Macro Strategy Chartbook

Transcription

1 Macro Strategy Chartbook April 2018

2 Executive Summary The S&P 500 is having difficulty keeping its head above water this year. While fundamentals are conducive for growth, policy uncertainties related to trade are keeping investors off balance. White House turnover personifies capricious leadership. Blue chips are a scant 5% overvalued relative to 12-month forward earnings and dividends. Economic growth is broadening worldwide, thanks to stimulative monetary policies and corporate tax reductions domestically. We anticipate a boost in business spending and capital expenditures. Liquidity, while positive, is under pressure, owing to increases in stock and bond market volatility and yen strength. The availability of credit, however, remains robust. Credit spreads are narrow and the willingness of banks to make loans is accommodative. Investors, reacting to global uncertainties and recent volatility have downgraded their outlooks from bullish to neutral in recent weeks. This is in stark contrast to overwhelming bullishness exhibited at the beginning of the year. Metrics Valuation Economy Liquidity Psychology Momentum Cresset Wealth S&P 500 Metrics March 2018 Bullish Bearish q q Source: Bloomberg; Cresset Wealth Advisors Chart #0838 q q q q q q q Technical conditions deteriorated in the downturn but remain positive both at home and abroad. The has S&P 500 bounced off of its 200-day moving average twice over the last two months and rebounded. 2 Source: Bloomberg

3 Table of Contents Slide Page No. Slide Page No. Retail Sales were Soft 4 A Tight Labor Market Improves 15 Central Bank Policy 5 Stocks for the Long Term 16 On the Lookout for Business Spending 6 Watching for Higher Interest Rates 17 Currency Monitor 7 Inflation Watch 18 Global Trade Profile 8 Asset Class Assessment 19 Watching Credit Trends 9 U.S. Equities: What s Working? 20 U.S. Housing Market 10 Implications of Higher Interest Rates 21 America Throws down the Gauntlet 11 A Closer Look at MLPs 22 Watching the Business Cycle 12 Market Technicals are Strong 23 Household Fundamentals 13 Disclosures 24 China and Alternative Energy 14 3

4 Retail Sales were Soft Retail sales are strong. It s encouraging to see discretionary sectors, like clothing, food & drink (dining out) and furniture exhibiting robust demand. High-end retailers (discretionary) have outpaced low-end retailers (necessities) since the beginning of the year. Retail sales are positive across the developed world with impressive growth in Japan and the Eurozone. High-End Retailers to Low-End Retailers Year-Over-Year Sales Growth Global Retail Sales Growth 4

5 Central Bank Policy Powell s tenure will be defined by normalization. That means that rates will be going up. Already, investors are anticipating tighter monetary conditions through next year. If the Taylor Rule is correct, the Federal Reserve is already behind the curve in raising rates. We could see between 9 and 10 more rate hikes over the next two years. Fed Funds Futures Trends Fed Funds vs. the Taylor Rule Odds of 4 Rate Hikes This Year 5

6 On the Lookout for Business Spending Business Investment: % of GDP ex Housing Lower corporate tax rates should prod business owners to spend. Market data suggest business investment will expand Rising capex leads to higher productivity. For now, we must wait The soft data, like CEO confidence and small business capex plans support on optimistic view on business spending. Business Investment and Productivity Cresset Capex Dashboard U.S. Capital Expenditures Dashboard % % 10.0% % % Small Business CapEx Plans -20.0% -30.0% -40.0% U.S. Capital Expenditures YoY Philly Fed Survey CapEx Plans CEO Confidence Souce: Bloomberg; Cresset Wealth Advisors Chart #0632 6

7 Currency Monitor The dollar has lost ground to major currencies for most of this year despite a more aggressive Fed After spending most of the year relatively expensive compared to foreign currencies, the Greenback is closer to fairly priced Yield differentials between Germany and the U.S. suggest a stronger dollar vs. the common currency Real rates suggest the dollar should gain ground Real Rates and the Dollar Purchasing Power Parity (using CPI) Yield Differentials Drive the Euro 7

8 Global Trade Profile North America comprises more than one-third of our exports. Ripping up NAFTA carries economic and market risks The EU represents nearly half of the U,K s exports, putting Teresa May in a difficult Brexit bargaining position Although China s trade is balanced between the developed and emerging world, U.S. trade tariffs could sting U.S. Exports by Region (1) North America 36.0% South & Central America 10.0% Pacific Rim 28.0% European Union 18.0% OPEC 4.0% United Kingdom 4.0% China s Top Export Destinations (2) United Kingdom s Top Export Destinations (2) Hong Kong, 10.6 United States, 19.3 China 6.1% Developing Asia 10.3% Developin g Asia, 10.6 European Union, 16.3 European Union 64.9% United States 18.6% 8 Source: 1: U.S. Census Bureau 2: Bloomberg

9 Watching Credit Trends Liquidity trends tightened since the beginning of the year on higher stock and bond market volatility and yen (safe haven currency) strength. Triple-B bond credit spreads are widening, although credit conditions remain positive. Lenders are loosening credit to borrowers, according to recent Fed surveys. Loan demand is on the rise too. Cresset Wealth Liquidity Barometer (1) Liquidity Indicators Japanese Yen Stock Market Volatility Bond Market Volatility Implied Inflation/Deflation Triple-B Bond Spread Source: Bloomberg; Cresset Wealth Advisors Chart #0035 Cresset Wealth Liquidity Barometer March 21, 2018 EASY TIGHT Percentile Percentile Now Last Month 60% q 59% 41% q 56% 7% q 14% 73% q 73% 12% q 5% 10 Year BBB Bond Credit Spread Bank Lending Standards for Multifamily Structures 9

10 U.S. Housing Market Housing prices are on the rise in most major cities, particularly out west. Those cities hardest hit in the downturn have not yet reached their pre-crisis peaks. Chicago is its own problem where property tax increases are crowding out prices. New home construction is rising to fall in line with family formations. This suggests Millennials are at long last taking the plunge. Home ownership remains more expensive than renting, according to housing and inflation data. Case-Shiller 20-City Housing Price Index New Home Construction vs. Family Formations Cost of Ownership vs. Rent 10

11 America Throws Down the Gauntlet America has gone from the highest corporate tax rate to just below average tax rate, suggesting that the United States is rolling out the welcome mat It is expected that nearly $2 trillion of stranded cash will be repatriated It s possible, sensing a threat to their domestic economies, countries like Germany, France and China will institute business-friendly policies of their own Global Corporate Tax Rate by Country (1) As of 2018 France Australia Germany Spain Japan Italy South Korea United States United Kingdom Turkey Canada Ireland 15.0% 13.0% 22.0% 21.0% 20.0% 20.0% 25.0% 24.0% 24.0% 33.0% 30.0% 30.0% 0.0% 10.0% 20.0% 30.0% 40.0% 11 Cash held Overseas Ease of Doing Business (3) In $mm (2) $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 - Source: 1: Deloitte 2: Bloomberg 3: World bank, KPMG Apple, Microsoft, Oracle & Google Rank Ease of Doing Business 17 Corporate Tax Rate 1 Singapore 17.0% 2 Hong Kong 17.0% 3 New Zealand 28.0% 4 United States 35.0% 5 Denmark 22.0% 6 Malaysia 24.0% 7 South Korea 22.0% 8 Georgia 15.0% 9 Norway 24.0% 10 United Kingdom 19.0%

12 Watching the Business Cycle GDP growth could continue without inflation as long as spare capacity exists. There are segments of shortages, most notably trucking. Current capacity utilization suggests inflation should be 3.2%, not 2.2%, where it s currently situated. We re somewhere between Phase 3 and Phase 4 of the business cycle. Equities will roll over if inflation rises and growth slows. Capacity Utilization & the Economy Capacity Utilization vs. CPI YoY Exhibit 12

13 Household Fundamentals Mortgage debt and a percentage of household debt is down dramatically over the last decade. Student loans and automobile borrowing shares have increased. Household incomes are on the rise, thanks to a strong labor market. Household debt relative to net worth continues to shrink. Components of Household Debt 3% 4% Components of Household Debt - 10-year Comparison 7% 11% 9% 7% Auto 3% 6% 5% Credit Card 3% 12/31/ /31/2017 Home Equity Mortgage Other 74% Student 68% Auto Credit Card Home Equity Mortgage Other Student Key Household Expenses vs. Household Income Household Debt as a % of Net Worth 13

14 China and Alternative Energy China is determined to lead the world in alternative energy, most notably electric vehicles, solar and lithium ion batteries. Since the country is not constrained by lack of profits, the trend will likely continue Already, China is the largest manufacturer of electric vehicles Lower operating costs should benefit consumers globally. China s drive could harm profit-seeking companies though Li-ion Battery Costs The Cost of Generating a Watt of Electricity (2) $800/kWh Top 10 EV Manufacturers by Units Sold (2016 (1) ) Volkswagen Group Nissan Motor General Motors Mitsubishi Motors In 000 s BYD Tesla Motors BMW BAIC Geely Renault China U.S.A. Germany Germany Japan China China U.S.A. Japan France Source: 1: Bloomberg News Energy Finance 2: PVInsights

15 A Tight Labor Market Improves US employment cost is high relative to the rest of the world, although it is in the middle of the pack in the developed world. Higher wages are coaxing labor off the sidelines. That means more people are employed and wage growth remains tame. Transportation jobs are exhibiting the highest wage growth over the last year due to capacity shortages. Wage Growth vs. Employment Participation Labor Cost Competitiveness Wage Growth by Occupation 15

16 Stocks for the Long Term Thanks to innovation and leverage, capital has far and away outpaced incomes over the years The longer you hold stocks the more likely you will make money. There s a 95% chance of coming out ahead with a 10-year time horizon Over the long term, dividends have done a good job staying ahead of inflation Income vs. Capital: Saving vs. Spending (1) Longer Holding Periods Reduce Loss Chances Dividend Growth vs. Inflation (2) 16 Source: 1: Bureau of Labor Statistics, S&P 2: S&P 500

17 Watching for Higher Interest Rates Higher interest rates could undermine the equity rally as bonds become a viable alternative to equity investing Based on their previous relationship, the S&P 500 earnings yield suggests that triple-b corporate bonds are trading 1.4 percent below fair value Our nominal GDP model confirms that view toward the 10-year Treasury. It suggests Treasury yields are 1.5 percent too low S&P Earnings Yld. vs. 10Y BBB Corp Bond Yld. 10-Year Treasury Yield vs. Nominal GDP High Dividend Stocks vs. 10-Yr Treasury Rates 17

18 Inflation Watch Inflation, to the Fed s dismay, is the missing ingredient in this expansion. That s a good thing. Inflation gains would signal the end of the business cycle and represent a key financial catalyst that would prompt a rollback in stocks Real GDP gains imply strong price growth over the coming 18 months. Expectations are subdued, but rising Small businesses have been successful at raising prices in recent months Real GDP vs Core Inflation 5-Year Forward Inflation Expectations NFIB Firms Planning to Raise Price vs CPI YOY 18

19 Asset Class Assessment Gold and bonds offer good diversification benefits, but the stock market s strong performance dominated returns Emerging markets are delivering the strongest equity market gains this year, combining relatively cheap valuations with reflation policies Commodities could be strong performers as our business cycle ages The Benefit of Diversification Asset Class Performance YTD Asset Class Valuation Metric Yield/Earnings Yield (Forward) Ranking Price/Sales Ranking %tile Relative to 10-year Historical Median Relative Value U.S. Treasurys (10-Year Note) 2.8% % U.S. Corporate Bonds (BBB) 4.2% % International Sovereign Bonds (Germany) 0.6% % U.S. High Yield Bonds 6.4% % U.S. Large Caps 5.7% % U.S. Small Caps 3.8% % International Large Caps 7.0% % Emerging Market Equities 7.7% % Source: Bloomberg; Cresset Wealth Advisors Strategy Chart #

20 U.S. Equities: What s Working? S&P returns relative to valuation are upside down so far this year with the most expensive stocks as the only quintile with positive returns. Higher interest rates are putting downward pressure on dividend stocks. Value, which has trailed growth for years, has outperformed in recent weeks. Too early to tell if the worm has turned. S&P 500 Style Analysis (1) S&P 500 Growth Relative to Value (2) S&P 500 Style Analysis (1) 20

21 Implications of Higher Interest Rates The ECB and German bund yields are controlling the 10-year Treasury yield. Higher rates in Europe, not the Federal Reserve, are behind the benchmark Treasury s yield spurt Master limited partnerships (MLPs) tend to benefit when rates rise. Perhaps they re more closely conjoined with energy prices than interest rates REITs and Utilities have been among the hardest hit asset classes as rates rise U.S. vs German 10-Year Government Yields Correlation to Treasurys Avg. Weekly Asset Class Performance 21

22 A Closer Look at MLPs Fundamentally, MLPs aren t great. Current cash flow only covers about 80% of their dividend payments on average. The recent FERC ruling knocked the stuffing out of the sector. We believe the market reaction was overdone. Relative to their relationship to crude, MLPs should be trading nearly 30% higher than where they re perched. Dividend Coverage Ratio MLPs vs Crude Crude vs Interest Rates 22

23 Market Technicals Weakening The S&P 500 has tested its 200-day moving average twice in two months. A break below would be a worrisome sign. High yield bonds broke out relative to Treasurys in 2016 and remain positively positioned technically. This is a sector that tends to run past fair value on the positive and negative sides. Emerging markets broke out relative to the S&P 500 in May, suggesting a multi-year outperformance. The sector remains is positive technical shape despite recent volatility. S&P 500 vs 3-Month US T-Bills US High Yield Master vs US Treasury Master Emerging Markets vs S&P

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Targeted returns are also based on models, estimates and assumptions about performance (including that the Company would be valued at a similar ratio to its book value as similarly situated companies currently are) believed to be reasonable under the circumstances and assume that the investment team is able to successfully execute on their business plans, strategies and realization plans with respect to such investments. These estimates constitute forward-looking estimates based on the General Partner s assumptions, opinions and estimates regarding future events and circumstances that are considered by the General Partner to be reasonable at the time of preparation. Such returns are subject to significant economic, market, and other uncertainties that may adversely affect the performance of the Fund or its individual investments, including those discussed in the Risk Factors and Potential Conflicts of Interest section of the Memorandum. 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