Climbing the Wall of Worry: U.S. Economic and Market Outlook. The views expressed in this presentation are those of the investment professional and are.
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Climbing the Wall of Worry:U.S. Economic andMarket Outlook
.
The views expressed in this presentation are those of the investment professional and are subject to change at any time. These views do not necessarily reflect the views of Pioneer Investments or others in the Pioneer Investments organization.
January 20, 2013
19220-62-0113 January 2013 | Page 2
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Agenda
Overview: Sunny with a Chance of Tornados
U.S. GDP Outlook: Slow Growth Should Continue
Inflation: Limited Near-Term Risk
Asset Prices: Where is the Relative Value?
19220-62-0113 January 2013 | Page 3
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Executive Summary
The U.S. economy does not appear to be heading into recession (although it may be pushed into one)
The global economic outlook is beginning to show signs of improvement
U.S. fiscal policy represents the greatest single source of economic and market risk
U.S. inflation appears likely to remain subdued in the near term
Valuations discount a very pessimistic macroeconomic outlook
– Investors appear to be placing a very high value on safety and liquidity
19220-62-0113 January 2013 | Page 4
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
The Global Economic Backdrop Appears to be Improving
1996 1998 2000 2002 2004 2006 2008 2010 2012-10
-5
0
5
10
15
©FactSet Research SystemsSource: FactSet. Last data point: Q3-12
Year/Year Real GDP Growth (%)ChinaUnited StatesEuropean UnionJapan
19220-62-0113 January 2013 | Page 5
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
U.S. Economic Outlook – Key PointsSlow growth should continue unless there is an external shock
The economy is not heading into a business cycle recession
– Rising employment and asset prices are tailwinds
– Private sector balance sheets and incomes are strong
– We don’t see the signs of excess which normally signal an impending recession
Washington represents the primary source of risk
– The “fiscal cliff” deal merely postponed difficult decisions
– The debt ceiling, spending sequesters, and lack of a budget represent significant first-quarter challenges
– Failure to curb the growth of entitlement spending is likely to lead to severe problems in the future and ratings downgrades in 2013
19220-62-0113 January 2013 | Page 6
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
The “Square Root” (Slow Growth) Recovery/Expansion ContinuesFourth quarter growth will be low—but it’s just volatility around the trend
1990 1995 2000 2005 2010-10
-8
-6
-4
-2
0
2
4
6
8
10
Ann
ual R
ate
(%)
©FactSet Research SystemsSource: FactSet. Last data point: Q3-12
Annualized Growth of U.S. Real Gross Domestic Product
Quarterly (annualized) Rolling 4 Quarter
19220-62-0113 January 2013 | Page 7
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Quarterly Contribution to Annualized U.S. GDP Growth by SectorInventories, Trade, and Government will contribute less in Q4
+5%
-5%
+5%
-5%
+5%
-5%
Personal Consumption
Trade Deficit
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012©FactSet Research Sy stemsSource: FactSet. Last data point: Q3-12
Residential Investment
Nonresidential Investment
Inventories
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012©FactSet Research Sy stemsSource: FactSet. Last data point: Q3-12
Government
19220-62-0113 January 2013 | Page 8
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Employment is Growing…Slowly, Perhaps, but Steadily
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-800
-600
-400
-200
0
200
400
600
800
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
Monthly Change in non-Farm Employment (000)
Rolling 12-Month Average Monthly Change
19220-62-0113 January 2013 | Page 9
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Home Prices Appear To be Rising in Most CitiesThis is important for consumer wealth and confidence
1996 1998 2000 2002 2004 2006 2008 2010 201250
75
100
125
150
175
200
225
250
©FactSet Research SystemsSource: FactSet. Last data point: Oct-12
Case-Shiller Home Price Index - Three Subsets(Indexed to 12/31/1999)
"Biggest Bubbles""Other 12"Detroit
19220-62-0113 January 2013 | Page 10
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
We Expect The Rebound in New Home Construction to ContinuePositive for both employment and GDP
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
500
1,000
1,500
2,000
2,500
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
U.S. Monthly Housing Permits and Starts (000)
Permits Starts
19220-62-0113 January 2013 | Page 11
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
We Expect Auto Sales to Remain Strong
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
5
10
15
20
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
U.S. New Light Vehicle Sales (Millions units/year)
Total Domestic Imported
19220-62-0113 January 2013 | Page 12
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
The ISM Indexes Are Signaling Economic AccelerationContinuing a cyclical pattern of seasonal “soft patches” and strengthening
2006 2007 2008 2009 2010 2011 201230
40
50
60
70
Ab
ove
50
= E
xpa
nsi
on
B
elo
w 5
0 =
Co
ntr
act
ion
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
ISM Indexes
ISM Non-Manufacturing IndexISM Non-Manufacturing New Orders IndexISM Manufacturing IndexISM Manufacturing New Orders Index
19220-62-0113 January 2013 | Page 13
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
The Index of Leading Economic Indicators Is (Still) RisingThe rate of increase is consistent with modest GDP growth
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
30
40
50
60
70
80
90
100
110
Inde
x
©FactSet Research SystemsSource: FactSet. Last data point: Nov-12
U.S. Index of Leading Economic Indicators
19220-62-0113 January 2013 | Page 14
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
At Current Levels, Energy Price Pose Little Risk for the Economy
1970 1975 1980 1985 1990 1995 2000 2005 2010
0.5
1
1.5
2
2.5
3
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
Oil (WTI) divided by Trailing 5-Year Average
U.S. Recessions
19220-62-0113 January 2013 | Page 15
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
US Monetary Policy Remains Very AccommodativeWe expect real interest rates to remain below zero for several more years
0%
5%
10%
15%
20%Rolling 12-month Core CPIFed Funds Rate
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010-5%
0%
5%
10%
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
Real Fed Funds Rate
19220-62-0113 January 2013 | Page 16
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Corporate Borrowing Costs Remain Very LowCompanies have been able to refinance debt, reduce interest expense
Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13
2
4
6
8
10
12
14
16
Per
cent
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
US Corporate Bond Yields
Barclays Capital US Aggregate Credit - Corporate - High Yield (CAA)Barclays Capital US Aggregate Credit - Corporate - High Yield (B)Barclays Capital US Aggregate Credit - Corporate - High Yield (BA)Barclays Capital US Aggregate Corporate (BAA)Barclays Capital US Aggregate Corporate (AAA)
19220-62-0113 January 2013 | Page 17
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Business Profits are High2012 will almost certainly be the best year ever for S&P 500 earnings
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012$5
$10
$15
$20
$25
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
S&P 500 Trailing Quarterly Earnings
S&P 500 EPS US Recession
19220-62-0113 January 2013 | Page 18
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Agenda
Overview: Sunny with a Chance of Tornados
U.S. GDP Outlook: Slow Growth Should Continue
Inflation: Limited Near-Term Risk
Asset Prices: Where is the Relative Value?
19220-62-0113 January 2013 | Page 19
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Inflation is Not a Near-Term Concern…Nor is DeflationEnergy prices may continue to make headline inflation volatile
1970 1980 1990 2000 2010-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
Rolling 12-Month Inflation
CPICPI Core
19220-62-0113 January 2013 | Page 20
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
US Core Inflation is Restrained by Modest Unit Labor Cost Growth
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010-4%
0%
4%
8%
12%
16%
©FactSet Research SystemsSource: FactSet. Last data point: Dec-12
Unit Labor Costs and Inflation (Rolling 4 Quarter Change)
Unit Labor Costs Core CPI
19220-62-0113 January 2013 | Page 21
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Agenda
Overview: Sunny with a Chance of Tornados
U.S. GDP Outlook: Slow Growth Should Continue
Inflation: Limited Near-Term Risk
Asset Prices: Where is the Relative Value?
19220-62-0113 January 2013 | Page 22
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Fundamentals don’t support a broadly bullish outlook on CommoditiesMost commodities are priced well above the cost of production
1990 1995 2000 2005 20100
400
800
1,200
1,600
2,000
Gol
d, A
gric
ultu
re I
ndex
Pric
e
0
40
80
120
160
200
Oil P
rice
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
Gold, Oil, and Agricultural Commodities
Gold Oil (WTI) S&P GSCI Agricultural & Livestock
19220-62-0113 January 2013 | Page 23
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Nominal Treasury Yields Remain Near All-Time Lows
2010 2011 20120
0.5
1
1.5
2
2.5
3
3.5
4
4.5
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
Fed Funds Rate and Treasury Bond Yields
US Fed Funds Target Rate US 2 Year TreasuryUS 5 Year Treasury US 10 Year Treasury
19220-62-0113 January 2013 | Page 24
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
U.S. TIPS Yields Are Near All-Time LowsNegative TIPS yields suggests investors are very risk averse
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-2
-1
0
1
2
3
4
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
US TIPS Yields
20-Year10-Year7-Year5-Year
19220-62-0113 January 2013 | Page 25
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Corporate Bond Credit Spreads Remain Above-AverageAnd well above the projected default rate
Jan-12
400600800
©FactSet
Research
Systems
Source:
FactSet.
Last
data
point:
18-JAN-13
ML US High Yield Master II -
Option Adjusted Spread
1/1/97 1/1/99 1/1/01 1/1/03 1/3/05 1/1/07 1/1/09 1/3/11 1/1/130
500
1,000
1,500
2,000
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
ML US High Yield Master II OAS
19220-62-0113 January 2013 | Page 26
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
S&P 500 Valuations Appear Relatively Inexpensive versus History
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
6
8
10
12
14
16
18
20
©FactSet Research SystemsSource: FactSet. Last data point: 18-JAN-13
S&P 500 Valuation Metrics Price to Free Cash FlowPrice to EarningsEnterprise Value to EBITPrice to Cash Flow
19220-62-0113 January 2013 | Page 27
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Equities Appear Very Inexpensive Relative to Bonds
1996 1998 2000 2002 2004 2006 2008 2010 20120%
3%
6%
9%
12%
©FactSet Research SystemsSource: FactSet. Last data point: 17-JAN-13
U.S. Capital Market Valuations
S&P 500 Earnings/Price RatioMoody's BAA Corporate Bond YieldUS 10 Year Treasury YieldS&P 500 - Dividend Yield
19220-62-0113 January 2013 | Page 28
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Valuations – Key PointsWe Believe:
Commodities
Generally expensive…
Fixed Income
Safety and liquidity (Treasuries) appear richly valued
– Little compensation for either current inflation or inflation risk
Corporate (and municipal) bonds are priced for higher default rates than we consider likely
Equities
Inexpensive relative to historic averages, very inexpensive relative to bonds
19220-62-0113 January 2013 | Page 29
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Investment Suitability Is Important
There is no guarantee that forecasts discussed will be realized.
The views expressed in this presentation are those of the investment professional and are subject to change at any time. These views do not necessarily reflect the views of Pioneer Investments or others in the Pioneer Investments organization.
Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional.
There is no guarantee that a diversified portfolio will enhance overall return or outperform a non diversified portfolio. Diversification does not protect against market risk.
19220-62-0113 January 2013 | Page 30
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Glossary of TermsThe consumer price index (CPI) is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. The CPI measure of core inflation systematically excludes food and energy prices because they are highly volatile.
The federal funds rate is the interest rate at which depository institutions lend balances (federal funds) at the Federal Reserve to other depository institutions overnight.
The Goldman Sachs Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully-collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets.
Government Bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The Leading Economic Indicators (LEI) index is a generally recognized index of several variables such as average workweek production and manufacturing, jobless claims and other statistics used to help identify turning points in US economic activity.
The Barclays Capital Baa Credit Index is an unmanaged index consisting of bonds in the Industrial, Utility, Finance and non-corporate sectors rated Baa by Moody's. It is equivalent to a BBB rating by Merrill Lynch.
The Barclays Capital Aa Credit Index is a sub-set of the Lehman US Credit Index. This AA investment-grade rating is composed of obligations judged to be of high quality and subject to very low credit risk. This is equivalent to a Merrill Lynch AA rating.
The Merrill Lynch BB US High Yield Index is a subset of The Merrill Lynch US High Yield Index including all securities rated BB1 through BB3, inclusive.
The Standard & Poor's 500 Stock Index (the S&P 500) is a commonly used measure of the broad U.S. stock market.
The S&P/Case-Shiller Home Price Index (S&P/CSI) is a market capitalization-weighted composite of 9 underlying Census Division indices, 20 individual metropolitan markets, and two market capitalization-weighted composite metro-area indices. The composite index weights reflect the aggregate value of single-family housing stock in each of the underlying regions or metropolitan areas.
A Treasury Inflation-Protected Security (TIPS) is identical to a treasury bond except that principal and coupon payments are adjusted to eliminate the effects of inflation.
Indices are unmanaged and it is not possible to invest directly in an index.
19220-62-0113 January 2013 | Page 31
There is no guarantee that forecasts discussed will be realized.Past performance is no guarantee of future results.
Pioneer Investments60 State Street
Boston, Massachusetts 02109us.pioneerinvestments.com©2012 Pioneer Investments
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