Monthly Economic Update September 2013

Transcription

1 Monthly Economic Update September 2013 Our mission is to provide professional wealth management services that will sustain Multi-Generational Family Wealth, Unity and Legacy.

2 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, may have a direct effect on the price of gold worldwide. The views and opinions expressed are those of Endowment Wealth Management and are subject to 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.

3 Economic Data World GDP growth accelerated Source: Markit Economics Limited. September 5, Page 3

4 Economic Data ISM Manufacturing Purchasing Managers Index Index Clear bands indicate recession. Note the historic volatility in the manufacturing PMI. Note how this indicator has slumped well below 50 even during periods of strong economic expansion, eg. 1995, 1999, Strong 55.7 in August. New orders very strong at 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 Source: Copyright 2013, Institute for Supply Management; data through August ISM: A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy, or GDP. 4 Page 4

5 Economic Data ISM Non-manufacturing Purchasing Managers Index Index Clear band indicates recession. Non-manufacturing captures the vast majority of the U.S. economy. 55 Strong rebound to 58.6 in August. 50 New orders very strong at Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 Source: Copyright 2013, Institute for Supply Management; data through August This data series was created in ISM: A reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. 5 Page 5

6 Economic Data U.S. Index of Leading Economic Indicators (monthly) Following moderate growth in the last few months, the U.S. LEI picked up in July, with widespread gains among its components. The pace of the LEI s growth over the last six months has nearly doubled, pointing to a gradually strengthening expansion through the end of the year. Shaded areas represent recession. The Conference Board August 22, 2013 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 July Page 6

7 Economic Data Gross Domestic Product Growth Fed s latest central tendency forecast GDP annualized percent change (%) 4.5 Actual Fed's central tendency GDP growth forecast range I 2002-III 2003-I 2003-III 2004-I 2004-III 2005-I 2005-III 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III 2011-I 2011-III 2012-I 2012-III 2013-I 2013-III 2014-I 2014-III 2015-I 2015-III -3.5 Participants generally continued to anticipate that the growth of real GDP would pick up somewhat in the second half of 2013 and strengthen further thereafter. Factors cited as likely to support a pickup in economic activity included highly accommodative monetary policy, improving credit availability, receding effects of fiscal restraint, continued strength in housing and auto sales, and improvements in household and business balance sheets. A number of participants indicated, however, that they were somewhat less confident about a near-term pickup in economic -5.5 growth than they had been in June; factors cited in this regard included recent increases in mortgage rates, higher oil prices, slow growth in key U.S. export markets, and the possibility that fiscal restraint might not lessen. FOMC Minutes of the July meeting, released August 21. Source: BEA actual data through June Federal Open Market Committee projections released June 19, Page 7

8 S&P 500 Index Stock Market S&P 500 and QE stocks like QE 1600 Does the end of QE mean the end of the stock market s advances? 1400 S&P QE 1 QE 2 Operation Twist & QE 3 Sep- Aug- Jul-13 Jun- May Apr- Mar Feb- Jan- Dec- Nov Oct- Sep- Aug- Jul-12 Jun- May Apr- Mar Feb- Jan- Dec- Nov Oct- Sep- Aug- Jul-11 Jun- May Apr- Mar Feb- Jan- Dec- Nov Oct- Sep- Aug- Jul-10 Jun- May Apr- Mar Feb- Jan- Dec- Nov Oct- Sep- Aug- Jul-09 Jun- May Apr- Mar Feb- Jan- Dec- Nov Oct- Sep- Aug- Jul-08 Jun- May Apr- Mar Feb- Jan- Source: Standard and Poor s. Index data through September 6, Page 8

9 The End of QE Rising bond yields have been good for stocks 10-Year Treasury Yield (%) S&P 500 Index Year Treasury Yield (left axis) S&P 500 (right axis) When bond yields start to rise we will, undoubtedly, hear this refrain: rising bond yields are bad for stocks. 1 It s not so. Bull markets have often been accompanied by rising bond yields Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan Sources: Standard and Poor s; Federal Reserve Bank of St. Louis. Data through September 3, The usual reasons cited are a) higher bond yields provide competition to dividend yields, making stocks less attractive; b) higher bond yields drive down the market s P/E ratio; and, c) higher bond yields will choke off the economic recovery, taking stocks down. Page 9

10 Stock Market S&P 500 vs. 15X-17X actual and estimated earnings S&P 500 Index Red lines Top: 17X actual and estimated 2013 and 2014 S&P 500 earnings 1 Bottom: 15X actual and estimated 2013 and 2014 S&P 500 earnings 1 S&P X 15X / Estimated 2013 and 2014 bottom-up S&P 500 earnings per share (left scale) as of August 22, 2013: for 2013, $110.70; for 2014, $ Sources: Yardeni Research, Inc. and Thomson Reuters I/B/E/S survey of consensus estimates. Standard and Poor s for index price data through September 10, 2013; and actual earnings data through June 30,

11 Stock Market S&P 500 P/E ratio reversion to the mean for a benign-inflation environment CPI Y/Y (%) S&P 500 Price/earnings Ratio P/E ratio Mar-48 Mar-50 Mar-52 Mar-54 Mar-56 Mar-58 Mar-60 Mar-62 Mar-64 Mar-66 Mar-68 Mar-70 Mar-72 Mar-74 Mar-76 Mar-78 Mar-80 Inflation Mar-82 Mar-84 Sources: Standard & Poor s Corporation, Thomson Reuters I/B/E/S, BLS. Stock price data through September 10, 2013; inflation data through July Top panel, latest data point: 1679 trailing earnings of $99.53 through 6/30/13 = 16.87X. 1 S&P 500 at EPS(e) $ Mar-86 Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 The S&P 500 s P/E ratio (9/10/13) on the consensus 2013 bottom-up earnings estimate is 15.2X 1 still modest by historic comparison. 11

12 Stock Market record profit margins Percent of Gross Domestic Income 8% 7% 6% Corporate profits after tax 1 Post-recession, profit margins have expanded to record levels. 5% Mean = 5.1% 4% 3% 2% I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II Corporate profits after tax with inventory valuation and capital consumption adjustments. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Data through June Headline: The Wall Street Journal, August 24-25, Bottom line: the drivers of this profit margin expansion may be more sustainable than is generally assumed. (See next two charts.) Page 12

13 Stock Market record profit margins Shares of gross domestic income Percent of Gross Domestic Income 17% 60% 16% 15% 14% 13% 12% Consumption of fixed capital (left axis) Compensation of employees (right axis) 59% 58% 57% 56% 55% 54% 53% The profitable substitution of capital for labor. Since 1970, labor s share of gross domestic income has declined by 5½ percentage points, while consumption of capital s share has increased by 3 percentage points. The, 2½ percentage points, has helped to boost profit margins. 11% I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II I IVIII II % Source: U.S. Department of Commerce, Bureau of Economic Analysis. Data through June Page 13

14 Stock Market record profit margins Shares of gross domestic income Percent of Gross Domestic Income 9% 8% 7% 6% 5% 4% 3% 2% 1% Net interest expense Corporate income taxes Since 1980, a 4 percentage point decline in interest expense as a percent of gross domestic income has boosted profit margins by a like amount. Similarly, a gradual decline in corporate income taxes has helped to boost profit margins. 0% I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II I IV III II Source: U.S. Department of Commerce, Bureau of Economic Analysis. Data through June Page 14

15 Economic Data - jobs Job formation monthly Total nonfarm Jobs 1-month change (000) Summer months have been sluggish is following the pattern Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bureau of Labor Statistics; data through August Page 15

16 Economic Data - jobs Employment Nonfarm Payrolls (millions) Nonfarm Payrolls +1.5% long-term CAGR 1 trendline. +1.6% CAGR 1 recovery trend. 2 August s total nonfarm employment at 136 million is still short of the 2008 peak of 138 million. Below trend but growing steadily sufficient to drive a healthy consumer spending recovery Jan-80 Mar- May- Jul-83 Sep-84 Nov-85 Jan-87 Mar- May- Jul-90 Sep-91 Nov-92 Clear bands indicate recession. Jan-94 Mar- May- Jul-97 Sep-98 Nov-99 Jan-01 Mar- May- Jul-04 Sep-05 Nov-06 Jan-08 Mar- May- Jul-11 Sep-12 Source: Bureau Labor Statistics, data through August Compound annual growth rate. 2 3-years ending August

17 Economic Data Vehicle sales strong recovery New Unit Sales SAAR (millions) Total Vehicle Sales (units) There is even some evidence that auto makers can t keep up with demand August 2009 cash for clunkers And, here s a stunner surging auto exports Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Source: Bureau of Economic Analysis. Data through August The Wall Street Journal, August 2, The Wall Street Journal, July 2, Page 17

18 Economic Data Housing starts steady recovery, a lot of headroom (000's) 1,700 1,500 1,300 1,100 Housing Starts (actual) Housing Starts (estimated) April 2010 End of tax credit May 2009 First-time homebuyers tax credit announced Q3 13 (E) Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 May-07 Mar-07 Jan-07 Nov-06 Sep-06 Q1 14 (E) Q3 14 (E) Sources: U.S. Census Bureau, data through July 2013; Mortgage Bankers Association s housing starts forecast dated July 25, Cartoon: Barron s, June 3, Page 18

19 Economic Data Construction and vehicles combined tailwind for GDP growth % of GDP (stacked) 16% 14% 12% 10% 8% 6% Vehicles Historically these two categories have contributed >12% of GDP. Today, they are 10%. There is good reason to think both will continue to recover, providing a lift to GDP in the quarters ahead. 4% Structures 2% 0% 2013-I 2012-I 2011-I 2010-I 2009-I 2008-I 2007-I 2006-I 2005-I 2004-I 2003-I 2002-I 2001-I 2000-I 1999-I 1998-I 1997-I 1996-I 1995-I 1994-I 1993-I 1992-I 1991-I 1990-I Sources: Bureau of Economic Analysis. Data through June Page 19

20 Economic Data Employment by category (000's) Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 22,000 20,000 18,000 Education and health services Professional and business services 16,000 14,000 12,000 10,000 8,000 Vehicles Retail trade Leisure and hospitality Manufacturing Financial Manufacturing and construction jobs, combined, are 4 million short of pre-recession peak. 6,000 Construction 4,000 2,000 Information Sources: Bureau of Labor Statistics. Data through August Page 20

21 Market Data Crude oil prices vs. recessions Crude oil - WTI ($/bbl) At $108/bbl, WTI crude oil has been in a flat trend for three years Kuwait invasion $16.70/bbl (6/90) to $36.00/bbl (10/90) Clear bands indicate recession. OPEC production cuts $11.35/bbl (12/98) to $33.88 (9/00) Volatility in gasoline prices get a lot of media attention, however, gasoline is only 4% of total consumer spending Crude oil up +380% Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00 Jul-99 Jan-99 Jul-98 Jan-98 Jul-97 Jan-97 Jul-96 Jan-96 Jul-95 Jan-95 Jul-94 Jan-94 Jul-93 Jan-93 Jul-92 Jan-92 Jul-91 Jan-91 Jul-90 Jan-90 Jul-89 Jan-89 Jul-88 Jan-88 Jul-87 Jan-87 Jul-86 Jan-86 Source: U.S. Department of Energy, data through August 30, Page 21

22 Economic Data consumer spending Household debt vs. disposable personal income ($) 1.6E E E E E+06 Household debt Disposable personal income (DPI) Because DPI has steadily increased and interest rates are far lower than in previous decades, in fact, Americans are in the best shape with respect to servicing their household debt than they ve been in a long time. See next slide. 6.0E E E Q3 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 2013, released June 6, $1.4E+07 = $14 trillion. 22

23 Economic Data consumer spending Financial obligations ratio record low Financial Obligations as a Percent of DPI (%) 1980Q1 1981Q2 1982Q3 1983Q4 1985Q1 1986Q2 1987Q3 1988Q4 1990Q1 1991Q2 1992Q3 1993Q4 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q2 2012Q3 19% 18% 17% 16% 15% 14% Deleveraging is done. 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. 15.7% 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 better as incomes have recovered, household debt has been reduced and interest rates remain low. Source: Federal Reserve, data through March 2013; released June 17, Page 23

24 Deficit spending Projected federal spending entitlements on autopilot ($billions) 6,000 5,000 4,000 The problem is that entitlements are projected to grow 5½%/year vs. nominal GDP growth of 4¾%/year. 3,000 Medicare and Medicaid 2,000 1,000 0 Defense and Other Discretionary Social Security Other Federal Noninterest Spending All other discretionary (+0.0%) Defense (+0.4%) Source: Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2013 to 2023, February 5, Federal civilian and military retirement, agriculture, higher education and other. 2 Food stamps, unemployment compensation, family support, child nutrition, child tax credits and other. Page 24

25 Deficit spending Federal revenues and outlays Billions ($) Sep-00 Sep-01 Sep-02 Sep-03 Sep month 1 surplus/deficit Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Higher tax rates, improving economy driving higher revenues. Across-theboard cuts (sequester) holding down spending ,000-1,200-1,400-1,600 The Treasury Department said this month that the debt limit will be hit after Labor Day some time. Medicare and Medicaid Actual 10-month deficit through July Social Security Other Federal Noninterest Spending Net result: the 2013 deficit is better than forecast. CBO s February month forecast for the fiscal year ended September Source: U.S. Treasury, Monthly Treasury Statement, July 2013, released August 12, 2013; Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2013 to 2023, February 5, months ended September for the years ; 10-months for 2013 July YTD. Page 25

26 Percent of GDP (%) Deficit spending Federal revenues and outlays it s a spending problem ATRA 1 didn t make a dent in the deficit problem. Outlays Cumulative deficit = $7.0 trillion under CBO s May 2013 updated baseline scenario Medicare and Medicaid Revenues Social Security Other Federal Noninterest Spending May 2013 revised revenue projections. 14 Actual Forecast Source: Congressional Budget Office (CBO), The Budget and Economic Outlook: Fiscal Years 2013 to 2023, February 5, 2013, and updated May CBO's baseline revenue and spending projections reflect the provisions of the American Taxpayer Relief Act of 2012; and the automatic spending reductions scheduled for March 1, 2013 (the sequester). Page 26

27 PCE Price Index Percent Change Y/Y (%) Percent Change Y/Y Economic Data Benign Inflation Expected to Continue CPI and Core CPI +2.0% +1.7% The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but anticipates that inflation will move back above its objective over the medium term. 1-2 Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan Actual Fed's central tendency core PCE inflation forecast range Federal Reserve s personal consumption expenditures (PCE) inflation forecast I 2002-III 2003-I 2003-III 2004-I 2004-III 2005-I 2005-III 2006-I 2006-III 2007-I 2007-III 2008-I 2008-III 2009-I 2009-III 2010-I 2010-III 2011-I 2011-III 2012-I 2012-III 2013-I 2013-III 2014-I 2014-III 2015-I 2015-III -2 1 FOMC s July 31, 2013 meeting minutes. 2 FOMC s latest economic projections released with June 19, 2013 meeting minutes. Sources: Bureau of Labor Statistics; data through July 2013 (top chart). FRB St. Louis; actual PCE data through December 2012 (bottom chart). Page 27

28 Economic Data Employment cost index vs. inflation 12-month percent change (%) Employment cost index See the correlation here. Because wages, salaries and benefits are companies biggest single cost, they are also the biggest single inflation factor for the economy as a whole. The most recent trend in the ECI remains benign Jun-82 Jul-83 Aug-84 Sep-85 Oct-86 Nov-87 Dec-88 Jan-90 Feb-91 Mar-92 Apr-93 May-94 Jun-95 Jul-96 Aug-97 Sep-98 Oct-99 Nov-00 Dec-01 Core CPI Jan-03 Feb-04 Mar-05 Apr-06 May-07 Jun-08 Jul-09 Aug-10 Sep-11 Oct-12 Source: Bureau of Labor Statistics, data through June Page 28

29 Market Data Municipal Bonds Percent (%) Municipals spreadto-treasuries is attractive. 7 5 Municipal Bond Index 3 1 Muni spread over/under 10- year Treasury Source: Federal Reserve Bank, bond buyer GO 20-bond municipal bond index. Data through August Page 29

30 $USD Index Market Data Gold Gold ($/oz) $USD (left scale) Gold (right scale) 2,000 1,800 1,600 1,400 1,200 1, Gold has generally trended inversely to the dollar. Until 2011, gold trended relentlessly higher as investors sought a safe haven from paper currency debasement and geopolitical risks Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 Sep-07 May-07 Jan-07 Sep-06 May-06 Jan-06 Sep-05 May-05 Jan-05 Sep-04 May-04 Jan-04 Sep-03 May-03 Jan-03 Sep-02 May-02 Jan-02 Sep-01 May-01 Jan-01 Sep-00 May-00 Jan-00 Sep The perception has changed. The $USD appears to be putting in a big, saucershaped bottom. Sources: Federal Reserve broad dollar index and London spot prices. Data through September 1, Page 30

31 Conclusions Economic data: Economists see continued economic expansion. Slow but steady progress on new job formation. Consumers savings and liquidity have risen substantially. Household net worth has recovered deleveraging is done. Significant skew in income, spending is relevant to economic recovery. Retail sales have come roaring back. The U.S. economy is positioned to continue its +2½% to +3% long-term trend rate of growth. Positive changes in manufacturing. Inflation is subdued and will probably remain so for at least a few years. Commodity inflation is transitory. The CBO projects massive budget deficits if current revenue and spending policies continue. It s just a correction. The fundamentals are still good. Market data: Better, and better-than expected, U.S. economic news has been a catalyst for stocks. Stocks climbed the Wall of Worry to new highs even as consumer sentiment remained depressed. Stocks are still reasonably valued on estimated earnings. Fed is poised to ratchet down QE. Total return on bonds cannot continue recent years returns. Municipal bonds are attractive. 31

32 Investment Strategy Wall Street s sector calls for 2013 should you take their advice? Barron s 2013 Forecast 1 Survey of 10 stock market strategists sector picks and pans for 2013 Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Federated Blackrock Barclays Capital Putnam Goldman Sachs JPMorgan Citibank Morgan Stanley Prudential BofA Merrill Lynch Net (+/-) Actual YTD % +15% +11% +20% +20% +14% +10% +7% +7% +7% Utilities 1 Published Dec. 17, Banks. 3 Media. 4 Cyclicals. 5 Except, avoid capital goods. 6 Pharma/biotech. 7 Through 6/4/13. Tech is the favored sector for the 4 th year in a row. It hasn t worked yet. 32

33 Stock Market S&P YTD sector returns not what the strategists 1 expected Health Care Neutral Consumer Discretionary Financials Industrials Energy Favored Neutral Most favored Least favored Consumer Staples Information Technology Materials Utilities Telecom Services Least favored Most favored Neutral Least favored Least favored S&P Sector Performance YTD through (%) Source: Standard and Poor s. Data through September 9, From Barron s survey of 12 Wall Street strategists, published December 17,

34 Investment Strategy Wall Street s Calls for 2012 some big mistakes Barron s 2012 Forecast 1 Survey of 10 stock market strategists sector picks and pans for 2012 Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Services Federated Blackrock Barclays Capital Putnam Goldman Sachs JPMorgan Citibank Morgan Stanley Prudential BofA Merrill Lynch Net (+/-) Utilities Actual 2012 Sector Returns (Rank) +22% (2) Big Miss +8% (8) +2% 1 Published Dec. 19, Big money center financials. 3 The S&P 500 price index gained +13.4% in 2012; the S&P 500 Total Return index gained +16.0%. (9) +26% (1) +15% (3) +12% (6) +13% (4) +12% Mistake Mistake Huge Miss OK call Mistake Mistake OK call (7) +13% (5) -3% (10) Good call Most-panned and second largest sector was, by far, the best performer in

35 Investment Strategy Asset Allocation An Example Let s construct a global balanced portfolio using 7 asset classes Commodities (14%) Large U.S. Stocks Small U.S. Stocks Real Estate (14%) Cash (14%) Stocks (43%) Non-U.S. Stocks Bonds Cash Real Estate Commodities Bonds (14%) Source: 2012 The 7Twelve Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large-cap US equity represented by the S&P 500 Index. Small-cap US equity represented by the Ibbotson Small Companies Index from , and the Russell 2000 Index starting in Non-US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from and the Dow Jones US Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became the S&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from and the Barclays Capital Aggregate Bond index starting in Cash represented by 3-month Treasury Bills. Page 35

36 Index (1/1/70=100) (logarithmic scale) Investment Strategy Asset Allocation An Example 5000 Diversified Portfolio CAGR 1 = +10.3% S&P 500 CAGR 1 = +9.9% Large US Equity Small US Equity Non-US Equity Aggregate US Bonds Cash Real Estate Commodities Equally Weighted Diversified Portfolio 1 Compound annual growth rate. Past performance is not a guarantee of future results. An investment cannot be made directly in the indexes used in this illustration. Source: 2013 The 7Twelve Portfolio powerpoint presentation, by Craig Israelsen. Used with permission. Indexes used in this illustration: Large-cap US equity represented by the S&P 500 Index. Small-cap US equity represented by the Ibbotson Small Companies Index from , and the Russell 2000 Index starting in Non-US equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from and the Dow Jones US Select REIT Index starting in 1978.Commodities represented by the Goldman Sachs Commodities Index (GSCI). As of February 6, 2007, the GSCI became the S&P GSCI Commodity Index.U.S. Aggregate Bonds represented by the Ibbotson Intermediate Term Bond Index from and the Barclays Capital Aggregate Bond index starting in Cash represented by 3-month Treasury Bills. Page 36

37 Compound Annual Return (%) Investment Strategy Asset Allocation MPT has delivered 12 Risk vs. Return by Asset Class Real Estate Aggregate US Bonds Equally Weighted Diversified Portfolio Large US Stocks Small US Stocks Non-US Stocks Commodities 6 5 Cash Standard Deviation of Annual Returns (%) Page 37

38 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 Endowment Wealth Management, Inc. assumes no duty to update any forward-looking 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. Page 38

39 Contact Us: Endowment Wealth Management, Inc N. Richmond Street, Suite 200 Appleton, WI Office: Fax: Thomas P. Remley, (920) Robert L. Riedl, (920) Prateek Mehrotra, (920) Heidi Buhler, (920) Page 39