the future of us economy_final version

1

Econ 106M: The Future of US EconomyZhuo “Kenny” ChenRishab KhandelwalYangyifan “Kim” WangZhiyu “Jack” WangVandana Bhairi

The Future of US Economy 2

Table of Contents

Diagnosis

Tipping Point

Investment Strategy


Table of Contents

Diagnosis

Tipping Point

Investment Strategy


Diagnosis Tipping Point

Investment StrategyFederal Funds Rate

32874 33239 33604 33970 34335 34700 35065 35431 35796 36161 36526 36892 37257 37622 37987 38353 38718 39083 39448 39814 40179 40544 40909 41275 41640 420050

1

2

3

4

5

6

7

8

9

FFRPe

rcen

tage

Source: FRED



Investment StrategyEconomic Indicators

GDP

Employment

Home Sales

Inflation

Foreign Influence



Investment StrategyGDP Growth Rate

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q3

2014Q1

2014Q3

2015Q1

2015Q314000

14500

15000

15500

16000

16500

17000

17500

18000

18500

GDP

Billi

ons o

f Dol

lars

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3

2010Q1

2010Q3

2011Q1

2011Q3

2012Q1

2012Q3

2013Q1

2013Q3

2014Q1

2014Q3

2015Q1

2015Q3-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

Growth

Source: Economic Research, Federal Reserve Bank of St. Louis



Investment StrategyGDP & GDP Gap

Source: International Financial Statistics

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

65

75

85

95

105

115 f(x) = 0.00473743421910714 x − 83.4725807715423

Industrial production index

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

May-15

Sep-15

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

GDP Gap (from 2008)



Investment StrategyEmployment

Jan 90Apr 9

1Jul 9

2Oct 9

3Jan

95Apr 9

6Jul 9

7Oct 9

8Jan

00Apr 0

1Jul 0

2Oct

03Jan

05Apr 0

6Jul 0

7Oct

08Jan

10Apr 1

1Jul 1

2Oct

13Jan

150.0

2.0

4.0

6.0

8.0

10.0

12.0

Unemployment Rate

Perc

enta

ge

Jan 08

Jun 08

Nov 08Apr 0

9Sep

09Feb

10Jul 1

0Dec

10

May 11

Oct 11

Mar 12

Aug 12Jan

13Jun 13

Nov 13Apr 1

4Sep

14Feb

15Jul 1

54.0

5.0

6.0

7.0

8.0

9.0

10.0

Unemployment Rate (after 2008)

Perc

enta

ge

Jan 08

May 08Oct

08Feb

09Jul 0

9Dec

09Apr 1

0Sep

10Jan

11Jun 11

Nov 11

Mar 12

Aug 12Dec

12

May 13

Oct 13Feb

14Jul 1

4

Nov 14Apr 1

5Sep

15200,000300,000400,000500,000600,000700,000800,000900,000

1,000,000Initial Claims

Source: US Bureau of Labor Statistics

Jan 08

Jun 08

Nov 08Apr 0

9Sep

09Feb

10Jul 1

0Dec

10

May 11

Oct 11

Mar 12

Aug 12Jan

13Jun 13

Nov 13Apr 1

4Sep

14Feb

15Jul 1

5127500129500131500133500135500137500139500141500143500

Non-Farm Payroll

Tho

usan

ds o

f Per

sons



Investment StrategyHome Sales

Jan 08

May 08Sep

08Jan

09

May 09Sep

09Jan

10

May 10Sep

10Jan

11

May 11Sep

11Jan

12

May 12Sep

12Jan

13

May 13Sep

13Jan

14

May 14Sep

14Jan

15

May 15Sep

153500000

3700000

3900000

4100000

4300000

4500000

4700000

4900000

5100000

5300000

5500000

Existing Home Sales

num

ber o

f sal

es

Jan 08Apr 0

8Jul 0

8Oct 0

8Jan

09Apr 0

9Jul 0

9Oct 0

9Jan

10Apr 1

0Jul 1

0Oct 1

0Jan

11Apr 1

1Jul 1

1Oct 1

1Jan

12Apr 1

2Jul 1

2Oct 1

2Jan

13Apr 1

3Jul 1

3Oct 1

3Jan

14Apr 1

4Jul 1

4Oct 1

475.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

Pending Home Sale Index




Investment StrategyConsumer Price Index

Jan 08

May 08

Sep 08

Jan 09

May 09

Sep 09

Jan 10

May 10

Sep 10

Jan 11

May 11

Sep 11

Jan 12

May 12

Sep 12

Jan 13

May 13

Sep 13

Jan 14

May 14

Sep 14

Jan 15

May 15

Sep 15

210

215

220

225

230

235

240

210.228

CPI

Feb 08

Jun 08Oct

08Feb

09Jun 09

Oct 09Feb

10Jun 10

Oct 10Feb

11Jun 11

Oct 11Feb

12Jun 12

Oct 12Feb

13Jun 13

Oct 13

Feb 14

Jun 14Oct 1

4Feb

15Jun 15

-4%

-2%

0%

2%CPI growth rate




Investment StrategyPersonal Consumption Expenditure

Feb 08

Jul 08Dec

08

May 09

Oct 09

Mar 10

Aug 10Jan

11Jun 11

Nov 11Apr 1

2Sep

12Feb

13Jul 1

3Dec

13

May 14

Oct 14

Mar 15

Aug 15

-0.0005

0

0.0005

0.001

0.0015

0.002

0.0025

0.003

0.0035Core Growth rate

Jan 08

Jun 08

Nov 08Apr 0

9Sep

09Feb

10Jul 1

0Dec

10

May 11

Oct 11

Mar 12

Aug 12Jan

13Jun 13

Nov 13Apr 1

4Sep

14Feb

15Jul 1

597.000

99.000

101.000

103.000

105.000

107.000

109.000

111.000 Core PCE

Billi

ons o

f Dol

lars

Jan 08

Jun 08

Nov 08Apr 0

9Sep

09Feb

10Jul 1

0Dec

10

May 11

Oct 11

Mar 12

Aug 12Jan

13Jun 13

Nov 13Apr 1

4Sep

14Feb

15Jul 1

59000.0

9500.0

10000.0

10500.0

11000.0

11500.0

12000.0

12500.0PCE

Billi

on o

f Dol

lars

Feb 08

Jul 08Dec

08

May 09

Oct 09

Mar 10

Aug 10Jan

11Jun 11

Nov 11Apr 1

2Sep

12Feb

13Jul 1

3Dec

13

May 14

Oct 14

Mar 15

Aug 15

-2%

0%

2%PCE Growth




Investment StrategyForeign Influence

1/2/2006

5/22/2

006

10/9/2006

2/26/2

007

7/16/2

007

12/3/2007

4/21/2

008

9/8/2008

1/26/2

009

6/15/2

009

11/2/2009

3/22/2

010

8/9/2010

12/27/2010

5/16/2

011

10/3/2011

2/20/2

012

7/9/2012

11/26/2012

4/15/2013

9/2/2013

1/20/2

014

6/9/2014

10/27/2014

3/16/2

015

8/3/2015

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

China SSE Composite Index

Source: Yahoo Finance

Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 201570.00

75.00

80.00

85.00

90.00

95.00

100.00

105.00

110.00

Brazil Real Effective Exchange Rate Based on Consumer Price Index



Investment StrategyTable of Contents

Diagnosis

Tipping Point

Investment Strategy



Investment StrategyFederal Funds Rate Hike Probability

Source: CME

December January March

20.6% 17.6%10.1%

79.4%71.0%

48.3%

0.0%11.4%

36.8%

Federal Fund Rate Hike ProbabilityNo Hike 25 Bps 50 Bps



Investment StrategyTaylor Rule & Effective FFR

Jan-90Mar-9

1

May-92Jul-9

3Sep-94

Nov-95Jan-97

Mar-98

May-99Jul-0

0Sep-01

Nov-02Jan-04

Mar-05

May-06Jul-0

7Sep-08

Nov-09Jan-11

Mar-12

May-13Jul-1

40.001.002.003.004.005.006.007.008.009.00

Taylor Rule and Effective Federal Funds Rate

Frequency: Quarterly Effective Federal Funds RateFrequency: Quarterly Taylor Rule Suggested Interest Rate




Investment Strategy

Capacity Utilization Rate (% Change from Previous Year) & Effective FFR

Jan 90Mar 9

1

May 92Jul 93

Sep 94Nov 95

Jan 97Mar 9

8

May 99Jul 00

Sep 01Nov 02

Jan 04Mar 0

5

May 06Jul 07

Sep 08Nov 09

Jan 11Mar 1

2

May 13Jul 14

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

Capacity Utilization Rate & Effective FFR

Capacity Utilization Rate FEDFUNDS

Rate HikeRate Hike




Investment StrategyTreasury and FFR Yield Spread

Decem

ber-89

Decem

ber-90

Decem

ber-91

Decem

ber-92

Decem

ber-93

Decem

ber-94

Decem

ber-95

Decem

ber-96

Decem

ber-97

Decem

ber-98

Decem

ber-99

Decem

ber-00

Decem

ber-01

Decem

ber-02

Decem

ber-03

Decem

ber-04

Decem

ber-05

Decem

ber-06

Decem

ber-07

Decem

ber-08

Decem

ber-09

Decem

ber-10

Decem

ber-11

Decem

ber-12

Decem

ber-13

Decem

ber-14

0.001.002.003.004.005.006.007.008.009.00

Six Month Treasury Bill Rates and Effective Federal Funds Rate

Frequency: Monthly Six Month Treasury RateFrequency: Monthly FEDFUNDS




Investment StrategyTreasury and FFR Yield Spread

28-Jan-15

8-Feb-15

19-Feb-15

2-Mar-

15

13-Mar-

15

24-Mar-

15

4-Apr-15

15-Apr-15

26-Apr-15

7-May

-15

18-May

-15

29-May

-15

9-Jun-15

20-Jun-15

1-Jul-1

5

12-Jul-1

5

23-Jul-1

5

3-Aug-15

14-Aug-15

25-Aug-15

5-Sep-15

16-Sep-15

27-Sep-15

8-Oct-

15

19-Oct-

15

30-Oct-

150.00

0.05

0.10

0.15

0.20

0.25

0.30

Six Month Treasury Bill Rate and Effective Federal Funds Rate:2015

Frequency: Daily DTB6 Frequency: Daily FEDFUNDS




Investment StrategyFinancial Stress Index and FFR

Jan-

94Nov

-94

Sep-

95Ju

l-96

May

-97

Mar

-98

Jan-

99Nov

-99

Sep-

00Ju

l-01

May

-02

Mar

-03

Jan-

04Nov

-04

Sep-

05Ju

l-06

May

-07

Mar

-08

Jan-

09Nov

-09

Sep-

10Ju

l-11

May

-12

Mar

-13

Jan-

14Nov

-14

Sep-

15

-2.000-1.0000.0001.0002.0003.0004.0005.0006.0007.000

Financial Stress Index and Effective Federal Funds Rate

Frequency: Monthly St. Louis Fed Financial Stress IndexFrequency: Monthly FEDFUNDS

Rate Hike

Rate Hike




Investment Strategy

Consumer Sentiment Index (% Change from Previous Year) and FFR

Jan-90

Nov-90

Sep-

91Ju

l-92

May

-93M

ar-94

Jan-95

Nov-95

Sep-

96Ju

l-97

May

-98M

ar-99

Jan-00

Nov-00

Sep-

01Ju

l-02

May

-03M

ar-04

Jan-05

Nov-05

Sep-

06Ju

l-07

May

-08M

ar-09

Jan-10

Nov-10

Sep-

11Ju

l-12

May

-13M

ar-14

Jan-15

-40.0-30.0-20.0-10.0

0.010.020.030.040.0

University of Michigan: Consumer Sentiment Index© and Effective Federal Funds Rate

Frequency: Monthly University of Michigan: Cosumer Sentiment IndexFrequency: Monthly Effective Federal Funds Rate

Rate HikeRate Hike




Investment StrategyTable of Contents

Diagnosis

Tipping Point

Investment Strategy



Investment StrategyPost-financial Crisis - 2014

S&P 500 and FED Easing 2008 - 2015

Source: Bespoke Investment Research

QE Bull Market

2008 - 2014



Investment Strategy2014 - Now

QE Taper

Rate Hike

Strong Dollar

Strong US vs. Weak Global

High Volatility &Low Dispersion



Investment StrategyEquity Market & FFR

4/1/90

3/1/91

2/1/92

1/1/93

12/1/93

11/1/94

10/1/95

9/1/96

8/1/97

7/1/98

6/1/99

5/1/00

4/1/01

3/1/02

2/1/03

1/1/04

12/1/04

11/1/05

10/1/06

9/1/07

8/1/08

7/1/09

6/1/10

5/1/11

4/1/12

3/1/13

2/1/14

1/1/15

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

8

9

S&P 500 P/E Ratio and Federal Fund Rate

S&P 500 P/E Ratio Over the years Historical federal fund rate

1 14 27 40 53 66 79 92 105 118 131 144 157 170 183 196 209 222 235 248 261 274 287 300

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Change in S&P 500 P/E and Federal Funds Rate

Change of the P/E ratio Change of the federal fund rate

Source: Economic Research, Federal Reserve Bank of St. Louis; WRDS



Investment StrategyEquity & Strong Dollar

Year S&P Returns USD Index Prior Year

1982 14.76% 15.82%

1983 17.27% 12.10%

1984 1.4% 12.3%

1985 26.33% 14.93%

1993 7.06% 10.57%

1998 26.67% 13.08%

2006 13.62% 12.76%

Sector Median Change Percent of Time Positive

Consumer Discretionary

18.2% 100%

Consumer Staples 11.8% 85.7%

Financials 10.2% 100%

Technology 22.6% 85.7%

Healthcare 11.3% 85.7%

Strong Dollar & Equity Performance Sector Performance Following 10% Annual Gains in USD Index

Source: Yahoo Finance; WRDS; Bespoke Investment Research



Investment Strategy

Financial Sector & Interest Rate Hike


Name Ticker

Financial Services IYG

Financials IYF

S&P 500 ^GPSC

Three-year Treasury SHY



Investment StrategyConsumers Benefit from Strong Dollar


Name Ticker

Consumer Discretionary

XLY

Consumer Staples XLP

S&P 500 ^GPSC

US Dollar Index UUP



Investment StrategyRobust Earnings in Technology and Healthcare


Name Ticker

Information Technology

IYW

Healthcare IYH

S&P 500 ^GPSC



Investment StrategyPortfolio Allocation

Equities40%

Fixed Income

30%

Cur-rencies

30%

Portfolio CompositionPortfolio Holdings CompositionEquities 40%

Financial Services (IYG) 6.7%Financials (IYF) 6.7%

Consumer Discretionary (XLY) 6.7%Consumer Staples (XLP) 6.7%

Healthcare (IYH) 6.7%Information Technology (IYW) 6.7%

Fixed Income 30%Inflation-linked Bonds 15%

3 Year Treasury Bond 15%Currencies 30%

US Dollar Index 30%



Investment StrategyQ&A

Questions?

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