economic and political update · globaloverviewofmomentum 6 international global purchasing...

ECONOMIC AND POLITICAL UPDATE:

FEBRUARY 2019

David B. Hanson, CPA CFA

Chief Executive Officer

Robust Economic Growth – Real or Fake News?

Impending Recession – Real or Fake News?

WORLD POPULATION COMPARISON 2

Rest of the World

Source: CIA World Factbook 8.18

GLOBAL GDP COMPARISON (PURCHASING POWER PARITY – 2017 DOLLARS) 3

Rest of the World


GLOBAL GDP PER CAPITA COMPARISON 4

World Average


GLOBAL GDP PER CAPITA COMPARISON 1870 – 2017 5

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000GDP Per Capita

United States

Japan

Western Europe

Russia Latin AmericaMiddle East

China

India, Asia

19

90

In

tern

ati

on

al G

ea

ry-K

ha

mis

do

lla

rs

GLOBAL OVERVIEW OF MOMENTUM 6

International

Global Purchasing Managers’ Index for manufacturing, quarterly

Nov Dec

Global 52.0 51.5

DM 52.8 52.3

EM 50.8 50.3

U.S. 55.3 53.8

Canada 54.9 53.6

Japan 52.2 52.4

UK 53.6 54.2

Euro Area 51.8 51.4

Germany 51.8 51.5

France 50.8 49.7

Italy 48.6 49.2

Spain 52.6 51.1

Greece 54.0 53.8

China 50.2 49.7

Indonesia 50.4 51.2

Korea 48.6 49.8

Taiwan 48.4 47.7

India 54.0 53.2

Brazil 52.7 52.6

Mexico 49.7 49.7

Russia 52.6 51.7

2008

Dev

elop

edE

mer

ging

20182009 2015 2016 2017 20182010 2011 2012 2013 2014

Source: JP Morgan Asset Management

FFA Investment Management

7

• Global Context and Overview

• Recap of Recent U.S. GDP Growth

• Tariffs and Trade Wars

• Economic Gear Box

• Consumer and Small Business Confidence

• Employment

• Inflation, Interest Rates, Energy, and Crypto-currency

• Capital Markets

• Washington…

8

Three Overarching / Recurring Questions:

• How likely is a near term recession?

• How likely is a near term stock market correction?

• What storm clouds are on the long term horizon?

1. Demographics

2. Disparity of Income

3. Deficits

4. Disaster (Geopolitical )

QUARTERLY GDP

2010 2011 2012 2013 2014 20152009 2016 20172008 2018

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0

Q1

08

Q2

08

Q3

08

Q4

08

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Q2

13

Q3

13

Q4

13

Q1

14

Q2

14

Q3

14

Q4

14

Q1

15

Q2

15

Q3

15

Q4

15

Q1

16

Q2

16

Q3

16

Q4

16

Q1

17

Q2

17

Q3

17

Q4

17

Q1

18

Q2

18

Q3

18

� 3rd quarter GDP growth came in at a strong 3.5%

� Large increases: Consumer Durable Goods (6.9%), Intellectual Property (7.9%)

� Decreases: Exports – Goods (-7.0%), Non-Residential Structures (-7.9%)

� Total Personal Consumption grew 4.0% - highest since Q4 ‘14

� Net Exports subtracted 1.78% on -3.5 shrinkage in Exports and 9.1% growth in

Imports

20

QUARTERLY GDP 20

WHAT A RECOVERY… 11

VERY L O N G……. BUT VERY weak…….

Source: BEA, NBER, J.P. Morgan Asset Management. *Chart assumes current expansion started in July 2009 and continued through December 2018, lasting 114 months so far. Data for length of economic expansions and recessions obtained from the National Bureau of Economic Research (NBER). These data can be found at www.nber.org/cycles/ and reflect information through December 2018. Past performance is not a reliable indicator of current and future results.Guide to the Markets – U.S. Data are as of December 31, 2018.

0

25

50

75

100

125

1900 1912 1921 1933 1949 1961 1980 2001

Length of economic expansions and recessions

Expansions: 48 months

Recessions: 15 months

Average length (months): 114 months*

Strength of economic expansionsCumulative real GDP growth since prior peak, percent

Number of quarters

Prior expansion peak

— 4Q48 — 1Q80

— 2Q53 — 3Q81

— 3Q57 — 3Q90

— 2Q60 — 1Q01

— 4Q69 — 4Q07

— 4Q73

-6%

4%

14%

24%

34%

44%

54%

0 8 16 24 32 40

CAUSES OF U.S. RECESSIONS SINCE WWI 12

Source: Goldman Sachs, FFA Investment Management

ECONOMIC HEATMAP 20

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Real consumer spending (y/y) 2.0% 3.0% 2.6% 2.5% 2.3% 2.4% 2.3% 2.4% 2.6% 2.8% 2.7% 2.5% 2.4% 2.2% 2.5% 2.6% 2.7% 3.0% 3.1% 2.7% 3.0% 2.8% 2.8%

Light vehicle sales (mil.) 17.32 16.72 16.97 16.7 16.59 16.69 16.03 18.47 17.98 17.4 17.76 17.07 16.96 17.4 17.07 16.81 17.38 16.68 16.6 17.4 17.5 17.4 17.5

Housing starts (000's) 1288 1189 1165 1122 1225 1185 1172 1158 1265 1303 1210 1334 1290 1327 1276 1329 1177 1184 1280 1237 1217 1256 1256

ISM Mfg. 57.6 56.6 55.8 55.5 56.5 56.6 58.9 60 58.4 57.7 59.4 59.6 60.7 59.3 57.9 58.7 60 58.4 60.8 59.5 57.5 58.8 54.3

ISM Non-mfg. 57 55.6 57.6 57.3 57 55.1 55.5 58.7 59.7 57.1 56.3 59.4 59.1 58.7 57.2 58.9 58.7 56.7 58.8 60.8 60 60.4 58

Durable goods orders (y/y) -2.1% 5.7% -0.3% 5.2% 15.3% 3.4% 5.1% 8.2% 2.9% 8.9% 8.0% 7.4% 12.3% 8.2% 11.6% 10.4% 1.8% 10.5% 13.4% 6.1% 8.2% 4.9% 4.9%

Unemployment rate (%) 4.7% 4.4% 4.4% 4.4% 4.3% 4.3% 4.4% 4.2% 4.1% 4.2% 4.1% 4.1% 4.1% 4.0% 3.9% 3.8% 4.0% 3.9% 3.8% 3.7% 3.8% 3.7% 3.9%

Nonfarm payrolls (000's) 200 73 175 155 239 190 221 14 271 216 175 176 324 155 175 268 208 165 286 119 274 176 312

Jobless claims (000's) 235 241 242 253 251 243 238 254 234 239 248 234 217 242 211 223 232 219 205 207 215 233 233

Avg. hourly earnings (y/y) 2.7% 2.6% 2.5% 2.5% 2.5% 2.5% 2.6% 2.8% 2.3% 2.5% 2.7% 2.8% 2.6% 2.6% 2.6% 2.8% 2.8% 2.8% 3.0% 2.8% 3.2% 3.1% 3.2%

S&P 500 EPS (NTM est.) $129 $129 $130 $130 $130 $131 $131 $131 $133 $134 $134 $154 $156 $156 $158 $159 $160 $161 $162 $162 $164 $164 $162

S&P 500 Sales (NTM est.) $1,216 $1,210 $1,210 $1,211 $1,211 $1,217 $1,215 $1,211 $1,229 $1,234 $1,233 $1,292 $1,303 $1,298 $1,308 $1,310 $1,315 $1,328 $1,331 $1,334 $1,344 $1,346 $1,340

S&P 500 net margin (%) 8.9% 9.1% 9.2% 9.2% 9.3% 9.3% 9.3% 9.2% 9.2% 9.2% 9.2% 9.1% 9.1% 9.4% 9.4% 9.5% 9.7% 9.7% 9.8% 10.1% 10.1% 10.1% 10.5%

Headline CPI (y/y) 2.7% 2.4% 2.2% 1.9% 1.6% 1.7% 1.9% 2.2% 2.0% 2.2% 2.1% 2.1% 2.2% 2.4% 2.5% 2.8% 2.9% 2.9% 2.7% 2.3% 2.5% 2.2% 1.9%

Core CPI (y/y) 2.2% 2.0% 1.9% 1.7% 1.7% 1.7% 1.7% 1.7% 1.8% 1.7% 1.8% 1.8% 1.8% 2.1% 2.1% 2.2% 2.3% 2.4% 2.2% 2.2% 2.1% 2.2% 2.2%

Headline PCE deflator (y/y) 2.2% 1.9% 1.8% 1.6% 1.5% 1.5% 1.5% 1.8% 1.7% 1.9% 1.8% 1.8% 1.9% 2.1% 2.0% 2.3% 2.3% 2.4% 2.2% 2.0% 2.0% 1.8% 1.8%

Core PCE deflator (y/y) 1.9% 1.6% 1.6% 1.6% 1.6% 1.5% 1.4% 1.5% 1.6% 1.6% 1.6% 1.6% 1.7% 2.0% 1.9% 2.0% 2.0% 2.0% 1.9% 2.0% 1.8% 1.9% 1.9%

2017 2018

GDP GROWTH OUTLOOK – THE IMPACT OF DEMOGRAPHICS 14

Source: J.P. Morgan Asset Management; (Top left) Census Bureau, DOD, DOJ; (Top left and right) BLS; (Right and bottom left) BEA.GDP drivers are calculated as the average annualized growth in the 10 years ending in 4Q of the last year. Future working age population is calculated as the total estimated number of Americans from the Census Bureau, per the March 2018 report, controlled for military enrollment, growth in institutionalized population and demographic trends. Growth in working age population does not include illegal immigration; DOD Troop Readiness reports used to estimate percent of population enlisted.Guide to the Markets – U.S. Data are as of June 30, 2018.

1.0%

0.6%0.8%

0.2%

0.04%

0.3%

0.4%

0.6%

0.3%

0.15%

1.3%

1.0%

1.3%

0.5%

0.2%

0.0%

0.3%

0.6%

0.9%

1.2%

1.5%

1.8%

'78-'87 '88-'97 '98-'07 '08-'17 '18-'27

Growth in working-age populationPercent increase in civilian non-institutional population ages 16-64

Census forecast

Immigrant Native born

Storm

Cloud #1

4.0%

Drivers of GDP growthAverage year-over-year % change

1.0% 1.3% 1.6% 1.9% 0.9%

2.2%

1.9%

1.4%1.1%

0.5%

3.2%3.2%

3.0% 3.0%

1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

'68-'77 '78-'87 '88-'97 '98-'07 '08-'17

Growth in workers + Growth in real output per worker

Growth in real GDP

DEMOGRAPHICS 15

Source: National Center for Health Statistics

Bureau of Labor Statistics

59.9

76.5

63.9

81.3

35

40

45

50

55

60

65

70

75

80

85

19

00

19

02

19

04

19

06

19

08

19

10

19

12

19

14

19

16

19

18

19

20

19

22

19

24

19

26

19

28

19

30

19

32

19

34

19

36

19

38

19

40

19

42

19

44

19

46

19

48

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

Life Expectancy at Birth

Male Life Expectancy (Years) Female Life Expectancy (Years)

Social Security instituted

Workforce ~77% male

(~52% male today)

TARIFFS AND TRADE WARS 16

ECONOMIC IMPACT OF ANNOUNCED TARIFFS

Source: Ned Davis Research, FFA Investment Management

HISTORICALLY, PROTECTIONISM HAS

RESULTED IN:

•Slower economic growth

•Less efficient allocation of

resources

•Reduced productivity growth

•Higher inflation

THESE TARIFFS WILL LIKELY LEAD TO:

•Higher prices

•Higher costs and margin pressure

•Employment losses

•No positive impact to GDP,

potentially larger trade deficit

TRADE WAR – THE LONG GAME?


Data as of 2014

CHN

CAN

MEX

JPN

KOR

IND

BRA

CHE

SGP

MAL

VIE

SAU

THA

AUS

ISR COL

RUS

IDN

UAE

CHL

TUR

PHL

PER

SAF

ARG

NOR

BAN

NGA

EGY

PAK

KAZ

0%

2%

4%

6%

8%

0% 2% 4% 6% 8% 10% 12% 14%

A general lack of tariff reciprocity

EU

Tariff applied BY the US is higher

Tariff applied TOthe US is higher

TRADE WAR – WHO HAS THE MOST TO LOSE?


Data as of 2014

Source: FactSet , J.P. Morgan Asset Management; (Left) Netherlands Policy Analysis; (Right) IMF. Guide to the Markets – U.S. Data are as of September 30, 2018.

11%

11%

19%

23%

36%

37%

48%

53%

8%14%

16%

17%

25%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

Brazil

India

China

Russia

Mexico

Korea

S. Africa

Taiwan

U.S.

Japan

Eurozone

UK

Canada

Exports as a share of GDPGoods exports, 2017

U.S.

EU

China

Other

EM ex -China

CONSUMER AND SMALL BUSINESS 20

INITIALLY FEELING PRETTY DARN GOOD…. 21

CONFIDENCE HAS SLOWLY RECOVERED…. ….BUT TOOK SOME BODY BLOWS IN RECENT MONTHS 22

Impact of Fiscal Cliff

Impact of Debt Ceiling

Impact of Gov’t Shutdown

China, ISIS,

Greece, Trump?

Trump

2nd only to ‘05

EMPLOYMENT AND INCOME INEQUALITY 23

EMPLOYMENT 24

Source: Bloomberg, FFA

Investment Management

4.0%58.00%

59.00%

60.00%

61.00%

62.00%

63.00%

64.00%

65.00%

66.00%

67.00%

68.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

'78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Unemployment Rate & Labor Force

Participation Rate

Unemployment Rate (Left) Labor Participation Rate (Right)

63.0%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Unemployment Rate & Wage Growth

Unemployment Rate Employment Cost % change YOY

2.9%

EMPLOYMENT - INCOME DISPARITY - TOP 10% VS. BOTTOM 50% 25

32.1%

47.2%

17.7%

11.3%

49.3%

70.9%

7.1%2.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

% of Income - Top 10% % of Income - Bottom 50%

% of Taxes - Top 10% % of Taxes - Bottom 50%

Storm

Cloud #2

EMPLOYMENT 26

Source: J.P. Morgan Asset Management; (Left) BLS, FactSet; (Right) Census Bureau.Unemployment rates shown are for civilians aged 25 and older. Earnings by educational attainment comes from the Current Population Survey and is published under historical income tables by person by the Census Bureau.Guide to the Markets – U.S. Data are as of December 31, 2018.

$38,145

$67,763

$98,368

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

High school graduate Bachelor's degree Advanced degree

Average annual earnings by highest degree earnedWorkers aged 18 and older, 2017

+30K

+27K

'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '180%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Unemployment rate by education level

2.2%3.1%3.5%5.6%Less than high school degree

High school no collegeSome collegeCollege or greater

Education level Nov 2018

EMPLOYMENT – IMPACT OF EDUCATION 27

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Workforce Composition by Education Attainment(Civilian Labor Force - 25 yrs. & over)

Less than Highschool Highschool College College +

Source: U.S. Bureau of Labor Statistics

College and advanced degree workers have grown from just

over half to 2/3 of the >25 workforce in 25 years

EARNINGS – IMPACT OF EDUCATION (WORKFORCE OVER 25 YRS. OF AGE) 28

Source: U.S. Bureau of Labor Statistics

$10,920 (70% of Median)

$27,040 (65% of

median)

$37,024

$41,496$17,888 (130% of median)

$60,996 (146% of

median)$76,440

$13,780

$47,164

-

20,000

40,000

60,000

80,000

Less than Highschool Highschool

Some College College

College + Workforce Median

RECESSION WATCH: HOUSING, INFLATION, INTEREST RATES, ENERGY 29

RECESSION WATCH - HOUSING 30

58 Year Avg – 1,430



0

500

1000

1500

2000

2500

3000

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Housing Starts

Seasonally adjusted annual rate

Surplus of 3MM

houses vs. average

start rate for 118 mos

Deficit of 5.66MM houses vs.

average start rate for 137 mos

HOUSING IS VERY TIGHT 31


BUT PRICES HAVE DRIFTED DOWN IN RECENT MONTHS 32


3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

200

400

600

800

1,000

1,200

1,400

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8

NEW HOME SALES (L) EXISTING HOME SALES (R)

$150

$175

$200

$225

$250

$275

$300

$325

$350

$3752 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8

MEDIAN PRICE OF NEW HOME SALES MEDIAN PRICE OF EXISTING HOME SALES

WILMINGTON AND DE ARE A LITTLE LESS TIGHT THAN THE U.S. 33

Source: Census Bureau, ACS, Moody’s Analytics, 2017

AND HAVE SEEN A LITTLE LESS PRICE APPRECIATION 34

Source: FHFA, Moody’s Ana;ytics

CONSTRUCTION INDUSTRY REMAINS OPTIMISTIC 35


CONSTRUCTION SPENDING MIX 36


CONSTRUCTION BACKLOG 37

Source: Associated Builders & Contractors, FFA Investment Management

RECESSION WATCH - CONSUMER PRICE INDEX 38

27

We have not seen

>3% core inflation

since May 1995

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

CPI and Core CPI

% change vs. prior year, seasonally adjusted

Core CPI Headline CPI

60.00%

65.00%

70.00%

75.00%

80.00%

85.00%

90.00%

95.00%

'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Capacity Utilization

US Capacity Utilization % of Total Capacity seasonally adjusted

RECESSION WATCH - CAPACITY UTILIZATION 39



50 Year Average – 80.2%

RECESSION WATCH - ENERGY 40

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18$0

$20

$40

$60

$80

$100

$120

$140

$160

Price of oilWTI crude , nominal prices, USD/barrel

Dec. 2018: $45.33

Jun. 2008: $140.00

Jan. 2009: $41.68

Jun. 2014: $105.37

Jan. 2016: $33.62

Production 2015 2016 2017 2018* 2019* Growth since ‘15

U.S. 15.1 14.8 15.7 17.8 19.6 29.5%

OPEC 38.4 39.4 39.3 39.2 38.3 -0.2%

Russia 11.0 11.3 11.2 11.4 11.5 4.4%

Global 97.0 97.4 98.1 100.4 101.8 5.0%

Consumption

U.S. 19.5 19.7 20.0 20.5 20.8 6.6%

China 12.4 12.8 13.4 13.9 14.3 15.8%

Global 95.9 96.9 98.6 100.1 101.6 6.0%

Inventory Change 1.1 0.4 -0.5 0.3 0.2

Change in production and consumption of liquid fuelsProduction, consumption and inventories, millions of barrels per day

'13 '14 '15 '16 '17 '18900

950

1,000

1,050

1,100

1,150

1,200

1,250

0

500

1,000

1,500

2,000

2,500

U.S. crude oil inventories and rig count**Million barrels, number of active rigs

Inventories (incl. SPR) Active rigs

Sep. 2018: $73.55

1Y 3Y 5Y 7Y 10Y 15Y 20Y 30Y0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

US Treasury Actives Curve 10/31/2016US Treasury Actives Curve 12/31/2016US Treasury Actives Curve 12/31/2017US Treasury Actives Curve 9/30/2018US Treasury Actives Curve 2/11/2019

RECESSION WATCH - INTEREST RATES 41

Pre-ElectionImmediate Post-Election

12/31/17

9/30/18

2/11/19

RECESSION WATCH - INTEREST RATES 42

Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management.Market expectations are the federal funds rates priced into the fed futures market as of the date of the December 2018 FOMC meeting and are through November 2021. *Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in absence of further shocks and under appropriate monetary policy. Guide to the Markets – U.S. Data are as of December 31, 2018.

Federal funds rate expectationsFOMC and market expectations for the federal funds rate

2.88%3.13% 3.13%

2.75%

2.53% 2.39%2.38%

0%

1%

2%

3%

4%

5%

6%

7%

'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 '23

FOMC December 2018 forecasts Percent

2018 2019 2020 2021Long run*

Change in real GDP, 4Q to 4Q 3.0 2.3 2.0 1.8 1.9

Unemployment rate , 4Q 3.7 3.5 3.6 3.8 4.4

PCE inflation , 4Q to 4Q 1.9 1.9 2.1 2.1 2.0

Federal funds rate

FOMC long - run projection*

FOMC year -end estimates

Market expectations on 12/19/18

Longrun

YIELD CURVE RECESSION SIGNALS? 43

PRIVATE SECTOR AND THE EQUITY MARKETS 44

S&P 500 INDEX Q4 THRILL RIDE 45

Source: Bloomberg, J.P. Morgan,

FFA Investment Management

10/3/18, 2925.51

12/3/18, 2790.37

12/24/18, 2351.1

1/31/19, 2704.1

2,300

2,350

2,400

2,450

2,500

2,550

2,600

2,650

2,700

2,750

2,800

2,850

2,900

2,950

3,000

9/28/18 10/28/18 11/28/18 12/28/18 1/28/19

S&P 500 RETURNS AFTER BAD QUARTERS 46

Quarterly

Performance

1 June-32 -37.7%

2 September-31 -33.6%

3 December-29 -27.8%





8 June-62 -20.6%

9 March-38 -18.6%


11 June-70 -18.0%

12 June-30 -17.7%


14 December-18 -17.1%

Quarter Ending

One

Year

Three

Years

Five

Years

162.9% 170.5% 344.8%

-9.6% 13.1% 118.2%

-24.9% -60.9% -40.7%

38.1% 72.7% 117.5%

16.8% 48.8% 109.0%

26.5% 48.6% 128.2%

31.1% 17.6% 25.4%

31.2% 69.2% 94.8%

35.2% 38.2% 84.5%

6.4% 24.5% 115.4%

41.9% 57.4% 56.3%

-23.4% -34.7% -32.8%

0.3% 27.0% 66.3%

25.6% 37.8% 91.3%

Forward Performance

?????

S&P 500 INDEX – REASONABLY VALUED? 47

S&P 500 INDEX - SOURCE OF EARNINGS 48

Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management.EPS levels are based on annual operating earnings per share except for 2018, which is quarterly. Percentages may not sum due to rounding. Past performance is not indicative of future returns.Guide to the Markets – U.S. Data are as of December 31, 2018.

S&P 500 year-over-year operating EPS growthAnnual growth broken into revenue, changes in profit margin & changes in share count

32%

27%27%

17%

6%

- 11%

5%

11%

0%

15%

47%

15%

- 40%

- 6%

15%13%

24%

19%19%

-31%

-60%

-40%

-20%

0%

20%

40%

60%

3Q182Q181Q18'17'16'15'14'13'12'11'10'09'08'07'06'05'04'03'02'01

Share of EPS growth 3Q18 Avg. ’01 -’17

Margin 20.3% 3.8%

Revenue 10.0% 3.0%

Share count 1.8% 0.2%

Total EPS 32.1% 6.9%

S&P 500 EARNINGS 49

Source: Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management; (Top right) Federal Reserve, S&P 500 individual company 10k filings, S&P Index Alert.EPS levels are based on operating earnings per share. Earnings estimates are Standard & Poor’s consensus analyst expectations.

S&P 500 operating earnings per shareIndex quarterly operating earnings

-$1

$2

$5

$8

$11

$14

$17

$20

$23

$26

$29

$32

$35

$38

$41

$44

$47

'02 '05 '08 '11 '14 '17

3Q18: $41.38

S&P consensus analyst estimates

THE FEDERAL GOVERNMENT 50

2,519 2,546 2,719

2,861 3,031

3,266 3,392 3,513 3,760

3,983 4,189

4,524

1,200 1,280 1,362 1,340 1,348 1,380 1,406 1,436 1,481 1,522 1,562 1,608

263 316 390 485 570 643 702 739 774 817 864 915

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Mandatory Discretionary Interest

Federal Budget (billions)

2017

Revenue $3,316

Expense $3,982

Deficit $ 665

% of GDP 3.5%

Debt % of GDP 76.5%

THE DEFICIT IS STILL A HUGE CHALLENGE… 51

Source: www.whitehouse.gov – Budget of the United States Government, Fiscal Year 2017, Summary Tables S-1 and S-4

2017 U.S. Federal Revenue (billions):

Personal Income $1,587

Corporate Income $ 297

SS, Medicare, FUT $1,162

Excise, Duties, T&E, etc. $ 270

Total $3,316

5.5%

CAGR2.7%

CAGR

Storm

Cloud #3

TRUMP BUDGET PROPOSAL FROM BEGINNING OF 2017 52

Source: www.whitehouse.gov – Budget of the United States Government, Fiscal Year 2018, Summary Tables S-1 and S-4

3,688 3,853 4,062 4,094

4,340 4,470 4,617 4,832 4,933 5,073

5,306 5,527 5,708

(438) (585) (602) (440) (526) (488) (456) (442) (318) (209) (176) (110)

16

20.7%

18.4%

18.2%

18.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

(3,000)

(1,000)

1,000

3,000

5,000

7,000

9,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Total Receipts Total Outlays Deficit Spending as % of GDP Receipts as % of GDP

• Debt to GDP

shrinking from

77.0% to 59.8%

• Personal taxes

growing at a CAGR

of 6.4%

• Corporate taxes

growing at a CAGR

of 5.2%

• Nominal GDP

growing at a CAGR

of 5.2%

CBO BUDGET PROJECTIONS – APRIL 2018 53

Source: Congressional Budget Office – The Budget and Economic Outlook: 2018 to 20028

3,982 4,142 4,470

4,685 4,949

5,288 5,500 5,688

6,015 6,322

6,615 7,046

(666) (804) (980) (1,007) (1,122) (1,276) (1,272) (1,244) (1,352) (1,320) (1,316)(1,526)

20.8%17.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

(3,000)

(1,000)

1,000

3,000

5,000

7,000

9,000

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Total Receipts Total Outlays Deficit Spending as % of GDP Receipts as % of GDP

• Debt to GDP

GROWING from

76.5% to 96.2%

• Personal taxes

growing at a CAGR

of 5.7%

• Corporate taxes

growing at a CAGR

of 3.8%

• Nominal GDP

growing at a CAGR

of 4.1%

54


NATIONAL DEBT

WHAT COULD CAUSE AN UPSIDE SURPRISE? 55



$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

'91

'92

'93

'94

'95

'96

'97

'98

'99

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

'17

'18

Household Net Worth

Billions USD, not seasonally adjusted

9.00%

9.50%

10.00%

10.50%

11.00%

11.50%

12.00%

12.50%

13.00%

13.50%

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

Household Debt Service RatioDebt Payments as % of disposable personal income, seasonally

adjusted

56WHAT COULD CAUSE A DOWNSIDE SURPRISE?

Storm

Cloud #4

57

• Growth has firmed up across the globe; U.S. recession is unlikely

• U.S. has been steadily “going 40” (~2% growth)

• Wage growth is trailing unemployment but finally showing up

• Inflation concerns are muted

• Further rate hikes now appear unlikely

• U.S. Equity Markets have been very volatile but are reasonably priced

• Trump budget assumed 3% GDP growth – hard to model but emotion could get us there

• New CBO budget assumes ~2% growth – possibly too pessimistic

• Syria / Korea / China / Russia / Brexit – Geopolitical risk is ever-present

IN SUMMATION…

economic and political update · globaloverviewofmomentum 6 international global purchasing...

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