nov-67 Jul-66 Mar-65 Nov-63 Jul-62 Mar-61 Nov-59 Jul-58 Mar-57 Nov-55 Jul Source: Federal Reserve. Actual monthly data through July Projections released June 14, % target = 1% neutral rate plus 2% inflation, per Janet Yellen s March 3, 2017 speech. Fed Funds Rate (%)

19 Federal Reserve policy Fed s key policy lever is the yield curve Yield (%) Lenders tend to borrow short and lend long. Hence, as their cost of funds rise compared to the interest they earn on loans, they curtail their lending activity, putting a damper on the economy. This policy lever is the Fed s key means to act as a governor on the economy in order to forestall inflation. March 31, 2007 August 4, mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr Maturity This is an inverted (negative) yield curve resulting from the Fed s raising the Fed Funds target rate (1 mo. maturity) to 5.23%. Today s is a positive yield curveresulting from the Fed s pushing the Fed Funds target rate down to 1%. Yield Curve, n. A measure of interest rates on bonds at various maturities; predicting where the yield curve is headed is about as easy as forecasting exactly where a fistful of feathers will land in a hurricane. 1 Source: U.S. Department of the Treasury. 1 Jason Zweig, The Devil s Financial Dictionary(New York, NY: PublicAffairs, 2015),

20 Federal Reserve policy Fed s key policy lever is the yield curve 10-year Treasury Yield - Fed Funds (%) Shaded bands represent recession. Yield Curve 1 Jul-17 Jul-16 Jul-15 Jul-14 Jul-13 Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Jul-06 Jul-05 Jul-04 Jul-03 Jul-02 Jul-01 Jul-00 Jul-99 Jul-98 Jul-97 Jul-96 Jul-95 Jul-94 Jul-93 Jul-92 Jul-91 Jul-90 Jul-89 Jul-88 Jul-87 Jul-86 Jul-85 Jul-84 Jul-83 Steep yield curves high bond yields compared to Fed Funds rates are consistent with strong GDP growth. Flat or negative yield curves have preceded recessions. Today the yield curve is positive. Rather than flatten the yield curve, the Fed will likely try to guide the entire yield curve higher. Sources: NBER, Federal Reserve. Data through July The interest rate on the 10-year Treasury bond (long term) minus the fed funds rate (short term). 23

21 Federal Reserve policy it s the lastrate hike that matters Shaded bands represent recession Initial fed funds rate hikes have caused the stock market to stutter. S&P 500 Index S&P Fed Funds (%) But, following the initial stutter stocks have continued higher even as the Fed has repeatedly hiked rates until fed funds have approximated bond yields. 250 Fed Funds 2 0 Feb-17 Jan-16 Dec-14 Nov-13 Oct-12 Sep-11 Aug-10 Jul-09 Jun-08 May-07 Apr-06 Mar-05 Feb-04 Jan-03 Dec-01 Nov-00 Oct-99 Sep-98 Aug-97 Jul-96 Jun-95 May-94 Apr-93 Mar-92 Feb-91 Jan-90 Dec-88 Nov-87 Oct-86 Sep-85 Aug-84 Jul-83 0 Sources: NBER, Federal Reserve and Standard & Poor s. Data through July

22 Federal Reserve policy Policy normalization means guiding the entire yield curve higher End of ECB s QE and the Fed s shrinking its portfolio of Treasury and mortgage securities. Yield (%) Projected appropriate policy path : 2.9% in August 4, mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr Maturity Source: U.S. Department of the Treasury, The Wall Street Journal, July 6, Federal Reserve projections released June 14, % neutral rate plus 2% inflation, per Janet Yellen s March 3, 2017 speech. 22

23 Point of View August 2017 Bond Yields lowest yields in history yields don t make sense fundamentally yields set to start rising with ECB s QE taper and Fed s SOMA (system open market account) normalization 23

24 Point of View August 2017 Inflation drop in PCED headline to +1.4%, +1.2% core drop in headline CPI +1.6%, +1.7% core employment cost inflation rising productivity drives declining unit labor costs unit labor costs up +2.1% year/year 5-year average 24

25 Inflation (PCED) recovered from the plunge in gasoline, diesel and fuel oil prices, but lately has turned back down. +1.4% headline +1.2% core 33 Oct-16 Jan-16 Apr-15 Inflation PCED headline and core 4.5 Shaded bands represent recessions PCE Core PCE 0.5 Jul-14 Price Index 12-month percent change (%) 0.0 Oct-13 Jan-13 Apr-12 Jul-11 Oct-10 Jan-10 Apr-09 Jul-08 Oct-07 Jan-07 Apr-06 Jul-05 Oct-04 Jan-04 Apr-03 Jul-02 Oct-01 Jan-01 Apr-00 Jul-99 Oct-98 Jan-98 Apr-97 Jul-96 Oct-95 Jan-95 Source: NBER, Federal Reserve Bank of St. Louis. Data through June 2017.

26 Inflation Employment cost index and inflation 12-month percent change (%) Shaded bands represent recessions. Employment Costs ECI 1 PCE Deflator Jun-17 Apr-16 Feb-15 Dec-13 Oct-12 Aug-11 Jun-10 Apr-09 Feb-08 Dec-06 Oct-05 Aug-04 Jun-03 Apr-02 Feb-01 Dec-99 Oct-98 Aug-97 Jun-96 Apr-95 Feb-94 Dec-92 Oct-91 Aug-90 Jun-89 Apr-88 Feb-87 Dec-85 Oct-84 Aug-83 Jun % +1.4% Wage and benefit inflation picking up. Because wages, salaries and benefits are companies biggest single cost, they are also the biggest single inflation factor for the economy as a whole. Inflation (PCE deflator) generally runs lower than measured ECI inflation because higher employment costs can be offset by productivity gains. Source: Bureau of Labor Statistics. Quarterly ECI data through Jun e 2017; monthly PCE data through May Employment Cost Index. The BLS s ECI is built with fixed weights for individual industries and occupations. 26

27 Point of View August 2017 Economy full-employment economy operating at full potential Q2 +2.6% y/y snap-back in GDP growth surge in LEI, small business optimism index accelerating global GDP growth forecast good growth in personal income, DPI, real DPI, retail sales strong household balance sheets, savings rate, FICO scores and record low household financial obligations ratio strong PMIs, strong hiring, record high job openings, high quit rate, declining unemployment rate, record low weekly unemployment claims, rising housing starts no inflation threat The Wall Street Journal, August 5,

28 Economic data U.S. index of leading economic indicators jump in June Up +.6% in June, +.3% in May, +.3% in April, +.3% and in March. The U.S. LEI rose sharply in June, pointing to continued growth in the U.S. economy and perhaps even a moderate improvement in GDP growth in the second half of the year. The broadbased gain in the U.S. LEI was led by a large contribution from housing permits, which improved after several months of weakness. Shaded bands represent recession. This chart shows how the LEI has definitively rolled over well in advance of the last two recessions. The Conference Board Leading Economic Index (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers new orders consumer goods and materials; 4) ISM index of new orders; 5) manufacturers new orders, nondefense capital goods; 6) building permits new private housing units; 7) stock prices, S&P 500; 8) Leading Credit Index ; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations., Source: The Conference Board. Data through June, released July 20,

29 Economic data GDP breakdown % of total real GDP (GDP in chained 2009 dollars) 80% 70% 60% 50% 40% 30% 20% 69.5% 17.0% 17.1% Government Consumption (17% of total GDP) Consumer spending drives the U.S. economy. 10% 0% -3.6% -10% Personal consumption expenditures Government consumption expenditures and gross investment Gross private domestic investment Net exports of goods and services Source: BEA. Data through June

30 Economic data consumer spending Consumer income by source Personal income 6/16-6/ % 16,000 Personal income 3/07-3/ % Government transfer payments +2.6% y/y 14,000 Interest and dividends +2.0% y/y $ billions SAAR (stacked line chart) 12,000 10,000 8,000 6,000 4,000 Employee compensation 3/07-3/ % Rental income +5.5% y/y Proprietors income +2.2% y/y Employee compensation % y/y Personal income 2,000 0 Source: Bureau of Economic Analysis, monthly data through June Includes wages, salaries, benefits and employer contributions for social security and Medicare. 30

31 Economic data consumer spending Consumer income, spending and saving $ billions SAAR 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Personal Outlays 7/02-7/ % Personal OutlaysCAGR 1 (left scale) Jan-97 Oct-97 Jul-98 Apr-99 Jan-00 Oct-00 Jul-01 Disposable Personal Income (left scale) DPI 7/02-7/ % CAGR 1 Apr-02 Jan-03 Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 Oct-12 Personal Jul-13 Apr-14 DPI +2.6% y/y Jan-15 Personal Outlays +4.1% y/y Oct-15 Jul-16 Apr-17 3,000 2,500 2,000 1,500 1, Nominal DPI drives spending, spending drives GDP and corporate earnings. The savings rate (3.8%) has recently dropped following its surge following the last recession. Source: Bureau of Economic Analysis, monthly data through June Compound annual growth rate. 31

32 Economic data Real disposable personal income and outlays Real DPI is growing at +2.8% y/y, the same rate as pre-recession. 15,000 14,000 13,000 Real personal outlays growth at +3.2% CAGR is only slightly less than prerecession which, at +3.5%, wasn t sustainable with +2.8% income growth. Real Disposable Personal Income +3.2% CAGR 12,000 11, % CAGR 10,000 billions ($) SAAR Real Personal Outlays 9,000 Shaded bands represent 8,000 7, Jan 2016-Jul 2016-Jan 2015-Jul 2015-Jan 2014-Jul 2014-Jan 2013-Jul 2013-Jan 2012-Jul 2012-Jan 2011-Jul 2011-Jan 2010-Jul 2010-Jan 2009-Jul 2009-Jan 2008-Jul 2008-Jan 2007-Jul 2007-Jan 2006-Jul 2006-Jan 2005-Jul 2005-Jan 2004-Jul 2004-Jan 2003-Jul 2003-Jan 2002-Jul 2002-Jan 2001-Jul 2001-Jan 2000-Jul 2000-Jan 1999-Jul 1999-Jan 1998-Jul 1998-Jan 1997-Jul 1997-Jan 32 Source: Bureau of Economic Analysis, data through June CAGR means compound annual growth rate.

33 Economic data Retail sales Government Consumption (18% of total GDP) 6/16-6/ % 460, ,000 Total retail sales Investment Healthy (17% of total GDP) retail sales growth. 420, ,000 Services (44% of total GDP) 380,000 Retail sales ($millions) 360,000 Retail sales exgasoline 10/06-10/ % 340, ,000 Shaded band represents recession. 300, ,000 Feb-17 Sep-16 Apr-16 Nov-2015 Jun-2015 Jan-2015 Aug-2014 Mar-2014 Oct-2013 May-2013 Dec-2012 Jul-2012 Feb-2012 Sep-2011 Apr-2011 Nov-2010 Jun-2010 Jan-2010 Aug-2009 Mar-2009 Oct-2008 May-2008 Dec-2007 Jul-2007 Feb-2007 Sep-2006 Apr-2006 Nov-2005 Jun-2005 Jan Source: U.S. Census Bureau. Data through June 2017.

34 Economic data Retail sales by category Retail sales by category y/y change ($millions) Government Consumption (18% of total GDP) Motor vehicles and parts dealers Nonstore retailers Building materials and garden equipment dealers General merchandise excluding department stores Food services and drinking places Food and beverage stores General merchandise incl. department stores Gasoline stations Furniture and home furnishings stores Clothing and accessories stores Miscellaneous store retailers Health and personal care stores Electronics and appliance stores Department stores Sporting goods, hobby, book and music stores Investment (17% of total GDP) Services (44% of total GDP) Amazoned Amazon -1, ,000 2,000 3,000 4,000 5,000 Source: U.S. Census Bureau. Data through June

35 Consumer balance sheets Financial obligations ratio record low 18.5 Financial Obligations as a Percent of DPI (%) Q1 The financial obligations ratio consists of estimated required payments on outstanding mortgage and consumer debt plus automobile lease payments, rental payments on tenantoccupied property, homeowners insurance and property tax payments divided by disposable personal income. 1991Q1 1992Q1 1993Q1 1994Q1 1995Q1 1996Q1 1997Q1 1998Q1 1999Q1 2000Q1 2001Q1 2002Q1 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 15.5% Comparing consumers monthly flow of income to their fixed recurring monthly expenses, including debt service, gives a more accurate measure of consumers financial health. Here s the stunner: consumers ability to cover the monthly nut has seldom been strongeras incomes have recovered, household debt has been reduced and interest rates remain low. Source: Federal Reserve, quarterly data through March 2017; released June 20,

36 Consensus GDP forecast Continued healthy growth expected Real GDP Q/Q % change(annualized) I 1997-IV 5.0 Percent (%) III 1999-II 2000-I 2000-IV 2001-III 2002-II 2003-I 2003-IV 2004-III 2005-II Average quarterly GDP growth (annualized) Q1 Q2 Q3 Q4 Actual and Forecast 2006-I 2006-IV 2007-III 2008-II 2009-I 2009-IV 2010-III 2011-II Q I 2012-IV 2013-III Q Hurricane Sandy 2014-II 2015-I 2015-IV Q East Coast winter 2016-III 4- quarter average +2.5% 2017-II 2018-I(E) The 63 economists surveyed in early July see an average +2.5 % rate of quarterly GDP growth over the four quarters ahead. Repeated 1 st quarter weakness. BEA is wondering whether their seasonal corrections need work. Sources: Bureau of Economic Analysis, actual data through June The Wall Street Journal survey taken July

37 Point of View August 2017 Jobs full-employment new jobs will soon be limited good news in part-timers data record job openings, strong quit rate strong relative U.S. job formation forecast long-term strong real wage and income growth mean and median incomes bottomed myth: but we re not creating good jobs 37

38 Job growth stronger for longer in this recovery due to the depth of the last recession. Economic data - jobs Net new job formation and the unemployment rate , % Job growth will decline as the unemployment rate sinks further. 52 Unemployment rate (%) Jan-17 May-16 Sep-15 Jan-15 May-14 Sep-13 Jan-13 May-12 Sep-11 Jan-11 May-10 Sep-09 Jan-09 May-08 Sep-07 Jan-07 May-06 Sep-05 Jan-05 May-04 Sep-03 Jan-03 May-02 Sep-01 Jan-01 May-00 Sep-99 Jan-99 May-98 Sep-97 Jan-97 May-96 Sep-95 Jan Shaded bands represent recession. 0 Monthly change in total nonfarm payrolls (000) -850 Source: Bureau of Labor Statistics. Data through July 2017.

39 241,750 Downward slide, record lows. 39 Apr Apr Ma Jun Economic data - jobs Weekly unemployment claims 800, , , , , , , ,000 Weekly Unemployment Claims 4-week moving average SA Shaded bands indicate recession. 0 Source: U.S. Department of Labor, NBER, data through the week of July 29, Jul-13 Aug Sep Oct Nov Dec Jan Feb Mar Apr Ma Jun Jul-02 Aug Sep Oct Nov Dec Jan

40 Economic data - jobs Tight jobs market I ve never seen recruiting for 16 year-olds. Denver-area Home Depot store, May 25,

41 Blowout 41 Dec-16 Economic data - jobs Job openings record high Shaded bands represent recession. 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Job Openings thousands Source: U.S. Department of Labor, NBER. Data through June 2017, released August 8, Dec-15 Dec-14 Dec-13 Dec-12 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 Dec-04 Dec-03 Dec-02 Dec-01 Dec-00

42 Wages wage stagnation? Average hourly earnings vs. inflation % y/y Pick-up in AHE growth. Average Hourly Earnings ($/hour) all private nonfarm employees % CAGR 1 Average hourly earnings 1 Inflation 2 2.2% CAGR 1 AHE growth has outstripped inflation Mar-06 Aug-06 Jan-07 Jun-07 Shaded band represents recession. Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May- Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May- Oct-15 Mar-16 Aug-16 Jan-17 Source: CNBC website, August 4, Jun-17 Source: BLS, BEA. AHE data through July Inflation data through June AHE includes 100% of non-farm private employees, and excludes benefits and employers share of payroll taxes. 2 Compound annual growth rate March 2006 through December 2008 = 3.4%; CAGR December 2008 through July 2017 = 2.2%. 2 March 2006 average hourly earnings of $20.04 inflated by the personal consumption expenditures deflator (PCED).

43 Wage stagnation? Real average hourly earnings the press is finally starting to get it +1.1% y/y Average Hourly Earnings ($/hour) Inflationadjusted all private nonfarm employees Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Shaded band represents recession. Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Real average hourly earnings 1 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Record high real AHE. Stagnant real wage gains for five years post-recession followed by significant growth since Wage stagnation is a fiction. One missing ingredient remains wage growth. From a year earlier, hourly earnings increased 2.5% for the fourth straight month. From a month earlier, there was a 9 cent increase, the largest gain since October, but still relatively modest. But the wage picture isn t all bad. When adjusting for inflation, wages are growing at stronger rate than their 30-year average. Source: BLS. Data through June AHE includes 100% of non-farm private employees, and excludes benefits and employers share of payroll taxes. 1 AHE adjusted by the personal consumption expenditures deflator. The Wall Street Journal website, August 4,

44 Wage stagnation? Real average hourly earnings blue collar workers Record high real AHE for blue collar workers. $22.00 $21.00 $20.00 $19.00 $18.00 Wage stagnation is a fiction % y/y Real average hourly earnings blue collar workers $17.00 Shaded bands represent recession. $ Source: BLS. Data through June AHE of production and nonsupervisory workers adjusted by the personal consumption expenditures deflator. Jan-17 Jan-16 Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 Jan-89 Jan-88 Jan-87 Jan-86 Jan-85 Jan-84 Jan-83 Jan-82 Jan-81 Jan-80

45 Jobs the jobs we re creating aren t good jobs. Y/Y change in jobs by category Information ($34.35) Education and health services ($26.19) Professional and business services ($31.49) Leisure and hospitality ($15.43) Trade, transporation and utilities ($22.75) Financial activities ($32.96) Construction ($28.68) Total private sector jobs y/y change (000s) Otherservices Financial activities +0.9% ($31.05) y/y ($22.80) Information 0.0% y/y($36.06) Financial activities +2.1% y/y ($32.19) Professional Construction and business +2.3% y/y($27.59) services ($29.48) Leisure and hospitality +2.1% y/y ($14.61) Construction ($26.81) Education and health services ($24.90) Trade, transportation and utilities +1.2% y/y ($22.12) Manufacturing ($24.87) Professionaland business services +2.7% y/y ($30.50) Strong y/y growth in the two largest jobs categories. Both categories pay equal to or greater than manufacturing. Other services ($23.58) Information ($38.14) Education and health Trade, services transportation +2.5% y/y and ($25.55) utilities ($21.49) Manufacturing ($26.47) Mining and logging ($32.79) Manufacturing -0.1% y/y ($25.61) Source: Bureau of Labor Statistics. Y/Y employment data from December 2015 to December Average hourly earnings data in parentheses as of May

46 Oil Shell made a splash with this pronouncement Source: The Wall Street Journal, July 28,

47 Oil World crude oil supply vs. consumption Million barrels per day Jan-10 May-10 Sep-10 Jan-11 May-11 Consumption (dotted, left axis) Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Supply (solid, left axis) Jan-14 May-14 WTI (right axis) Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May WTI price per barrel ($) In 2014, 2015 and for the first six months of 2016, global supply surged, outstripping demand growth, driving prices down. In November 2016, OPEC announced production cuts of 1.3 mmbpd. These latest statistics show consumption and supply in equilibrium Source: U.S. Energy Information Agency, Short-Term Energy Outlook, data through June Includes condensate and natural gas liquids. 47

48 Oil U.S. drilling plunge U.S. oil production (mmbpd) U.S. crude oil production (left axis) U.S. oil rig count (right axis) 1,800 1,600 1,400 1,200 1, U.S. oil rig count 9.43 mmbpd production. Peaked at 9.61 mmbpd in June oil rig count. Peaked at 1,609 in October 2014; bottomed at 316 in May Jul-17 Jul-15 Jul-13 Jul-11 Jul-09 Jul-07 Jul-05 Jul-03 Jul-01 Jul-99 Jul-97 Jul-95 Jul-93 Jul-91 Jul-89 Jul-87 Source: U.S. Energy Information Agency, Baker Hughes. Rig count through August 4, Crude oil production through July 28,

49 Taxes Corporate income tax rates 1 comparison The U.S. has the highest marginal corporate income tax rate among developed economies Medicare and Medicaid Social Security Other Federal Noninterest Spending 5 0 United States France Belgium Italy Germany Mexica Australia Japan Portugal Luxembourg Greece New Zealand Canada Spain Norway Mexico Israel Austria Korea Chile Sweden Slovak Denmark Switzerland United Turkey Iceland Finland Estonia Poland Hungary Czech Slovenia Latvia Ireland 49 1 Top marginal federal plus state and local corporate income tax rates. Source: OECD Tax Database, 2016, Table II.1. Does not include non- OECD countries such as China, Brazil, India and Russia. Top marginal corporate income tax rate 1 (%)

50 Taxes Corporate tax rates 1 comparison from 1990 Top marginal corporate income tax rate 1 (%) Medicare and Medicaid U.S. France Germany Social Security OECD Average 2 Other Federal Noninterest Spending U.K. Ireland Corporate income tax rates started moving lower in the mid-1990 s but the U.S., alone, did not follow. At 39% today, the U.S. is 15% higher than the OECD average. 1 Top marginal federal plus state and local corporate income tax rates. 2 Average of the 34 non-u.s. OECD countries. Source: OECD Tax Database, 2016, Table II.1. Does not include non-oecd countries such as China, Brazil, India and Russia This is why the inversions were going to Ireland. 50

51 Taxes Taxes % of GDP comparison Total tax revenue as a percent of GDP (%) Korea Chile Switzerland United States Turkey Australia Japan Ireland Slovak Republic Canada Poland Israel Estonia United Kingdom New Zealand Medicare and Medicaid Social Security Other Federal Noninterest Spending Czech Republic Spain Greece Portugal Slovenia Germany Luxembourg Netherlands Iceland Hungary Sweden Norway Italy Austria Belgium Finland Denmark France While the U.S. has the highest corporate tax rate, the U.S. has one of the lowest total tax burdens among developed economies. The U.S. s comparatively low tax burden allows flexibility in solving its long-term entitlement spending problem. Source: OECD, Revenue Statistics, 2016 Edition data for all countries except 2014 data for Australia, Japan and Poland. Does not include non-oecd countries such as China, Brazil, India and Russia. Includes all forms of taxes: federal, state and local; income taxes, sales taxes, VAT taxes, estate taxes, property taxes, etc. 51

52 Important Information All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These materials may contain statements that are not purely historical in nature but are forward-looking statements. These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Fritz Meyer assumes no duty to update any forwardlooking statement. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower than those presented. Note: Not all products, materials or services available at all firms. Advisers, please contact your home office. 52