Market Snapshot. Liz Ann Sonders Senior Vice President Chief Investment Strategist Charles Schwab & Co., Inc. December, 2014

Transcription

1 Market Snapshot Liz Ann Sonders Senior Vice President Chief Investment Strategist Charles Schwab & Co., Inc. December, 2014

2 GDP s components and latest reading % of real GDP 2Q14 annualized Q/Q % change 3Q14 annualized Q/Q % change Consumer spending 67.9% 2.5% 2.2% Government spending 18.0% 1.7% 4.2% Federal: 7.1% (0.9%) 9.9% State/local: 10.9% 3.4% 0.8% Net exports of goods & services (2.7%) (0.3)* 0.8* Exports: 13.0% 11.1% 4.9% Imports: (15.7%) 11.3% (0.7%) Fixed investment 16.3% 9.5% 6.2% Nonresidential: 13.2% 9.7% 7.1% Residential: 3.1% 8.8% 2.7% Change in private inventories * (0.1)* Real GDP 4.6% 3.9% 2.3% ( new normal ) = average real GDP since June 2009 recession end 3.2% ( old normal ) = average private sector real GDP since June 2009 recession end As of 3Q14. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. Source: Bureau of Economic Analysis, FactSet. 1

3 Fiscal drag is moved into stimulus mode Total Government Spending Federal State/Local 9 6 y/y % change As of 3Q14. Source: Bureau of Economic Analysis, FactSet, High Frequency Economics, Ltd. 2

4 US leading indicators showing no stress Leading Economic Index Current level Trend Leading Economic Index (LEI) Strong Improving Average workweek Fair Improving Unemployment claims Strong Improving New orders: consumer goods & materials Fair Improving ISM new orders index Strong Improving New orders: nondefense capital goods excl. aircraft Fair Improving Building permits Fair Improving S&P 500 Strong Improving Leading credit index Strong Improving Interest rate spread Strong Stable Avg. consumer expectations for business & economic conditions Fair Improving As of 10/14. Gray-shaded areas indicate periods of recession. See last slide for definition of recession. The Conference Board's Leading Economic Index (LEI) is a composite average of individual economic indicators designed to capture turning points in aggregate economic activity better than any individual component. Source: FactSet, The Conference Board. 3

5 QE and jobs Initial Unemployment Claims (inverted, 4-week moving average) Monthly Change in Nonfarm Payrolls (3-month moving average) Unemployment Rate Blue-shaded areas indicate periods of quantitative easing (QE) Claims as of 11/21/14. Payrolls and Unemployment Rate as of 10/14. Source: Department of Labor, FactSet,. 4

6 Job openings have surged Job Openings (JOLTS) - thousands 5,000 Average payroll employment change = +235k 4,000 3,000 Average payroll employment change = +173k 2, As of 9/14. Job Openings and Labor Turnover Survey (JOLTS) is a monthly survey of private nonfarm establishments and local government entities which provides information on the total number of job openings, hires, and separations (voluntary quits and layoffs/discharges). Source: Department of Labor, FactSet, ISI Group LLC. 5

7 Long-term unemployment has plunged 5 Long-Term Unemployment Rate (more than 27 weeks) Short-Term Unemployment Rate (less than 5 weeks) As of 10/14. Source: Department of Labor, FactSet. 6

8 Declining unemployment leads higher wages Unemployment Rate Average When Wages Bottomed Average Hourly Earnings of Production & Nonsupervisory Employees y/y % change, 3m moving average As of 10/14. Source: Department of Labor, FactSet,. 7

9 Inflation remains extremely benign PCE Core PCE Fed 2% Target Inflation Rate As of 10/14. Source: FactSet. 8

10 Consumers stresses quite low (objectively) Consumer Stress Index -30% -20% -10% 0% 10% 20% Consumer Stress Index (CSI) =average year-over-year % change of S&P 500 index, non-farm payrolls, real DPI, median home price; and inverse of oil price, medical care inflation, household liabilities and CRB Foodstuffs Index. As of 11/28/14. Data plotted on inverted scale. DPI represents disposable personal income. Median home price component based on new and existing single-family homes. Medical care component taken from Consumer Price Index. Gray-shaded areas indicate periods of recession. See last slide for definition of recession. Source: FactSet. 9

11 Closer to escape velocity than recession Indicator Escape Velocity level Key recession level Current level NDR Recession Probability Model Breadth of Philly Fed State Leading Indexes NDR Economic Timing Model NDR Composite Leading Model 3.4% -2.6% 2.9% National Financial Conditions Index Initial unemployment claims 350, , ,000 Conference Board s Consumer Confidence Index Conference Board s Business Confidence Index ISM Manufacturing Index ISM Non-Manufacturing Index Escape velocity refers to economic growth returning to potential after a recession, and activity is self-sustaining, i.e., it no longer needs the support of fiscal/monetary accommodation *As of 11/28/14. Green means indicator is above escape velocity level. Lighter green means indicator is getting close to escape velocity level. ISM=Institute for Supply Management. Source: Ned Davis Research (NDR), Inc. Further distribution prohibited without prior permission. Copyright 2014 (c) Ned Davis Research, Inc. All rights reserved. 10

12 Higher rates more a positive than negative Demand Deposits at Commercial Banks 1,200 1,000 $, billions Household Interest Income Household Interest Expense 1,600 1,200 $, billions As of 10/14. Demand Deposits are funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Source: Bureau of Economic Analysis, Cornerstone Macro, FactSet, Federal Reserve. 11

13 Stocks tend to rally into/after initial rate hike S&P 500 Performance Before/After First Fed Rate Increase 8% Rate Increase 6% 4% 2% 0% -2% Days Performance before/after beginning of Fed tightening cycle (since 1962) Months before S&P % 3 3.3% 1 0.4% Months after S&P % 3 0.3% 6 3.0% Based on fed tightening cycles since Discount rate used prior to Fed Funds rate used since S&P 500 price only performance. Source: Birinyi Associates, Inc. 12

14 Now in favorable seasonal/election cycle phase S&P 500 Annualized Total Returns 30% Post-Election Year Mid-Term Year Pre-Election Year Election Year 25% 20% 15% 10% 5% 0% Nov-Apr May-Oct Nov-Apr May-Oct Nov-Apr May-Oct Nov-Apr May-Oct /14. Source: The Leuthold Group. 13

15 Market loves the current make-up of DC Political power lies with: DJIA gain/annum (since 1901) % of time Democratic president 8.0% 47.2 Republican president 3.0% 52.8 Democratic congress 5.5% 54.4 Republican congress 7.8% 31.7 Congress split -0.6% 14.0 Democratic president/democratic congress 7.3% 35.0 Democratic president/congress split 11.2% 3.4 Democratic president/republican congress 9.6% 8.8 Republican president/republican congress 7.0% 22.9 Republican president/congress split -4.2% 10.6 Republican president/democratic congress 2.2% /4/ /28/14. DJIA=Dow Jones Industrial Average. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2014 (c) Ned Davis Research, Inc. All rights reserved.) 14

16 Presidential cycle points to further strength Period after mid-term elections (since 1942) S&P 500 average price return % positive 3 months later 8.5% 94 6 months later 15.0% months later 15.6% 100 Presidential term (since 1928) S&P 500 average price return % positive 1 st year 5.2% 55 2 nd year 4.5% 62 3 rd year 13.4% 86 4 th year 5.5% 76 Source: Bloomberg, Yardeni Research, Inc. 15

17 5 has been the market s lucky number Year S&P 500 price change 1905* 38% 1915* 82% 1925* 30% % % % % % % % % Average 32% Median 31% *Price change based on Dow Jones Industrial Average. Source: Strategas Research Partners LLC. 16

18 Forward P/E near historic median S&P 500 Operating Forward P/E Median = 15.7x Current S&P 500 forward 16.1 As of 11/14. P/Es are based on forward 12-month consensus operating earnings. Source: FactSet. 17

19 Low inflation supports higher valuation We are here Inflation Average P/E Highest P/E Lowest P/E < 0% % % % % % % % >7% Current S&P 500 forward /14. Current P/E as of 11/14. P/Es based on forward 12-month as reported earnings ( ) and operating earnings starting in Based on consensus estimates starting in 9/95 and actual earnings prior. Inflation is y/y % change based on CPI. Source: Bureau of Labor Statistics, FactSet. 18

20 LEI and earnings highly correlated S&P 500 Operating Forward Earnings, y/y % change (left) Leading Economic Index, y/y % change (right) As of 10/14. S&P earnings based on forward 12-month consensus operating earnings. The Conference Board's Leading Economic Index (LEI) is a composite averages of individual economic indicators designed to capture turning points in aggregate economic activity better than any individual component. Source: FactSet, The Conference Board. 19

21 Investor confidence back at optimistic extreme NDR Crowd Sentiment Poll Extreme Optimism (Bearish for Market) Extreme Pessimism (Bullish for Market) We are here NDR Crowd Sentiment Poll 12/1/ /25/2014 S&P 500 annualized gain >66-5.3% from above -0.6% from below 18.5% < % As of 11/25/14. See last slide for description of Crowd Sentiment Poll. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2014 (c) Ned Davis Research, Inc. All rights reserved.) 20

22 Market s emotional roller coaster Euphoria Exhilaration Enthusiasm Optimism S K E Bull P Market T Uneasiness I Ends C I S Denial M Optimism Pessimism M S I Bear C Panic Market Relief Ends Capitulation S K E P T I Hope Despair 21

23 Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction to shifting market conditions. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Examples provided are for illustrative purposes only and not intended to be reflective of results you should expect to attain. Diversification does not eliminate the risk of investment losses Charles Schwab & Co., Inc. All rights reserved. Member SIPC 22

24 Index definitions Indexes are unmanaged, do not incur management fees, costs and expenses (or "transaction fees or other related expenses"), and cannot be invested in directly. The Dow Jones Industrial Average (DJIA, The Dow ) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials and is the oldest and most widely quoted of all the market indicators. The S&P 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares Charles Schwab & Co., Inc. All rights reserved. Member SIPC 23

25 Terms Ned Davis Research (NDR) Crowd Sentiment Poll - Shows perspective on a composite sentiment indicator designed to highlight short- to intermediate-term swings in investor psychology. It's based on seven different individual sentiment indicators in order to represent the psychology of a broad array of investors. Recession - As per National Bureau of Economic Research (NBER), a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales Charles Schwab & Co., Inc. All rights reserved. Member SIPC 24