The Good, The Bad & The Ugly of Election Results on the Economy

Transcription

1 The Good, The Bad & The Ugly of Election Results on the Economy Presented by: Andrew W. Bischel, CFA CEO & Chief Investment Officer Capital Management, October 2012

2 U.S. Economic & Financial Market Outlook Positives 15% tax rate on dividends and capital gains remain low through S&P 500 reported profits are finally back to normal levels. Reported CPI inflation has slowed to roughly 1.5-2% annual rate. Passage of trade agreements with South Korea, Columbia & Panama beneficial to net exports and U.S. jobs. Balance sheets of U.S. corporations are very strong. Negatives Europe has fallen into recession and still faces sovereign debt dilemma in pursuing austerity rather than growth agendas. U.S. budget negotiations may remain in gridlock, facing fiscal cliff of draconian cuts in federal defense and health care expenses. Potential tax increases and regulatory burdens put headwinds on economic recovery beyond 2012 and create potential stagflation. Negative real interest rates are unsustainable over the long term, and T-bond yields should rise from current levels, even without a re-acceleration in the inflation rate. Post election government policies pose unusually large consequences for future economic growth. 1

3 Intrade Prediction Markets Probability of President Obama Winning Re-Election Source: 2

4 Iowa Election Markets Probability of Republicans and Democrats Winning House and Senate Source: University of Iowa Election Markets 3

5 s U.S. Economic Scenarios As of 6/30/12 2-Year Horizon Estimated Return Outlook Real GDP Inflation Stocks T-Bonds Boom Happy Days Are Here Again Really Ugly Stagflation Not So Happy Just Ugly Historical Norm Surprisingly Super Ugly Perfection Boom Time Again No Better Recession Pretty Unhappy Bond Heaven Outlook and returns are subject to change and should not be viewed as a promise of future performance. 4

6 U.S. Treasury 30 Year As of 6/30/12 30 Yr US Treasury Yield Monthly, Last 20 Years 9.0 % 8.0 % 7.0 % 6.0 % 5.0 % 4.0 % 3.0 % 2.0 % 06/92 06/94 06/96 06/98 06/00 06/02 06/04 06/06 06/08 06/10 06/12 Source: FactSet/Compustat 5

7 Proxy for the Burden of Regulation and Compliance 90,000 80,000 70,000 60,000 Average Annual Pages Added to Federal Statutes & Federal Register By President (2012 Estimated) Carter Reagan Clinton GW Bush Obama 50,000 40,000 Nixon / Ford HW Bush 30,000 20,000 Roosevelt Eisenhower Johnson 10,000 0 Truman Kennedy Source: Law Librarian s Society of Washington DC; Federal Register & Federal Statutes 6

8 Reported Versus Normalized S&P 500 Earnings Per Share $ $90.00 $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $ Year Reported S&P 500 EPS S&P Operating EPS Normal S&P EPS Forecasts are subject to change and should not be viewed as a promise of future performance Source: FactSet/S&P, Compustat, and Estimates 7

9 Intrade Election Prediction Markets For Presidential, House & Senate Races $90.00 $85.00 $80.00 $75.00 $70.00 $65.00 $60.00 $55.00 $50.00 $45.00 Intrade - Weekly Average Probability of Winning Election $Price for $100 Payoff for Winning $ /3/2011 7/1/2011 7/29/2011 8/26/2011 9/23/ /21/ /18/ /16/2011 1/13/2012 2/10/2012 3/9/2012 4/6/2012 5/4/2012 6/1/2012 6/29/2012 7/27/2012 Republicans Win House Republicans Win Senate Pres Obama Wins Reelection Source: 8

10 What Are Possible Economic Consequences of Election Results? Intrade Prediction Markets Probabilities Estimated Probability Likely Resulting Possible As of: 16-Aug-12 If Independent US Political US Economic Election For: Probability of Winning Resulting Govt Events Result: Outcome* Outcome* House Republican 87.0% All Three Republican 19.5% Growth Agenda Economic Boom Democrat 13.0% All Three Democrat 3.6% US Falls Off Cliff Recession Reps Win House Only 23.9% Bad Compromise Recession Senate Republican 50.6% Dems Win House Only 2.9% OK Compromise Historic Norm Democrat or Tie 49.4% Reps Win Senate Only 3.7% Muddle Through Stagflation Dems Win Senate Only 19.1% Compromise Stagflation President Romney 44.4% Reps Win Pres Only 2.9% Gridlock Recession Obama 55.6% Dems Win Pres Only 24.5% Clinton Compromise Historic Norm 100% *These hypothetical outcomes may be changed without notice and are for illustration only, not a promise of future performance

11 2 Year Multi-Scenario Outcomes & Estimated Returns June 2012 Outlook As of: 06/30/12 2 Years to: 06/30/14 Stag- Historic Scenario Forecasts Boom flation Norm Perfection Recession Probabilities 0% 20% 45% 5% 30% 100.0% Expected Values & Annualized Returns by Scenario* Today's Estimated Values Future Estimated 06/30/12 Values Returns* S&P 500 $1,362 $1, % -3.7% 20.7% 45.6% -12.6% 7.0% 30-Yr T-Bond 2.75% 3.5% -20.0% -9.9% -8.1% -12.3% 11.9% -2.7% 6 Month T'Bill 0.15% 1.2% 3.2% 1.2% 0.8% 1.3% 0.1% 0.7% * Estimated Returns are subject to change and should not be viewed as a promise of future performance. 10

12 2-Yr Probability of Loss in S&P Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Actual Next 2-Yr % Annual Return Historical Probabilities of Rolling 2-Year Perspectives 10% Risk Versus Return on S&P % 20% 30% Low risk of loss 25.0% 15.0% 40% 50% 5.0% 60% 70% High risk of loss -5.0% -15.0% 80% -25.0% Quarter/Year Probability of 2-Yr Loss Next 2-Yr Annualized Return The multi-scenario process helps us gauge the general direction of the markets, and offers a disciplined framework for considering the range of possible outcomes. 11

13 2-Yr Probability of Loss in T-Bond Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Actual Next 2-Yr % Annual Return Historical Probabilities of Rolling 2-Year Perspectives Risk Versus Return on 30-Yr T-Bond 10% 35.0% 20% 30% Low risk of loss 25.0% 15.0% 40% 50% 5.0% 60% 70% High risk of loss -5.0% -15.0% 80% -25.0% Quarter/Year Probability of 2-Yr Loss Next 2-Yr Annualized Return The multi-scenario process helps us gauge the general direction of the markets, and offers a disciplined framework for considering the range of possible outcomes. * 30-Year T-Bond returns are calculated using Merrill's 30-Year T-bond Index. 12

14 Conclusions - With US Election Outcome Too Close to Call, What Should You Watch Out For? The world views of candidates are dramatically different - with possibly vastly different economic policy paths post election. The private sector wants to grow investment and employment but fears the regulatory and tax burdens that are coming. European malaise is a problem for U.S. exports and accounts for roughly 20% of S&P 500 company profits. The Federal Reserve Board still sustains artificially low interest rates that are hurting economic growth! Yet even just % economic growth would be good for stocks. 13