Cavanal Hill Macroeconomic Perspectives Second Quarter 2016

Transcription

1 2016 Cavanal Hill Investment Management, Inc. Cavanal Hill Macroeconomic Perspectives Second Quarter 2016

2 About Cavanal Hill Investment Management Cavanal Hill is a multi-billion dollar investment adviser to high-net-worth individuals and institutions. Our firm s seasoned investment team follows proven, disciplined investment processes to manage fixed income, equity, and cash assets. Our unique investment approach looks beyond conventional Wall Street wisdom to discover stock and bond opportunities and takes advantage of those that are within our clients risk tolerance levels. Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Cavanal Hill s equity team leverages its own primary stock research with insights from company management and secondary street research to form the basis of their buy/sell decisions. The firm s fixed income team uses proprietary credit and interest rate modeling tools to analyze investment opportunities within the high grade corporate, municipal, mortgage-backed and government bond markets. Our Investment Professionals Fixed Income Management Team J. Brian Henderson, CFA President Michael P. Maurer, CFA Senior Fixed Income Portfolio Manager Rich Williams Senior Tax Free Fixed Income Portfolio Manager Michael J. Kitchen, CFA, CTP Cash Management Portfolio Manager Russell Knox, CFA Fixed Income Portfolio Manager Our Investment Strategies Tyler Bosworth Junior Portfolio Manager Douglas Benton Senior Municipal Credit Manager Leslie Lukens-Martin Senior Municipal Credit Analyst Keaton Hoppe Municipal Fixed Income Analyst Equity Management Team Matt Stephani, CFA Senior Equity Portfolio Manager Thomas Mitchell, CFA Equity Portfolio Manager Mike Schloss Senior Equity Analyst Brandon Barnes, CFA Equity Analyst Kendall Toyne Equity Analyst William Gray Equity Analyst Quantitative Equity Team Wes Verdel, CFA Senior Quantitative Equity Portfolio Manager Chris Story Quantitative Equity Analyst Rob Gaston Quantitative Systems Analyst Trading Team Patti Robertson Head of Trading Chris O Connell Equity Trader Ryan Friedl Fixed Income Trader Tax Exempt Cash/Fixed Income Strategies Equity Strategies Fundamental Multi-Asset Class Strategies Taxable Cash/Fixed Income Strategies Equity Strategies Quantitative Alternative Strategies 2

3 Second Quarter 2016 Market Returns Period Ending June 30, 2016 Market Indices 2Q 16 Last 12 Months Barclays Municipal Fixed Income 2.61% 7.65% Barclays Aggregate Fixed Income 2.21% 6.00% Dow Jones Industrial 2.07% 4.50% S&P % 3.99% Russell 1000 Growth 0.61% 3.02% Russell % 2.93% Russell 1000 Value 4.58% 2.86% Russell 800 MidCap 3.18% 0.56% Nasdaq -0.23% -1.68% Russell % -6.73% MSCI EAFE -1.46% % MSCI Emerging Market 0.66% % 3 Source: MSCI, Barclays, S&P, Russell Investments, Bloomberg

4 Dow Jones Credit Suisse Hedge Fund Index Performance Through May 31, 2016 Returns YTD % 1 Year % Dow Jones Credit Suisse Hedge Fund Index -1.52% -5.39% Convertible Arbitrage 1.68% -1.20% Dedicated Short Bias -5.81% 5.64% Emerging Markets -0.25% -5.35% Equity Market Neutral -1.02% 2.62% Event Driven -1.94% % Fixed Income Arbitrage 0.30% -0.08% Global Macro -2.21% -6.19% Long/Short Equity -3.20% -3.63% Managed Futures -2.07% -4.74% Multi-Strategy 0.75% 0.92% 4 Source: Credit Suisse Hedge Index LLC

5 Second Quarter Macroeconomic Perspectives Highlights: The Brexit vote results reinforce the deflationary, and slow economic growth trends that were already in place Short term issue: Financial sector weakness, particularly EU banks Longer term issue: Further EU exits Global bond markets pricing-in deflation, and little economic growth Central Banks at limits on what can do to improve growth U.S. growth outlook depends on the consumer 5

6 A Global Shock British Pound Spot (USD) December 30, 2015 June 27, 2016 U.S. Dollar to 1 British Pound 1.50 Brexit vote 6/23/ /30/15 01/30/16 02/29/16 03/31/16 04/30/16 05/31/16 06/30/16 6 Source: Bloomberg, L.P.

7 U.K. Equity Market FTSE 100 Index (GBP) June 30, 2011 June 27, 2016 Index level Holding in remarkably well YTD: <4.2%> /30/11 02/29/12 10/31/12 06/30/13 02/28/14 10/31/14 06/30/15 02/29/16 7 Source: Bloomberg, L.P.

8 European Equity Markets (June 30, 2011 June 27, 2016) Deutsche Boerse Germany Index (EUR) Index level CAC 40 France Index (EUR) Index level YTD: <14%> YTD: <14.4%> FTSE Italy MIB Index(EUR) Index level YTD: <20.3%> YTD: <30.5%> /30/11 12/31/11 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15 06/30/11 12/31/11 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15 06/30/11 12/31/11 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15 06/30/11 12/31/11 06/30/12 12/31/12 06/30/13 12/31/13 06/30/14 12/31/14 06/30/15 12/31/15 IBEX 35 Spain Index (EUR) Index level 8 Source: Bloomberg, L.P.

9 U.S. Dollar Appreciation US Dollar Index June 30, 2011 June 27, 2016 Index level Strong dollar and oil have been the main culprits to low inflation /30/11 10/31/11 02/29/12 06/30/12 10/31/12 02/28/13 06/30/13 10/31/13 02/28/14 06/30/14 10/31/14 02/28/15 06/30/15 10/31/15 02/29/16 9 Source: Bloomberg, L.P.

10 Market Implied Inflation Expectations % 3.7 Fed s Five-Year Forward Breakeven Inflation Rate June 30, 2006 June 27, Super-slow growth, and stronger U.S. $, driving inflation expectations lower /30/06 06/30/07 06/30/08 06/30/09 06/30/10 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15 10 Source: Federal Reserve, Bloomberg, L.P.

11 Lower Interest Rates & Flatter Curve % 3.0 U.S. Treasury Yield Curve year-to-date change December 31, 2015 June 27, /31/2015 <75 bps> <80 bps> 6/27/ <45 bps> Flattest since late M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y US Treasury Actives Curve 06/27/16 Yield US Treasury Actives Curve 12/31/15 Yield 11 Source: Bloomberg, L.P.

12 Search For Safe Yield S&P 500 Index Sector Returns (price only) December 31, 2015 June 27, 2016 S&P 500 INDEX Utilities Telecom Energy Investors favoring more stable industries that pay dividends Materials Consumer Staples Industrials Consumer Discretionary Technology Health Care Financials Tough to make money with flat yield curves, slowing economies, and market flare ups % -7.0% -2.0% 3.0% 8.0% 13.0% 12 Source: Bloomberg, L.P.

13 Dividend Stocks Dow Jones Dividend Index ishares Dividend ETF December 31, 2015 June 27, 2016 $/share Dividend stocks up over 10% on average, but some trading at extreme valuations /31/15 01/31/16 02/29/16 03/31/16 04/30/16 05/31/16 13 Source: Bloomberg, L.P.

14 Negative 10-Year Interest Rates % Generic German Government 10-Year Bond Yield June 22, 2011 June 27, A new all time record low yield: negative 11 bps! /22/11 02/22/12 10/22/12 06/22/13 02/22/14 10/22/14 06/22/15 02/22/16 14 Source: Bloomberg, L.P.

15 Flat Curves Indicative of Oncoming Recession German Government Bond Yield Curve year-to-date change December 31, 2015 June 27, 2016 % 1.5 December 31, June 27, Very flat (and negative!) =not a good sign for economic growth going forward 1M 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y German Sovereign Curve 06/27/16 Yield German Sovereign Curve 12/31/15 Yield 15 Source: Bloomberg, L.P.

16 European Bank Equity Index index 500 Euro Stoxx Index December 21, 2006 June 27, This is where the market s immediate fears lie. EuroBank stocks hammered on who s next?, Brexit, flat yield curves, negative interest rates, possible recession /21/06 12/21/07 12/21/08 12/21/09 12/21/10 12/21/11 12/21/12 12/21/13 12/21/14 12/21/15 16 Source: Bloomberg, L.P.

17 Central Bank Impotence Japanese Yen Spot June 22, 2011 June 27, 2016 Price of U.S. $ in Yen BOJ finding it very difficult to weaken the Yen Helicopter money next?? /22/11 02/22/12 10/22/12 06/22/13 02/22/14 10/22/14 06/22/15 02/22/16 17 Source: Bloomberg, L.P.

18 Below the Zero Bound Limits Japan Government Bond Yield Curve year-to-date change December 31, 2015 June % 1.5 December 31, June 27, Again, flat curves aren t encouraging for future GDP. 3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 30Y 40Y JPY Japan Sovereign Curve 06/27/16 Yield JPY Japan Sovereign Curve 12/31/15 Yield 18 Source: Bloomberg, L.P.

19 Japanese Banks: Please no more rate cuts index TOPIX Bank Index Tokyo Stock Exchange June 22, 2011 June 27, Same story with Japanese banks: negative rates, flat curves /22/11 02/22/12 10/22/12 06/22/13 02/22/14 10/22/14 06/22/15 02/22/16 19 Source: Bloomberg, L.P.

20 Less Worried About Yuan Devaluation? S&P 500 vs. Chinese Yuan June 22, 2015 June 27, 2016 index 2150 USD/CNY The S&P is much higher than when China devalued its currency to this same level in January /22/15 07/22/15 08/22/15 09/22/15 10/22/15 11/22/15 12/22/15 01/22/16 02/22/16 03/22/16 04/22/16 05/22/16 06/22/16 S&P 500 Index (left scale) China Yuan-Offshore - inverted (right scale) 20 Source: Bloomberg, L.P.

21 China Leading Economic Indicator Copper Futures Generic-1 st Contract June 22, 2011 June 27, 2016 $/lb./contract Watch copper for signs that China growth picking up /22/11 06/22/12 06/22/13 06/22/14 06/22/15 21 Source: CMX-Commodity Exchange

22 Fed Maintains Bright Outlook Economic Projections of Federal Reserve Board Members June 15, 2016 Median Variable Longer run Change in Real GDP Slow & steady Unemployment Rate PCE InflaFon Core PCE InflaFon* Memo: Projected appropriate Federal Funds Rate Path *Longer-run projecfons for core PCE inflafon are not collected Fed rate hikes really seem out of place, especially now given Brexit 22 Source: Federal Reserve

23 Wishful Optimism vs. Reality Implied Fed Funds Target Rate June 27, 2016 % Median FOMC participant is forecasting a total of 8 rate hikes by the end of The bond market is pricing in none Longer Term FOMC dot projecfons FOMC Dots Median OIS - Latest Value 23 Source: Bloomberg, L.P.

24 Are Monetary Policy Transmission Mechanisms Broken? U.S. Mortgage Refinancing Index March 31, 1990 June 19, 2016 index Previous mortgage refi cycles gave the economy a positive shot in the arm ?? /31/90 03/31/92 03/31/94 03/31/96 03/31/98 03/31/00 03/31/02 03/31/04 03/31/06 03/31/08 03/31/10 03/31/12 03/31/14 03/31/16 Monthly Rolling 6-month 24 Source: Mortgage Bankers Assoc.

25 Tighter Financial Conditions Corporate Credit Spreads June 20, 2011 June 24, 2016 % % Widening trend /20/11 12/20/11 06/20/12 12/20/12 06/20/13 12/20/13 06/20/14 12/20/14 06/20/15 12/20/15 06/20/16 BofA Merrill Lynch US Corporate BBB OAS (left scale) 25 BofA Merrill Lynch US High Yield OAS (right scale) Source: Federal Reserve

26 Impressive U.S. Consumer U.S. Economic Growth Contribution to GDP By Sector (%, 4-quarter average) June 30, 2011 March 31, 2016 % Personal consumption is primary driver of U.S. economy /01/11 02/01/12 10/01/12 06/01/13 02/01/14 10/01/14 06/01/15 02/01/16 Net Exports Government Residential Non residential investment Personal consumption 26 Source: BEA, Bloomberg, L.P.

27 Jobs & U.S. Economic Growth Real GDP Growth Rate & Non-Farm Payrolls June 1, 2006 May 31, 2016 y-o-y % Job growth slowing a bit. 0-1 Watch layoff announcements and weekly jobless claims for more up to date trends /01/06 06/01/07 06/01/08 06/01/09 06/01/10 06/01/11 06/01/12 06/01/13 06/01/14 06/01/15 Real GDP (ending March 2016) Non-farm payrolls (ending May 2016) 27 Source: BEA, BLS, Bloomberg, L.P.

28 Consumer Income & Spending Trends Real Disposable Income and Spending (year-over-year %) January 1, 2000 April 30, 2016 % 7 5 U.S. consumer enjoying improved job markets, and low inflation /01/00 07/01/01 01/01/03 07/01/04 01/01/06 07/01/07 01/01/09 07/01/10 01/01/12 07/01/13 01/01/15 US Personal Consumption Expenditures US Disposable Personal Income 28 Source: BEA, BLS, Bloomberg, L.P.

29 Housing Sector Now Adding To Growth Housing Starts & Residential Housing Contribution to GDP (year-over-year %) June 11, 1996 May 31, 2016 % Housing is a positive contributor to GDP % /01/96 06/01/98 06/01/00 06/01/02 06/01/04 06/01/06 06/01/08 06/01/10 06/01/12 06/01/14 US housing starts-may 2016 (left scale) Residential investment contribution to real GDP - March 2016 (right scale) 29 Source: BEA, U.S. Census Bureau, Bloomberg, L.P.

30 Corporate Profit Trends % Corporate Profits Turn Negative (year-over-year %) June 30, 2011 March 31, % Corporate profit growth has been negative for past 1.5 yrs /01/11 12/01/11 06/01/12 12/01/12 06/01/13 12/01/13 06/01/14 12/01/14 06/01/15 12/01/15 US Corporate Profits With IVA and CCA Total SA (left scale) Domestic Industries Total SA (left scale) Rest of the World U.S. Profits (right scale) 30 Source: BEA,, Bloomberg, L.P.

31 Business Inventory to Sales Ratio Inventory Overhang January 1, 1980 April 30, 2016 I/S ratio U.S. manufacturers remain under pressure from excess inventories, strong $, energy contraction /01/80 12/01/82 12/01/84 12/01/86 12/01/88 12/01/90 12/01/92 12/01/94 12/01/96 12/01/98 12/01/00 12/01/02 12/01/04 12/01/06 12/01/08 12/01/10 12/01/12 12/01/14 31 Source: Department of Commerce, Bloomberg, L.P.

32 Regional Fed Manufacturing Indices Capex Plans Suggest Business Investment Weakness Through May 31, 2016 Index level /01/96 12/01/97 06/01/99 12/01/00 06/01/02 12/01/03 06/01/05 12/01/06 06/01/08 12/01/09 06/01/11 12/01/12 06/01/14 12/01/15 Philadelphia Dallas Empire State Kansas City 32 Source: Federal Reserve, Bloomberg, L.P.

33 U.S. Wages Unemployment Rate and Average Hourly Earnings March 1, 2007 May 31, 2016 % 10 y-o-y % Wage rates have been trending higher with lower unemployment rate /01/07 03/01/08 03/01/09 03/01/10 03/01/11 03/01/12 03/01/13 03/01/14 03/01/15 03/01/16 Civilian Unemployment Rate (left scale) Average Hourly Earnings-inverted (right scale) 33 Source: BLS, Bloomberg, L.P.

34 Disclosure 1. Standard and Poor s, 2. MSCI Barra Indices, 3. Bloomberg Professional Service, Bloomberg Finance L.P. 4. Federal Reserve Board, 5. Barclay s Fixed Income Indices, June Federal Reserve press release, Economic projections, June 15, Strategas International Economics, June 16, Is the Global Reflation Trade Out of Steam?, Caroline Miller, Bank Credit Analyst, blog.bcarsearch.com, June 10, United States Country Primer, Carl J. Riccadonna, BI economic analysis, Bloomberg Intelligence, June 7, Board of Governors of the Federal Reserve System, Speech, Chair Janet Yellen, June 6, Barclay s Fixed Income Indices, June

35 Disclosure Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This report is not to be considered a recommendation of Cavanal Hill s investment management services, any particular security, strategy or investment product, nor is it intended to provide personal investment advice. It does not take into account any specific investment objectives, financial situations, or particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. The information provided in this presentation is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Investments are not insured by the FDIC and are not guaranteed by Cavanal Hill or any bank, including any banking affiliates of Cavanal Hill. Investments are subject to risks, including the possible loss of the principal amount invested. Past performance does not guarantee future results. This document contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections, the securities and credit markets and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks. Cavanal Hill does not undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise. This report may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of Cavanal Hill. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report. For questions about this report, please contact Brian Henderson at (918)