liz ann sonders senior vice president chief investment strategist charles schwab & co., inc....
TRANSCRIPT
Liz Ann Sonders
Senior Vice PresidentChief Investment StrategistCharles Schwab & Co., Inc.
October, 2013
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“The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.” –Arthur C. Pigou
2
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Government shutdowns & market impacts
1970-9/30/13. Source: www.sentimenTrader.com.
S&P 500 performance before, during and after government shutdowns
Shutdown start # of days Week before During
shutdown 1 week after 1 month after
9/30/76 10 -1.6% -3.4% -0.2% -2.8%
9/30/77 12 1.6% -3.2% -0.8% 2.7%
10/31/77 8 0.8% 0.7% 2.7% 0.7%
11/30/77 8 -1.3% -1.2% -0.3% -4.2%
9/30/78 17 0.7% -2.0% -3.2% -6.7%
9/30/79 11 -1.0% -4.4% -2.8% -0.9%
11/20/81 2 0.0% -0.1% 3.7% 0.6%
9/30/82 1 -2.7% 1.3% 7.4% 11.1%
12/17/82 3 -1.5% 0.8% 1.9% 5.5%
11/10/83 3 0.6% 1.3% -0.3% -2.0%
9/30/84 2 0.3% -2.2% -0.2% 3.1%
10/3/84 1 -2.3% 0.1% 0.9% 3.6%
10/16/86 1 1.6% -0.3% -0.2% 1.8%
12/18/87 1 5.9% 0.0% -1.4% -2.6%
10/5/90 3 1.8% -2.1% -2.0% 0.3%
11/13/95 5 0.7% 1.3% 0.2% 2.0%
12/15/95 21 -0.2% 0.1% -2.4% 4.0%
Median 3 0.3% -0.1% -0.2% 0.7%
% Positive 59% 47% 35% 65% 3
US & global economy: decoupling?
4
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GDP’s components & latest readingFederal spending now biggest (& only) drag
As of 2Q13. *Represents contribution to percent change in real GDP. Numbers may not add up to 100% due to rounding. Source: Bureau of Economic Analysis, FactSet.
% of real GDP
1Q13 annualized
Q/Q % change
2Q13 annualized
Q/Q % change
Consumer spending 68.2% 2.3% 1.8%
Government spending 18.5% (4.2%) (0.4%)
Federal: 7.4% (8.4%) (1.6%)
State/local: 11.1% (1.3%) 0.4%
Net exports of goods & services (2.7%) (0.3)* (0.1)*
Exports: 12.7% (1.3%) 8.0%
Imports: (15.4%) 0.6% 6.9%
Fixed investment 15.7% (1.5%) 6.5%
Nonresidential: 12.6% (4.6%) 4.7%
Residential: 3.1% 12.5% 14.2%
Change in private inventories -- 0.9* 0.4*
Real GDP 1.1% 2.5% 5
2.2% (“new normal”) = average real GDP since June 2009 recession end
3.2% (“old normal”) = average private sector real GDP since June 2009 recession end
(1013-6769)US on best & most stable path globally Change matters more than level to markets
China, US and Japan as of 2Q13. Eurozone as of 1Q13. Source: FactSet. 6
6
7
8
9
10
11
12
13
14
2003 2005 2007 2009 2011 2013
Rea
l G
DP
(y/
y %
ch
ang
e)
-10
-8
-6
-4
-2
0
2
4
6
Rea
l G
DP
(y/
y %
ch
ang
e)
China (left) US Japan Eurozone
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It’s not déjà vu all over againSome weakness; but not as sinister as past 3 years
As of 9/13. 13-week average. Diffusion Index represents economic strength minus weakness. Gray-shaded areas indicate periods of recession. See last slide for definition of recession. Source: ISI Group. 7
-25
-20
-15
-10
-5
0
5
10
15
1998 2000 2002 2004 2006 2008 2010 2012
a b ISI US Diffusion Index
-20-15
-10-50
510
1520
1998 2000 2002 2004 2006 2008 2010 2012
a b ISI Global Economic Diffusion Index
(1013-6769)Economy better & policy risk lower than 2011But the fiscal fight has only just begun
As of 9/13. Economic Policy Uncertainty Index measures policy-related economic uncertainty using 3 types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty. Citigroup Economic Surprise Index measures the amount that economic activity surprised or disappointed relative to analyst expectations. Source: FactSet; Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com. 8
80
110
140
170
200
230
260
2008 2009 2010 2011 2012 2013
US Economic Policy Uncertainty Index
August 2011
-150
-100
-50
0
50
100
2008 2009 2010 2011 2012 2013
Citigroup US Economic Surprise Index
August 2011
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Businesses “hoarding” cashLevels not seen since WWII & reflects heightened uncertainty
As of 2Q13. MMMF represents money market mutual fund shares. Source: FactSet, Federal Reserve. 9
0
2
4
6
8
10
1947 1957 1967 1977 1987 1997 2007Non
fina
ncia
l Cor
por
ate
Bu
sin
ess
Dep
osit
s (a
s %
of
nom
inal
GD
P)
Checkable Deposits & Currency MMMFs Time & Savings Deposits
Fed policy: no taper … for now
10
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Fed’s balance sheet has balloonedBut with velocity so low, inflation risk is minimal
As of 9/13. Source: FactSet, Federal Reserve.
Fed has flooded system
But “velocity” of money remains depressed
11
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2007 2008 2009 2010 2011 2012 2013
Monetary Base ($, billions) QE (+$85B a month)∞
3
4
5
6
7
8
9
10
2007 2008 2009 2010 2011 2012 2013
M2 to Monetary Base Ratio
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Bank deposits soaring thanks to FedBut lending remains subdued (record gap)
As of 9/13. Source: FactSet, Federal Reserve. 12
2,500
3,500
4,500
5,500
6,500
7,500
8,500
9,500
10,500
1996 1998 2000 2002 2004 2006 2008 2010 2012$, b
illio
ns
(4-w
ee
k m
ovi
ng
ave
rage
)
US Bank Deposits US Bank Total Loans
Public & private sector deleveraging: a report card
13
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As of 8/13. Source: Department of the Treasury, FactSet, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.).
Incredibly shrinking deficitRapid improvement should help stabilize debt growth
14
-12-10-8-6-4-20246
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
% o
f n
om
inal
GD
P
Federal Budget Deficit/Surplus
12
14
16
18
20
22
24
26
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
% o
f n
om
inal
GD
P
Federal Outlays Federal Receipts
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Debt growth down, but more to goDebt servicing cost remains low but will rise even if rates don’t
As of 2Q13. Debt servicing cost = interest payments made on outstanding federal debt divided by total government expenditures. Source: FactSet, Federal Reserve, Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.), U.S. Department of Treasury. 15
30
40
50
60
70
80
90
100
110
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-5
0
5
10
15
20
25
Public Debt as % of Nominal GDP (left)
Public Debt, annual growth rate (right)
5
10
15
20
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Public Sector Debt Servicing Cost
(1013-6769)GDP’s strength waned as debt surgedBut, it’s a “chicken-or-egg” argument as to causality
As of 2Q13. Source: Bureau of Economic Analysis, FactSet, Federal Reserve. 16
40
60
80
100
120
140
160
180
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Nominal GDP (10-year % change)
100
150
200
250
300
350
400
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Total Credit Market Debt as % of GDP
(1013-6769)Private sector deleveraging’s come a long wayNo longer causing economic drag
As of 2Q13. Yellow and blue chart lines represent trend lines. Source: FactSet, Federal Reserve. 17
30
50
70
90
110
130
1952 1959 1966 1973 1980 1987 1994 2001 2008
Household Debt as % of Disposable Personal Income 1
Trend including housing bubble
Trend excluding housing bubble
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Net worth takes out prior highHousing & stock market represent 2 largest components
As of 2Q13. Source: FactSet, Federal Reserve. 18
0
10
20
30
40
50
60
70
80
1952 1962 1972 1982 1992 2002 2012
Household Net Worth ($, trillions)
US manufacturing & energy renaissance: no longer a pipe dream
19
(1013-6769)Key reasons for US manufacturing renaissance
Key advantages for US
Restrained US labor costs
Big emerging markets wage increases
Abundant energy/low natural gas prices
“Made in America” bias by US consumers
Digitization
Labor market stability
Rule of law
Economic & accounting transparency
Demographics
Deep/liquid capital markets
Well-developed infrastructure
Better inventory control
Japan energy problem
Eurozone/China economic uncertainty
Source: ISI Group. 20
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As of 5/24/12. Landed Cost=total cost of a product once it has arrived at buyer’s door and includes original cost of the item, all brokerage and logistics fees, complete shipping costs, customs duties, tariffs, taxes, insurance, currency conversion, crating costs, and handling fees. Not all components are present in every shipment, but all must be considered part of the landed cost. EM=emerging markets. Source: Supply Chain Optimization Study, The Hackett Group, 2012.
US total cost gap narrowing significantlyNot only relative to China but to other EMs, too
21
51%
38%
30%31%
23%16%
0%
10%
20%
30%
40%
50%
60%
2005 2010 2013E
Ch
ina
Labor Cost Gap Total Landed Cost Gap
39% 37%34%
21% 19% 18%
0%
10%
20%
30%
40%
50%
2005 2010 2013E
Oth
er E
mer
gin
g M
arke
ts
Labor Cost Gap Total Landed Cost Gap
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It’s not just ChinaUnited States' rising cost advantage spreads
Source: “US Manufacturing Nears the Tipping Point” by The Boston Consulting Group (BCG), March 22, 2012.
United States will gain 2-3 million jobs; and $100b in annual output; from higher exports and production work shifting from China over next decade
By around 2015, United States will have export cost advantage of 5-25% over Germany, Italy, France, UK & Japan in range of industries
Manufacturing unit labor costs in $
1980 2011 Change
US 92 86 -6%
Germany 75 144 +92%
Canada 88 179 +103%
Source: Department of Labor.
22
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As of 2011. Based on historical-cost average age. Source: Bureau of Economic Analysis, ISI Group.
Large replacement cycle on tapEquipment & manufacturing plants oldest on record
23
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
6.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
year
s
US Average Age of Equipment & Software
8
9
10
11
12
13
14
15
16
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
year
s
US Average Age of Manufacturing Plants
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Manufacturing workweek hit highShould be precursor to better job growth
As of 8/13. Source: Department of Labor, FactSet. 24
38.5
39.0
39.5
40.0
40.5
41.0
41.5
42.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Average Weekly Hours-Manufacturing (3-month moving average)
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Manufacturing adding most to GDP While government spending brings up rear
As of 12/12. Source: Bureau of Economic Analysis. 25
-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60
Durable-goods manufacturingFinance & insurance
Wholesale TradeInformation
Retail TradeNondurable-goods manufacturing
Real estate, rental, & leasingConstruction
Accommodation & food servicesProfessional, scientific, & technical services
MiningManagement of companies
Administrative & waste services
Transportation & warehousingHealth care & social assistance
Arts, entertainment, & recreationUtilities
Educational servicesOther services
Agriculture, forestry, fishing, & huntingGovernment
US 2012 Contribution to % Change in Real GDP
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US manufacturing/GDP comeback First “triple” in postwar era
As of 12/12. Source: Bureau of Economic Analysis, FactSet, Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.). 26
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
1948 1958 1968 1978 1988 1998 2008
US Manufacturing as % of Nominal GDP (y/y point change)
Housing: boosting economy, confidence & jobs
27
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Housing turning up as % of GDP Long path back to “normal” but trend will help economy
As of 2Q13. Gray-shaded areas indicate periods of recession. See last slide for definition of recession. Source: Bureau of Economic Analysis, FactSet. 28
2
3
4
5
6
7
1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
% o
f n
om
inal
GD
P
Residential Investment Average
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New home prices at all-time high!Reflecting limited new building/record-low inventories
As of 8/13. 12-month moving average. Source: FactSet, National Association of Realtors, US Census Bureau. 29
50
100
150
200
250
300
1980 1984 1988 1992 1996 2000 2004 2008 2012
Med
ian
Sin
gle
-Fam
ily
Sal
es
Pri
ces
($,
tho
usa
nd
s)
New Home Prices Existing Home Prices
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Housing inventory off historic lowsExplains jump in prices
As of 8/13. Source: FactSet, National Association of Realtors, Organization for Economic Cooperation and Development (OECD), US Census Bureau. 30
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
% o
f w
ork
ing
-ag
e p
op
ula
tio
n
New & Existing Single-Family Homes for Sale Average
(1013-6769)
Impact of spike in mortgage ratesBiggest weight on refi; not as much on purchases
As of 9/13. The Refinance Index covers all mortgage applications to refinance an existing mortgage. The Purchase Index includes all mortgages applications for the purchase of a single-family home. Source: FactSet, Mortgage Bankers Association (MBA), Ned Davis Research, Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.). 31
3
4
5
6
7
8
9
2000 2002 2004 2006 2008 2010 2012
30-Year Fixed Mortgage Rate
0
2,000
4,000
6,000
8,000
10,000
2000 2002 2004 2006 2008 2010 2012
150
250
350
450
550
MBA Refinance Index (left) MBA Purchase Index (right)
(1013-6769)Housing affordability falling but still highRising mortgage rates have been culprit
Affordability Index as of 7/13. Ratio data as of 2Q13. DPI=disposable personal income. Gray-shaded areas indicate periods of recession. See last slide for definition of Affordability Index and recession. Source: FactSet, Federal Finance Housing Board, High Frequency Economics (HFE), National Association of Realtors. 32
75
80
85
90
95
100
105
110
115
1981 1985 1989 1993 1997 2001 2005 2009 2013
a b Ratio of Home Prices to DPI
60
80
100
120
140
160
180
200
220
1981 1985 1989 1993 1997 2001 2005 2009 2013
a b Housing Affordability Index
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-15-10
-505
1015
2025
1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Real Mortgage Rates for Existing Single-Family Homes
1) 6.1% minus 16.9% = (10.8%) 2) 5.1% minus (16.7%) = 21.8% 3) 4.3% minus 14.4% = (10.1%)
“Real” mortgage rates remain deeply negativeAs long as prices continue to rise, higher rates won’t bite much
As of 8/13. Real Mortgage Rate represents 30-year fixed mortgage rate minus y/y % change in median sales price. Gray-shaded areas indicate periods of recession. See last slide for definition of recession. Source: FactSet, Federal Reserve, National Association of Realtors.
3
2
33
1
Stock & bond markets: valuation/ sentiment/rising yields
34
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S&P 500 bull markets
Start date End dateDuration (months)
Percent change
6/1/1932 3/10/1937 57 324%
4/28/1942 5/29/1946 49 158%
6/13/1949 8/2/1956 86 267%
10/22/1957 12/12/1961 50 86%
6/26/1962 2/9/1966 43 80%
10/7/1966 11/29/1968 26 48%
5/26/1970 1/11/1973 32 74%
10/3/1974 11/28/1980 74 126%
8/12/1982 8/25/1987 60 229%
12/4/1987 7/16/1990 31 65%
10/11/1990 3/24/2000 113 417%
10/9/2002 10/9/2007 60 102%
Average 57 165%
3/9/2009 ?* 55 149%*As of 9/30/13. Source: Strategas Research Partners LLC.
Current bull still sub-average
35
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Table highlights each of the prior periods where Dow Jones Industrial Average (DJIA) went two or more years without closing at new all-time high. Source: Bespoke Investment Group, LLC (B.I.G.).
Market highs after long drought…now what?
New all-time highs in Dow Jones Industrial Average (1900-2013)
DJIA performance (%)
Date of new high
Calendar days since prior high
One month
Three month
Six month
One year
Maximum
drawdown
Maximum gain
3/24/1905 1,375 2.1 -4.4 3.3 19.6 -10.0 29.9
9/28/1916 3,904 1.7 -8.8 -6.2 -18.7 -19.4 9.3
7/9/1919 959 -7.8 2.8 -2.6 -14.5 -20.9 8.3
12/31/1924 1,884 2.5 -2.0 9.3 30.0 -4.6 32.3
11/23/1954 9,211 3.8 7.5 9.8 26.1 0.0 27.4
9/15/1958 889 2.4 7.8 16.1 20.8 -0.2 29.6
11/10/1972 2,465 3.8 -1.6 -6.8 -8.7 -14.4 5.7
11/3/1982 3,582 -3.2 -0.3 13.8 14.3 -7.1 20.6
10/3/2006 2,453 2.5 6.3 6.7 19.2 0.0 20.1
3/5/2013 1,973 2.2 5.0 4.8 ? ? ?
Average 1.0 1.2 4.8 9.8 -8.5 20.3
% of time positive 80 50 70 67
All period average 0.5 1.7 3.4 7.1
% of time positive 58 60 63 65
36
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As of 9/30/13. EM=emerging markets. Source: FactSet, Morgan Stanley Capital International (MSCI), Standard & Poor’s.
US outperformance of EM since ’09 lowBeginning of secular shift?
37
0.5
1.5
2.5
3.5
4.5
1988 1991 1994 1997 2000 2003 2006 2009 2012
S&P 500 Relative to MSCI Emerging Markets Index
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As of 8/13. Source: Bloomberg, Windhaven Investment Management, Inc.
New secular bull market relative to gold?3rd consecutive 13-year gold bull likely over
38
$1
$10
$100
$1,000
$10,000
$100,000
1912 1922 1932 1942 1952 1962 1972 1982 1992 2002 2012
S&P 500 Total Return Gold
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As of 9/30/13. CRB (Commodity Research Bureau) Index based on the Thomson Reuters/Jefferies CRB Commodity Index. Source: FactSet.
Stocks & commodities de-linkingCommodity “super cycle” likely topped in 2011
39
600
800
1,000
1,200
1,400
1,600
1,800
2003 2005 2007 2009 2011 2013
200
250
300
350
400
450
500
S&P 500 Index (left) CRB Index (right)
(1013-6769)Stocks & commodities typically divergentReflects hit to economy/stocks/valuation when inflation’s high
40*Most recent shaded areas represent Liz Ann Sonders’ view of respective bull markets.
*
*
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As of 9/30/13. Source: FactSet.
Stocks & dollar reconnectingDollar stronger for “right” reasons…better relative growth
41
600
800
1,000
1,200
1,400
1,600
1,800
2003 2005 2007 2009 2011 2013
70
75
80
85
90
95
100
105
S&P 500 (left) US Dollar Index (right)
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*As of 9/30/13. Source: FactSet.
Comparing stock & dollar marketsHistory shows equity returns were higher when dollar was rising S&P 500 performance during dollar bull & bear marketsDollar
bull/bear Dates
Calendar days
US dollar index
% change
S&P 500 %
change
$ bull 10/30/1978-2/25/1985 2,310 100.7% 88.5%
$ bear 2/25/1985-12/31/1987 1,039 -48.2% 37.9%
$ bull 12/31/1987-6/14/1989 531 23.7% 31.1%
$ bear 6/14/1989-2/11/1991 607 -23.8% 13.8%
$ bull 2/11/1991-7/5/2001 3,797 50.2% 230.8%
$ bear 7/5/2001-4/22/2008 2,483 -41.0% 12.9%
$ bull 4/22/2008-3/5/2009 317 24.9% -50.4%
$ bear 3/5/2009-11/25/2009 265 -16.7% 62.7%
$ bull 11/25/2009-6/7/2010 194 19.0% -5.4%
$ bear 6/7/2010-4/29/2011 326 -17.5% 29.8%
Average dollar bull market 43.7% 58.9%
Average dollar bear market -29.4% 31.4%
Recent $ rally 4/29/2011-?* 885 10.0% 23.3%
42
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As of 9/13. Current P/E based on estimated 3Q13 EPS. P/Es are based on forward 12-month operating earnings. Source: FactSet, Standard & Poor’s.
On forward earnings, stocks appear undervaluedGives market breathing room in face of slower earnings growth
Current S&P 500 forward P/E @ 14.7
43
10
15
20
25
30
35
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
S&P 500 Forward P/E
Median = 16.5x
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As of 8/13. *Earnings truncated at 40% in 2010. Data represents 12-month earnings per share. Source: BCA Research Inc., FactSet, ISM (Institute for Supply Management), Standard & Poor’s.
Imminent acceleration in earnings coming?High correlation between earnings & ISM new orders
44
-45
-30
-15
0
15
30
45
1990 1993 1996 1999 2002 2005 2008 2011
20
30
40
50
60
70
80
S&P 500 Operating Earnings, y/y % change (left)
ISM New Orders Index (right)
*
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Margin peaks & stock market performance
Date when profit margins peaked
S&P 500 nominal total return S&P 500 real total return
Year Quarter 1-year after
2-years after 1-year after 2-years
after
1950 4 24% 46% 17% 37%
1955 1 38% 31% 37% 26%
1959 2 1% 18% -1% 15%
1966 1 5% 8% 2% 1%
1973 1 -13% -19% -21% -33%
1977 3 12% 26% 3% 4%
1984 2 31% 78% 26% 68%
1988 4 32% 28% 26% 15%
1997 3 9% 39% 7% 34%
2006 3 16% -9% 13% -16%
Mean 15% 25% 11% 15%
Median 14% 27% 10% 15%
1950-2012. Profit Margins defined as total pre-tax corporate profits relative to corporate GDP. Source: BCA Research Inc.
Profit margins peaking?Not necessarily a problem for stocks
45
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-800
-400
0
400
800
1,200
2008 2009 2010 2011 2012 2013
Net
New
Cas
h F
low
-
C
um
ula
tive
Ch
ang
e ($
, b
illi
on
s)
Domestic Equity Mutual Funds Total Bond Mutual Funds
Investors had banished stocks in favor of bondsBond funds now experiencing record outflows
As of 9/13. Bottom chart based on estimated weekly cash flows. Source: Investment Company Institute (ICI). 46
-6
-4
-2
0
2
4
6
1/13 2/13 3/13 4/13 5/13 6/13 7/13 8/13 9/13
Ne
t N
ew
Ca
sh
Flo
w (
$, b
illio
ns
)
-30
-20
-10
0
10
20
Ne
t N
ew
Ca
sh
Flo
w (
$, b
illio
ns
)
Domestic Equity Mutual Funds (left) Total Bond Mutual Funds (right)
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Pension funds have de-riskedFixed income exposure now above equity exposure
As of 3/13. Data covers 100 US public companies with the largest defined benefit pension plan assets for which a 2012 annual report was released by 3/7/13. Source: Milliman 2013 Pension Funding Study. 47
25%
30%
35%
40%
45%
50%
55%
60%
65%
2005 2006 2007 2008 2009 2010 2011 2012Pen
sio
n F
un
din
g A
sset
All
oca
tio
n Equities Fixed Income
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Endowments asset allocation (dollar-weighted average)
Year EquitiesFixed
income
Alternative
strategiesCash/ other
2002 50% 23% 24% 2%
2003 49% 21% 27% 2%
2004 51% 17% 28% 4%
2005 48% 17% 32% 3%
2006 48% 15% 35% 2%
2007 47% 13% 37% 2%
2008 40% 13% 46% 1%
2009 32% 13% 51% 4%
2010 31% 12% 52% 5%
2011 33% 10% 53% 4%
2012 31% 11% 54% 4%
Source: NACUBO (National Association of College and University Business Officers)-Commonfund Study of Endowments (2009-2012), NACUBO Endowment Study (2002-2008), Strategas Research Partners LLC.
Endowments’ equity exposure way downAlternative strategies biggest beneficiary
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As of 9/24/13. See last slide for description of Crowd Sentiment Poll. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.).
12/1/1995-9/24/2013
NDR Crowd Sentiment Poll
S&P 500 annualized gain
>66 -7.6%
57-66 from above -3.1%
57-66 from below 16.7%
< 57 10.5%
Investor confidence moves with marketSentiment now in best zone for stocks
We are here
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20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013
NDR Crowd Sentiment Poll
Extreme Pessimism (Bullish for Market)
Extreme Optimism (Bearish for Market)
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Market’s emotional roller coasterMaintaining discipline = key to long-term success
50
Euphoria
Despair
Bear MarketEnds
BullMarketEnds
Optimism
Optimism
Relief
Hope
Panic
Capitulation
Pessimism
Denial
Uneasiness
Enthusiasm
Exhilaration
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DisclosuresThe information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions and estimates herein are as of the date of the material and are subject to change without notice at any time in reaction to shifting market conditions. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Examples provided are for illustrative purposes only and not intended to be reflective of results you should expect to attain.
Index DefinitionsIndexes are unmanaged, do not incur management fees, costs and expenses (or "transaction fees or other related expenses"), and cannot be invested in directly.The Dow Jones Industrial Average (DJIA, “The Dow”) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials and is the oldest and most widely quoted of all the market indicators.The IntercontinentalExchange (ICE) U.S. Dollar Index is an index of the of the United States dollar relative to a basket of foreign currencies, and is a weighted geometric mean of the dollar’s compared to the Euro (EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) and Swiss franc (CHF) relative to March 1973.The Morgan Stanley Capital International (MSCI) Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.The National Association of Realtors (NAR) Housing Affordability Index (HAI) measures whether or not a typical family could qualify for a mortgage loan on a typical home. A value of 100 means a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. The S&P 500 Index is a capitalization-weighted index of 500 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares.The Thomson Reuters/Jefferies CRB (Commodity Research Bureau) Commodity Index is a global commodity index that tracks the price movement of commodity futures as a whole.
Terms AAII (American Association of Individual Investors) Investor Sentiment Survey measures the percentage of individual investors who are bullish, Ned Davis Research (NDR) Crowd Sentiment Poll - Shows perspective on a composite sentiment indicator designed to highlight short- to intermediate-term swings in investor psychology. It's based on seven different individual sentiment indicators in order to represent the psychology of a broad array of investors.Recession - As per National Bureau of Economic Research (NBER), a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Disclosures/definitions
©2013 Charles Schwab & Co., Inc. All rights reserved. Member SIPC
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Source: Bloomberg, FactSet, Federal Reserve, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.), Standard & Poor’s.
New highs…then vs. now: bad stuff
3/24/2000 10/9/2007 9/18/2013
S&P 500® index 1,527 1,565 1,726
Budget deficit (12-month sum) $138b $169b $680b
Fed balance sheet $556b $858b $3,672b
Gross federal debt $5,773b $9,007b $16,738b
Debt as % of nominal GDP 58% 62% 100%
NYSE average daily volume (millions of shares)
1,124 1,320 750
Consumer confidence 137.1 95.2 79.7
Americans unemployed (millions) 5.7 7.2 11.3
Unemployment rate 4.0% 4.7% 7.3%
S&P rating of US debt AAA AAA AA+
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See last slide for description of AAII (American Association of Individual Investors) Sentiment Survey. Source: Bloomberg, FactSet, Federal Reserve, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved .), Standard & Poor’s.
New highs…then vs. now: good stuff
3/24/2000 10/9/2007 9/18/2013
S&P 500 index 1,527 1,565 1,726
S&P 500 operating earnings $54 $89 $102e
S&P 500 P/E 28.3 17.6 16.9
S&P dividends per share $17 $28 $34
AAII investor sentiment survey – bullish 66% 55% 45%
10-year Treasury yield 6.2% 4.7% 2.7%
10-year minus 2-year Treasury yield spread (basis points)
-44 52 234
% of S&P 500 above 200-day moving average NA 60% 85%
% of S&P 500 with 50-day moving average above 200-day moving average NA 43% 82%
Core CPI (y/y % change) 2.4% 2.2% 1.8%
Household debt $6,508b $13,644b $12,971b
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0
2
4
6
8
10
12
14
16
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
10-Year Treasury Yield
Bond yields settle down after no QE taperRenewed uncertainty about QE taper timing
As of 9/13. Source: FactSet, The Leuthold Group. 54
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13
10-Year Treasury Yield
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Mapping payrolls to the 10-year Treasury
Monthly payroll change (000s)
Fed Funds (“lift-off” date)
10Y Treasury yield (%, end of
2013 est.)
230 Mar 2014 3.9%
220 Jun 2014 3.8%
210 Sep 2014 3.6%
200 Dec 2014 3.4%
190 Jun 2015 2.8%
180 Sep 2015 2.5%
170 Jun 2016 1.8%
160 Jun 2017 1.4%
150 Mar 2018 1.1%
As of 2/5/13. Source: BCA Research Inc.
When might unemployment hit 6.5%?Fed’s unemployment rate threshold puts payrolls in spotlight
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S&P 500 performance during periods of rising and falling yields
10-year Treasury yield
Rising/ falling Begin End Start Finish Change Days
S&P 500 change
Rising 3/9/2009 4/5/2010 2.89 4.01 38.8% 392 75.5%
Falling 4/5/2010 10/8/2010 4.01 2.41 -39.9% 186 -1.9%
Rising 10/8/2010 2/8/2011 2.41 3.75 55.6% 123 13.7%
Falling 2/8/2011 9/22/2011 3.75 1.72 -54.1% 226 -14.7%
Rising 9/22/2011
10/27/2011 1.72 2.42 40.7% 35 13.7%
Falling 10/27/2011 1/31/2012 2.42 1.83 -24.4% 96 2.2%
Rising 1/31/2012 3/19/2012 1.83 2.39 30.6% 48 7.4%
Falling 3/19/2012 7/25/2012 2.39 1.43 -40.2% 128 -5.1%
Rising 7/25/2012 3/11/2013 1.43 2.07 44.8% 229 16.3%
Falling 3/11/2013 5/2/2013 2.07 1.66 -19.8% 52 2.7%
Rising 5/2/2013 9/30/2013 1.66 2.64 59.0% 151 5.3%
Average rising yields 22.0%
% of time positive 100
Average falling yields -3.4%
% of time positive 40
As of 9/30/13. Source: Bespoke Investment Group, LLC (B.I.G.) Federal Reserve, FactSet.
Current bull market: rising yields = rising stocks
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Economic & market performance during rising interest rate periods (based on monthly 10-year Treasury yield)
% Gain per annum
Trough Peak10Y Treasury yield begin
10Y Treasury yield end S&P 500
Coincident index
Nonfarm payrolls
Apr 1954
Oct 1957 2.3% 4.0% 16.7% 3.3% 2.0%
May 1958
Jan 1960 2.9% 4.7% 22.5% 11.6% 3.9%
May 1961
Aug 1966 3.7% 5.2% 7.0% 4.9% 3.5%
Mar 1967
May 1970 4.5% 7.9% -1.9% 3.0% 2.6%
Mar 1971
Sep 1975 5.7% 8.4% -0.1% 2.2% 1.9%
Dec 1976
Mar 1980 6.9% 12.8% 5.1% 3.6% 3.9%
Jun 1980
Sep 1981 9.8% 15.3% 7.6% 2.6% 1.2%
Jan 1987
Mar 1989 7.1% 9.4% 8.3% 3.7% 3.1%
Oct 1993
Nov 1994 5.3% 8.0% 1.8% 4.4% 3.4%
Oct 1998
Jan 2000 4.5% 6.7% 17.0% 3.8% 2.5%
Jun 2003
May 2006 3.3% 5.1% 11.4% 2.4% 1.6%
Median 4.5% 7.9% 7.6 3.6% 2.6%
Mean 5.1% 8.0% 8.7% 4.1% 2.7%
Gain per annum over entire history 11.2% 2.5% 1.7%
Table highlights periods between local troughs and peaks in the 10-year Treasury yield around Fed tightening cycles. Source: Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2013 (c) Ned Davis Research, Inc. All rights reserved.).
Economic & market performance during rising ratesGrowth tends to be above-average, at least for a while
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Longer-term valuation stretchedBut largest equity inflows have come when P/E was around 20
As of 9/13. The Leuthold Group calculates normalized earnings using a 5-year average of reported earnings (18 quarters of historical results combined with 2 quarters of future estimates). To adjust for legitimate write-offs, the mid point between reported earnings and operating earnings is used. Source: The Leuthold Group.
Current S&P 500 normalized P/E @ 21.1
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5
10
15
20
25
30
35
40
1946 1954 1962 1970 1978 1986 1994 2002 2010
S&P 500 P/E (5-year normalized)
Median = 17.6x
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1946-8/2013
Inflation Average P/E Highest P/E Lowest P/E
< 0% 12.6 17.1 9.3
0 – 1% 14.5 22.5 9.2
1 – 2 % 19.8 32.6 9.2
2 – 3% 20.5 35.1 9.7
3 – 4% 18.7 34.4 9.7
4 – 5% 16.8 22.4 9.6
5 – 6% 15.9 19.8 7.4
6 – 7% 12.2 18.1 7.7
>7% 11.9 19.1 7.9
1946-8/13. Current P/E as of 9/13. The Leuthold Group calculates normalized earnings using a 5-year average of reported earnings (18 quarters of historical results combined with 2 quarters of future estimates). To adjust for legitimate write-offs, the mid point between reported earnings and operating earnings is used. Inflation is y/y % change based on CPI. Source: Bureau of Labor Statistics, FactSet, The Leuthold Group.
Current S&P 500 normalized P/E @ 21.1
Moderate inflation supports higher valuationsInflation in one of valuation’s sweet spots
We are here
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14.7
22.720.1
18.4
0
5
10
15
20
25
1.4%-3.0% 3.0%-4.5% 4.5%-6.5% > 6.5%
10-Year Treasury Yield
S&P 500 P/E (5-year normalized)
1962-8/13. Current P/E as of 9/13. The Leuthold Group calculates normalized earnings using a 5-year average of reported earnings (18 quarters of historical results combined with 2 quarters of future estimates). To adjust for legitimate write-offs, the mid point between reported earnings and operating earnings is used. Source: FactSet, Federal Reserve, The Leuthold Group.
Current S&P 500 normalized P/E @ 21.1
Valuation expansion could continueHistorically, much higher rates before valuation suffered
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