Washington & The Investment Landscape Daniel Clifton February 2019 Macro Research Investment Strategy Economics Policy Research Quantitative Research Technical Research Fixed Income Research Industry Surveys Bespoke Research Conferences Sales & Trading
Economic Volatility Is Translating Into Political Volatility 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Trend vs. Actual GDP 1966-2017 Real GDP at 3.1% Growth Rate Actual Real GDP '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14 $3.0TN Gap Something Just Broke In 2008 & The US Has Transitioned From A 3% to a 2% Growth Rate. Voters Know There Is Something Wrong Source: Bureau of Economic Analysis, Strategas 2
Voters Have Removed The Party In Power In 6 of the Past 7 Elections 3
Fiscal Policy Is Taking Over From Monetary Policy To Get More Growth Post Crisis: Monetary Policy Stimulus Fiscal Policy Austerity Lower Nominal GDP Growth Strong Equity Market Low Productivity, Low Inflation Subdued Volatility Higher Debt Levels Geopolitical Stress Below Historic Levels of Growth Leads To Greater Populism Looking Ahead: Fiscal Policy Stimulus Monetary Policy Austerity Faster Nominal GDP Normalized Equity Returns Higher Productivity, Higher Inflation More Volatility De-Leveraging Geopolitical Conflict? Faster Nominal Growth Lead To A More Normal Political Environment? 4
US Is Outpacing The World Regional GDP Growth Rates (IMF) Changes In The IMF GDP Forecast Since October 8% 7% 6% 5% 4% 3% 2% 1% 0% 2.9% 2.7% 2.2% 2017 2.4% 2018 Est. 2019 Est. 1.9% 1.6% 1.9% 1.8% 1.5% 1.3% 0.9% 0.9% 6.9% 6.6% US Eurozone Japan UK China 6.2% Japan China Italy France Germany Euro US World -0.8-0.6-0.4-0.2 0 0.2 0.4 Source: International Monetary Fund, Estimates Subject To Change 5
Neighbor Envy: The Rest of the World Is Looking To Follow The US Lead 55% 50% 45% Statutory Corporate Tax Rates & US Inversions Combined Federal + Subnational Tax Rates (Source: Mercatus) United States, LHS # of US Inversions, RHS 12 10 40% 35% 30% 25% 20% 15% 10% Organization for Economic Cooperation and Development, Ex-US, LHS '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '14 '17 8 6 4 2 0 6
150 100 50 2018 Was An Exceptional Year For 108.7 Annual Change In S&P 500 Cap Ex $BN Housing Bubble Tech Bubble 1-Year 100% Expensing 76.5 The US Economy 95.4 74.4 2.50% 2.00% 1.50% % Change in Non-Farm Payroll Employment Year over Year Tax Reform Passes 0-50 1.00% -100 0.50% -150 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 Source: Standard & Poor s Dow Jones, Bureau of Labor Statistics, Strategas 0.00% Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 7
Wages Are Accelerating, Especially For Lowest Wage Workers 3.50% Average Hourly Earnings: Production and Nonsupervisory Workers (December, YoY%, SA,$/Hr) 3.32% Usual Weekly Earnings Bottom 10th Percentile: Y/Y % Chg, Full Time Wage & Salary Workers (BLS) 3.00% 7% 2.50% 2.00% 1.50% 1.00% 0.50% 2.50% 2.51% 2.49% 2.43% 2.26% 2.02% 1.92% 1.77% 1.69% 6% 5% 4% 3% 2% 1% 0% 0.00% '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Source: Bureau of Labor Statistics, Strategas -1% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 8
The Bad News: Global Policy Uncertainty Surged In 4Q 400 350 300 250 200 150 100 50 Global Policy Uncertainty Index Source: Baker, Bloom & Davis 0 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 US Monetary Policy China Slowdown EU Economic Woes Trade Wars Brexit Lower Profit Revisions US Budget Deficit Gov t Shutdown Low Oil Prices Credit Spreads 2020 Election 2020 Recession? The Index is a GDP weighed average of policy uncertainty indices for 20 countries 9
The Good News: Stocks Usually Rally After Heightened Policy Uncertainty 20% 18% 16% 14% S&P 500 Returns Following Spikes In Global Policy Uncertainty (Source: S&P Dow Jones, Strategas) 17.4% 16.3% Financial markets have been working as a vigilante in recent years to get the political system to act. 12% 10% 8% Uncertainty Over 200 Uncertainty Over 250 7.1% 7.4% 6% 4% 2% 0% 3.6% 3.0% 0.2% 0.4% 1mo Return 3mo Return 6mo Return 1yr Return Source: S&P Dow Jones & Strategas For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that stocks will rally after heightened uncertainty going forward even if they have so historically. 10
S&P 500 Has Not Declined In The 12 Months Following Midterm Since 46 1. Midterm Elections Usually Produces Gridlock 2. President s Worry About Their Own Re- Election And Push New Stimulus Source: S&P Dow Jones & Strategas For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that stocks will rally after midterm elections going forward even if they have so historically. 11
Still More US Fiscal Policy Stimulus Coming Down The Pipeline 2.50% 2.00% Fiscal Policy Stimulus, % of GDP CY 2018-2021 2.15% 32.0 30.0 Year To Date Individual Tax Refunds, $BN Through February 14th 30.5 30.6 28.0 1.50% 1.32% 1.38% 26.0 1.00% 0.85% 24.0 22.5 22.0 0.50% 20.0 0.00% 2018 2019 2020 2021 18.0 2017 2018 2019 Sources: Joint Committee On Taxation, Bureau of Economic Analysis, Treasury, Strategas 12
But Investment Has Slowed Due To Heightened Trade Tensions Source: Institute for Supply Management 13
De-Regulation Is Also Helping The US Economy Source: Department of Labor, Office of Management & Budget 14
A China Trade Deal Is The Most Impactful Stimulus For Trump 16% Average Tariff Rate, 2017 (WTO) 14% 13.7% 12% 10% 9.8% 8% 6.9% 6% 4% 3.4% 4.0% 5.1% 2% 0% US Canada EU Mexico China S. Korea Source: World Trade Organization 15
But Without A Trade Deal, Tariffs Will Begin To Outpace Fiscal Policy Boost Breakdown of CY 2019 Tax Cuts, Stimulus & Tariffs, $BN 250 Incremental 2019 Fiscal Stimulus: $122bn Incremental 2019 Tariffs: $60-283bn China Round 3 at 25%: $237bn 200 150 China Round 3 at 10%: $157bn China Round 2 at 25%: $104bn 100 50 70 52 44 40 0 6.3 Tax Cuts Spending Steel & Aluminum Tariffs Source: US Trade Representative, Strategas China Tariffs Global Tariffs (Incl'd Retaliation) Auto Tariffs (Ex-Can, Mex, Japan, S Korea, China) 16
Auto Tariffs Remain A Big Risk To The Global Outlook Source: International Trade Commission, Bureau of Economic Analysis, Tax Foundation 17
What Will Matter In Congress: Debt Ceiling/Sequestration 300 100-100 -300-500 -700-900 -1100-1300 -1500 Federal Government Surplus/Deficit (12 Mo. Rolling, $BN) Last Click: Dec= -873 BN '01 '03 '05 '07 '09 '11 '13 '15 '17 18
Muller Is Closing In: There Are 17 Active Investigations of Trump 60 Betting Odds: Will Trump Be Impeached In His First Term? (PredictIt) 55 50 45 40 35 30 25 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 19
Equity Market Is Starting To Price In A Democratic Government In 2021 70% 60% 50% 40% 30% 20% 10% 0% Will President Trump Win Reelection (Strategas Policy Conf Survey) 01/08/2019) 39% 61% Yes No 70 65 60 55 50 45 40 35 30 25 Betting Odds: Which Party Will Win The 2020 Election? (PredictIt) Democratic Republican 20 10/5/2018 11/4/2018 12/4/2018 1/3/2019 Strategas surveyed investors at their Annual Policy Conference on January 8, 2019 20
How Are We Investing During These Uncertain Political Times? Strategas' Real-Time Lobbying Index Performance, Annualized Returns (As of 02/12/2019) 24% 20% Lobbying TR S&P 500 TR 16% 12% 8% 4% 0% MTD QTD YTD 1 Year 3 Years 5 Years 10 Years For Illustrative Purposes. An index is unmanaged and not available for direct investment. Past performance is not a guarantee of future results. There can be no assurances that companies engaged in lobbying with outperform going forward even if they have so historically. 21
Appendix: Important Disclosures This communication was prepared by Strategas Securities, LLC ( we or us ) and is intended for institutional investors only. Recipients of this communication may not distribute it to others without our express prior consent. This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. The intended recipients of this communication are presumed to be capable of conducting their own analysis, risk evaluation, and decision-making regarding their investments. For investors subject to MiFID II (European Directive 2014/65/EU and related Delegated Directives): We classify the intended recipients of this communication as professional clients or eligible counterparties with the meaning of MiFID II and the rules of the UK Financial Conduct Authority. The contents of this report are not provided on an independent basis and are not investment advice or personal recommendations within the meaning of MiFID II and the rules of the UK Financial Conduct Authority. The information in this communication has been obtained from sources we consider to be reliable, but we cannot guarantee its accuracy. The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. To the extent that any securities or their issuers are included in this communication, we do not undertake to provide any information about such securities or their issuers in the future. We do not follow, cover or provide any fundamental or technical analyses, investment ratings, price targets, financial models or other guidance on any particular securities or companies. Further, to the extent that any securities or their issuers are included in this communication, each person responsible for the content included in this communication certifies that any views expressed with respect to such securities or their issuers accurately reflect his or her personal views about the same and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this communication. This communication is provided on a where is, as is basis, and we expressly disclaim any liability for any losses or other consequences of any person s use of or reliance on the information contained in this communication. Strategas Securities, LLC is affiliated with Robert W. Baird & Co. Incorporated ( Baird ), a broker-dealer and FINRA member firm, although the two firms conduct separate and distinct businesses. A complete listing of all applicable disclosures pertaining to Baird with respect to any individual companies mentioned in this communication can be accessed at http://www.rwbaird.com/research-insights/research/coverage/third-party-research-disclosures.aspx. You can also call 1-800-792-2473 or write: Robert W. Baird & Co., PWM Research & Analytics, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. 19
DISCLAIMER: The model investment portfolios discussed in this report have been developed and maintained by Strategas Securities, LLC. Strategas Securities licenses the portfolios to its affiliate, Strategas Asset Management, LLC, an investment adviser, which either provides the model portfolios to other managers with investment discretion, or manages client accounts directly in a manner that tracks the composition of one or more of the model portfolios. Strategas Securities does not selectively distribute its research reports to any particular customer or class of customers including its affiliates in advance of other customers that are entitled to receive the report. NEW YORK WASHINGTON, DC COLUMBUS, OHIO 52 Vanderbilt Avenue 1775 I Street, NW 88 E. Broad Street 8th Floor Suite 420 Suite 1180 New York, NY 10017 Washington, DC 20006 Columbus, OH 43215 United States (202) 223-7644 (614) 221-6680 (212) 906-0130 (202) 223-7647 fax (212) 906-131 fax info@strategasrp.com 23