Economic and Market Update. Actuaries Club of Springfield and Hartford. May 22, Cliff Noreen

Transcription

1 Economic and Market Update Actuaries Club of Springfield and Hartford May 22, 2018 Cliff Noreen

2 Agenda Global Growth Inflation Rates Corporate Profits Market Valuation Debt/Public Spending Takeaways

3 Goldilocks Economy Low/Slow Economic Growth Low (but rising) Inflation Low (but rising) Interest Rates Record Corporate Profits Lower Corporate Taxes Lower Regulations for Business

4 World GDP $75.8 Trillion Consensus Growth Next Quarter % U.S. 2.3 China 6.8 Japan (0.6) Germany 1.6 U.K. 0.1 France 0.3 India 7.2 Italy 1.4 Brazil 2.1 Canada 1.7 Russia 1.3 WORLD U.S., 20.0 Rest of World, 19.4 China, 12.8 Japan, 4.9 Germany, 3.7 U.K., 2.6 France, 2.7 India, 2.5 Italy, 1.9 Brazil, 2.1 Canada, 1.7 Russia, 1.6 4

5 World Population 7.5 Billion World Population 2018 India 1.3B U.S. 321M Indonesia 259M China 1.4B Rest of World 3.0B Brazil 206M Pakistan 194M Nigeria 184M Bangladesh 162M Russia 146M Japan 126M Source: IMF Database Oct 2017 (2018 Est) 5

6 Growth (%) Real GDP Growth U.S. 8 U.S. Nominal GDP = $19.8T 4 3.1% 2.3% 2.2% Projected 2.5% 2.5% Source: U.S. Bureau of Economic Analysis 12/31/2017 6

7 Tax Cuts and Jobs Act of 2017 Corporate tax cut from 35% to 21% $6 billion in worker bonuses and wage increases Over $200 billion in announced stock buybacks (so far) Assets up Berkshire Hathaway assets boosted by $29 billion Foreign Corporate Cash Repatriation; Tax lowered to 15.5% Top tax rate for individuals cut to 37% $10,000 combined limit on State, local and real estate tax itemized deductions U.S. Federal deficit returns to over $1 trillion by 2020 Questionable impact on long term economic growth CNN Feb 16 th CRFB Jan 26 th Vox Feb 26 t h ABC Feb 24 Bloomberg Feb 6

8 Months Length of Recovery Current Recovery, one of the Longest in History As of M ay 18, Recovery started in June Source: National Bureau of Economic Research 8

9 Growth (%) Real GDP Growth Eurozone 6 Eurozone Nominal GDP = $12.3T 4 2.3% 2.5% 2 1.3% Projected 2.5% 2.5% Source: Eurostat as of 12/31/2017 9

10 Growth (%) Real GDP Growth Japan 10 Japan Nominal GDP = $4.9T 5 1.4% 1.4% -0.6% Projected 1.3% 1.0% Source: Japanese Cabinet Office as of 12/31/

11 Growth (%) Real GDP Growth China 15 China Nominal GDP = $11.5T Projected 6.5% 6.3% % 9 8.0% 7 6.8% Source: Bureau of Statistics of China as of 12/31/

12 U.S. Consumer Price Index 6 US Inflation - CPI January 1999 April 2018 As of Apr, Average 2.6% Average 1.4% 2.5% 0 12

13 YoY Change in Hourly Earnings (%) 2.9 Wage Inflation Growth in Hourly Earnings As of Apr,

14 Median household income ($ thousands) U.S. Median Household Income 124 Million Households Median Household Income As of Dec, $59, $56, Average Household Income = $83, /

15 Individual Wages 2016 # of People Wages 115M <$50,000 49M >$50,000 34M $50,001 to $99,999 15M >$100, M >$150, M >$250, ,000 >$500, ,000 >$1,000,000 21,000 >$3,000,000 9,400 >$5,000, > $20,000, M Total Wage Earners As of 2016 Wage Income $8.6T of $16.8T Total Income 22M people earned $5,000 or less (Part time) 70M workers earned less than $25,000 Average wage $46,500 (Median $30,000) Top 10% earned $2.9T of total $7.6T Top 114 people earned an average of $100M Source: Social Security Administration 15

16 Unemployment (%) Unemployment Unemployment Continues to Improve As of Apr, 2018 Jobs added by year (millions)

17 U.S. Housing Starts (thousands) Housing Starts U.S. Housing Starts (Annual Rate) April 1978 April 2018 As of Apr, ,500 2,000 1,500 1,000 1,360k 1,287k New Home Starts Average 17

18 % of GDP Homes and Furnishings Contribution to GDP 9% Spending on New Housing and Furnishings % As of M ar, % 5.8% 5% 3% 0.0 Recessions % of GDP Average 18

19 Household Net Worth ($ trillions) Household Net Worth $100 September 1997 December 2017 As of Dec, 2017 $98.7 T $90 $80 $70 $68 T $60 $50 $55 T $40 $30 19

20 Consumer Confidence Index Consumer Confidence April 2008 April As of Apr,

21 Retail Store Closings 2017 As of Dec, 2017 RadioShack Payless Others Ann Taylor Walgreens Rue 21 Gymboree Kmart The Limited Family Christian HHGregg Gap Bebe Wet Seal Crocs Gamestop JCPenney Michael Kors Vitamin World BCBG Sears American Apparel Gordmans Bare Minerals Charming Charlie Source: Business Insider

22 Price per Share $ 1,800 Amazon Amazon As of May 18, ,600 1,400 1,200 ($ Billions) Revenue Net Income Market Cap ,527 1,000 Current Market Cap $ 741 Billion /

23 % 20 Fed Funds Target Rate As of M ay, %

24 Three Month LIBOR % 8% 7% LIBOR LIBOR As of May 18, % 5% 4% 3.9% 3% 2% 2.33% 1% 0.5% 0% 1 5/

25 Central Bank Balance Sheets $ Trillions As of Apr, 2018 US $4.5T Fed Asset Run Off 2017 $30B 2018 $420B >2018 $600B BOE $0.5T PBC $5.5T BOJ $4.8T 10 ECB $5.5T US $4.4T

26 Sovereign Yields As of May 18, 2018 As of Tradable Debt $ B 1y 5y 10y 30y Switzerland Japan 9, Germany 1, France 2, Spain 1, UK 2, Italy 2, Canada 1, Australia US 14, China 4, Mexico India Brazil 1, /

27 2 Year Sov eriegn Yields Sovereigns 2 Year - Sovereigns As of May 18, % 6% 4% 2% U.S. 2.46% 2.54% 0% -2% Japan -0.15% -0.59% Germany 1 5/

28 Yield % 2-Year Sovereign Bond Yields The Negative Rate Club As of M ay 18, %

29 Yield (%) 7% U.S. 10-Year Yield 20 Years U.S 10-Year Yield As of M ay 18, % 5% 5.1%Avg 4% 3% 3.11% 2% 2.27%Avg. 1% 0% Source: Yale University-Robert Schiller, Bloomberg 29

30 16% U.S. 10-Year Yield 100 Years U.S 10-Year Yield As of M ay 18, % 12% 10% 8% 6% 4% 2% 4.86% 2.95% 2.66% 3.11% 0% 30 Source: Yale University-Robert Schiller, Bloomberg 30

31 bps Yield Curve 2s-10s Spread As of M ay 18, US Recessions 2s - 10s 31

32 Corporate Profits ($ billion) 2,000 U.S. Corporate Profits Real Corporate Profits As of Dec, ,600 $1.7T 1, Recessions U.S. Real After Tax Corporate Profits 32

33 Corporate Profits as % of GDP U.S. Corporate Profits Corporate Profits as a share of GDP As of Dec, % 10% 8% 6% 4% 2% 0% 12% 10% 8% 6% 4% 2% 0% Recessions Corporate Profits as % of GDP 33

34 Wages as % of GDP 54% Wages Wages as a share of GDP As of Dec, % 52% 52% 50% 50% 48% 48% 46% 46% 44% 44% 42% 42% Recessions Wages as a % of GDP Post 2000 average Pre 2000 avg 34

35 World Market Cap ($ trillions) U.S. Companies Represent 37% of World Equity Value As of M ay 18, Current World Market Cap $81.7T Top 10 U.S. companies represent 18% of total U.S. market cap (billions) Top Ten Market cap Cash Apple $922 $267 Amazon $768 $25 Google $744 $103 Microsoft $744 $132 Facebook $532 $44 Berkshire $486 JP Morgan $380 Exxon $345 J & J $333 Bank of America $310 Visa $266 $14 Total Wells Fargo $5,563 $

36 US Market Cap 100 Years As of M ay 18, 2018 US Steel AT&T Standard Oil Bethlehem Steel Armour & Co. Swift & Co. International Harvester Dupont Midvale Steel US Rubber $47B IBM AT&T Kodak GM Standard Oil Texaco Sears GE Polaroid Gulf $259B Apple Amazon Google Microsoft Facebook Berkshire JP Morgan Exxon J & J Bank of America $922B $110B $1.2T $5.6T 36 Source: Business Insider 36

37 S&P Stock Buybacks ($ Billions) Annual S&P500 Stock Buybacks Large companies are repurchasing shares at a record pace As of May, 2018 $700 $650 Billion (Estimated) $600 $500 $400 Average: $446B $300 $200 $100 $0 Source: S&P Dow Jones Indices

38 ($billions) Large Cap Stock Growth Globally 1000 $922B $105B 0 5/20/2008 5/18/

39 Market Cap in Trillions Large Caps Outperforming the Russell 2000 January 2008 May 2018 As of M ay 18, Russell 2000 Vs. Apple, Microsoft, Amazon, and Google

40 S&P 500 Forward Price to Earnings (P/E) Ratio 30X January 1998 May 2018 As of May 18, X 20X 15X 17.3X 10X 5X 40

41 Stock market capitalization as (% of GDP) U.S. Equity Market Value to U.S. GDP Valuations Relative to GDP US Market Cap $30.3T/US Q1 GDP $19.9T = 151% As of May, % March % May % % % Source Data, NDR, Bloomberg, Calculations Barings 41

42 S&P 500 Index S&P 500 Index 20-Years May 1998 May 2018 As of May 18, Total Returns (annualized) 1 - Year 17% 3 - Years 11% 5 - Years 13% 10 - Years 9% 20 - Years 6.5% 2, ,517 1,

43 Oil ($ per barrel) Oil Price Oil Price $79.0 Brent WTI $79.80 $71.10 As of M ay 18, 2018 Petrostate Break-Evens Nigeria $ 130 Venezuela $ 117 Bahrain $ 101 Azerbaijan $ 91 Saudi Arabia $ 83 Angola $ 82 Equador $ 80 Oman $ 79 Russia $ 72 Libya $ 71 UAE $ 67 Gabon $ 66 Algeria $ 65 Kazakhstan $ 61 Iraq $ 54 Qatar $ 53 Iran $ 51 Kuwait $ 49 43

44 U.S. Dollar Index U.S. Dollar Index (DXY) January 2008 May 2018 Weighting 1-Year Chg YTD EUR 57.6% 6.2% -1.8% JPY 13.6% 0.8% 1.8% GBP 11.9% 4.2% -0.2% CAD 9.1% 5.6% -2.4% SEK 4.2% 0.7% -6.5% CHF 3.6% -1.6% -2.2% DXY -4.4% 1.6% As of M ay 18,

45 Trillions $ 22 Federal Debt Federal Government Debt Has Grown Over $10 Trillion Since As of May, 2018 $21.1T Debt Ceiling Debates 8 45 For Investment Professional Use Only. Not for use with the public

46 Receipts/Outlays/Deficits in ($ trillions) Federal Deficit 4.5 Federal Deficit As of Dec, $4.0T Outlays 3.5 $850B Deficit $3.1T Receipts $1.6T $1.3T $1.3T $1.1T Deficits 46

47 Federal Social Spending in ($ trillions) 3.0 Federal Spending on Social Programs Federal Spending Federal Spending on Social Programs $3.0T 76% of Total Spending As of Dec, $792B Unemployment, Education $1,310B Medicare, Medicaid, Veterans 0.5 $952B Social Security

48 Federal Defense Spending ($ billions) Defense Spending Defense Spending As of Jan, $638B Defense Spending $609B (trailing 12 months)

49 Healthcare Spending as % of GDP Health Care Spending Around the World U.S. Spends nearly as much as any other nation just in Public Spending % X $19.7T = $3.4T 17.2% 12.4% Private Spending Public Spending As of December Public Spending Private Spending For Investment Professional Use Only. Not for use with the public 49

50 Average Interest Rate (%) Interest Paid ($ billions) Interest Rates on the Federal Debt Interest on the Federal Debt % 5.0% $474 As of Apr, % % % % % % % 2.0% 0 Interest paid Interest rate Average Rate 50

51 Taxes as Percent of GDP As of Denmark 46.6 Belgium Austria Sweden Norway Germany Portugal OECD Avg. 34% Spain United Kingdom Canada Switzerland United States 26.4 Korea Mexico 51 51

52 Illinois Indiana New Jersey Connecticut Kentucky Rhode Island Vermont Massachusetts Michigan Missisippi New Hampshrie South Carolina Colorado Louisiana Pennsyvania Hawaii New Mexico North Dakota Oklahoma West Virginia Kansas Alabama Alaska Maryland California Minnesota Nevada Virginia Montana Arizona Wyoming Arkansas Georgia Maine Texas Iowa Oregon Ohio Idaho Florida Washington Nebraska Delaware North Carolina New York DC Tennessee South Dakota Wisconsin U.S. State Pension Systems Funded Ratio As of % 90% 80% 70% 60% 31 States funded below 80% in 2009 there were only 19 80% 50% 40% 40% 30% 20% 10% 0% Source: Public Plans Data 52

53 and FactSet as of 3/16/2018 Asset Class Returns

54 Global Risks Economic Political (domestic) Geopolitical 1 5/

55 Outlook and Takeaways Generating Client Returns in a Lower Return Environment Low but improving economic growth (GDP) worldwide Very strong and growing U.S. corporate profits Inflation fears Interest rates now rising, but still very low Equity and fixed income valuations full Goldilocks may be going away Going forward: Expect lower investment returns worldwide for most asset classes 55

56 Basis Points 120 Spreads Investment Grade One Year As of M ay 17, U.S. Investment Grade Corporate Spread Average Spread

57 Basis Points Spreads Investment Grade Twenty Years As of M ay 17, U.S. Investment Grade Corporate Spread Average Spread

58 Basis Points 460 Spreads High Yield One Year As of M ay 17, U.S. High Yield Average

59 Basis Points Spreads High Yield Twenty Years As of M ay 17, ,000 1,600 1, Recessions U.S High Yield Average *Average Omitting Peak

60 2017 Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA All rights reserved.