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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005: What Next For The Post-Election Economy? A Presentation To The Iowa Chapter Of Financial Executives International Des Moines, Iowa January 20, 2005. THE ECONOMIC-POLICY DEBATE OF 2005. - PowerPoint PPT Presentation
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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005:
What Next For The Post-Election Economy?
A Presentation To The Iowa Chapter Of Financial Executives International
Des Moines, IowaJanuary 20, 2005
THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005:
What Next For The Post-Election Economy?
A Presentation To The Iowa Chapter Of Financial Executives International
Des Moines, IowaJanuary 20, 2005
THE ECONOMIC-POLICY THE ECONOMIC-POLICY DEBATE OF 2005DEBATE OF 2005
* Sharpening A Classic Division Between Republicans * Sharpening A Classic Division Between Republicans And Democrats And Democrats
--What Kind Of “Ownership Society?”--What Kind Of “Ownership Society?”
* Finding A Balance Between Growth & Inequality * Finding A Balance Between Growth & Inequality Vs. A More Equal, Less Efficient EconomyVs. A More Equal, Less Efficient Economy
* Ideology Frames The Policy Issues In 2005* Ideology Frames The Policy Issues In 2005
--Social Security Reform--Social Security Reform
--Permanent Tax Cuts--Permanent Tax Cuts
--Tax Reform--Tax Reform
RESPECTABLE, BUT STILL SUB-PAR GROWTH RESPECTABLE, BUT STILL SUB-PAR GROWTH THROUGH 2005THROUGH 2005
Year-Ago Percent Change In Real GDPYear-Ago Percent Change In Real GDP
-2%-2%
-1%-1%
0%0%
1%1%
2%2%
3%3%
4%4%
5%5%
6%6%
7%7%
-1-1 11 22 33 44 55 66 77 88 99 1010 1111 1212 1313 1414 1515 1616
Quarters Before And After The Start Of A RecoveryQuarters Before And After The Start Of A Recovery
Source: U.S. Department Of CommerceSource: U.S. Department Of Commerce
Avg. Annual % Chg., Avg. Annual % Chg., 1991-2003=3.4% P.A.1991-2003=3.4% P.A.
Avg., Previous 5 Long Cycles*Avg., Previous 5 Long Cycles*
Current CycleCurrent Cycle
* Cycles beginning in 1960, 1969, 1974, 1981, 1990.* Cycles beginning in 1960, 1969, 1974, 1981, 1990.
ForecastForecast
IOWA'S ECONOMIC RECOVERY LAGS THE IOWA'S ECONOMIC RECOVERY LAGS THE NATIONAL AVERAGENATIONAL AVERAGE
Percent Change, Gross Sate/ Domestic ProductPercent Change, Gross Sate/ Domestic Product
-1.0%-1.0%
-0.5%-0.5%
0.0%0.0%
0.5%0.5%
1.0%1.0%
1.5%1.5%
2.0%2.0%
2.5%2.5%
3.0%3.0%
3.5%3.5%
4.0%4.0%
4.5%4.5%
1998-1998-20002000
20012001 20022002 20032003 20042004 20052005 2006-2006-0808
Sources: Economy.com, Blue Chip Economic ForecastSources: Economy.com, Blue Chip Economic Forecast
ForecastForecast
IowaIowa U.S.U.S.
GAUGING "DISINFLATION'S" IMPACT ON GAUGING "DISINFLATION'S" IMPACT ON CORPORATE "PRICING POWER," COSTS AND CORPORATE "PRICING POWER," COSTS AND
PROFIT PROFIT Year -Ago Percent Change; Non-Financial CorporationsYear -Ago Percent Change; Non-Financial Corporations
-4%-4%
-3%-3%
-2%-2%
-1%-1%
0%0%
1%1%
2%2%
3%3%
4%4%
5%5%
Mar-89Mar-89 Mar-91Mar-91 Mar-93Mar-93 Mar-95Mar-95 Mar-97Mar-97 Mar-99Mar-99 Mar-01Mar-01 Mar-03Mar-03 Mar-05Mar-05
Selling PricesSelling Prices
Unit Labor CostsUnit Labor Costs
Source: U.S. Commerce Dep't.Source: U.S. Commerce Dep't.
'04Q3'04Q3
Note: Bars DenoteNote: Bars DenoteRecession PeriodsRecession Periods Margin Margin
PressurePressure
Margin Margin ExpansionExpansion
A "YELLOW FLAG" ON INFLATIONA "YELLOW FLAG" ON INFLATIONYear-Ago Percent Change, Non-Energy CPI Goods Vs. Year-Ago Percent Change, Non-Energy CPI Goods Vs.
Services PricesServices Prices
-3.0-3.0
-2.5-2.5
-2.0-2.0
-1.5-1.5
-1.0-1.0
-0.5-0.5
0.00.0
0.50.5
1.01.0
1.51.5
2.02.0
Jan-1996Jan-1996 Jan-1998Jan-1998 Jan-2000Jan-2000 Jan-2002Jan-2002 Jan-2004Jan-20042.42.4
2.72.7
3.03.0
3.33.3
3.63.6
3.93.9
4.24.2Commodities, Ex. Food & Commodities, Ex. Food &
EnergyEnergy(Left Scale)(Left Scale)
Services, Ex. EnergyServices, Ex. Energy(Right Scale)(Right Scale)
11/0411/04
Source: U.S. Dep't Of LaborSource: U.S. Dep't Of Labor
INVENTORIES STILL "LEAN" OUTSIDE THE INVENTORIES STILL "LEAN" OUTSIDE THE AUTO INDUSTRYAUTO INDUSTRY
Ratio Of Inventories To SalesRatio Of Inventories To Sales
1.2501.250
1.3601.360
1.4701.470
1.5801.580
1.6901.690
1.8001.800
Jan-92Jan-92 Jan-94Jan-94 Jan-96Jan-96 Jan-98Jan-98 Jan-00Jan-00 Jan-02Jan-02 Jan-04Jan-041.1501.150
1.2001.200
1.2501.250
1.3001.300
1.3501.350
1.4001.400
1.4501.450
1.5001.500
1.5501.550
11/0411/04
Source: U.S. Department Of CommerceSource: U.S. Department Of Commerce
Excluding AutosExcluding Autos(Right Scale)(Right Scale)
AutosAutos(Left Scale)(Left Scale)
U.S. EXPORTS RESPOND TO A U.S. EXPORTS RESPOND TO A WEAKER DOLLARWEAKER DOLLAR
4444
4646
4848
5050
5252
5454
5656
5858
6060
6262
6464
Dec-98Dec-98 Dec-99Dec-99 Dec-00Dec-00 Dec-01Dec-01 Dec-02Dec-02 Dec-03Dec-03 Dec-04Dec-048686
8888
9090
9292
9494
9696
9898
100100
102102
104104
106106
108108
110110
112112
* Based on the dollar's inflation-adjusted, trade-weighted exchange * Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.rate against 44 other currencies.
Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.
12/0412/04
"Real Trade-Weighted" "Real Trade-Weighted" $*$*
(Right Scale)(Right Scale)
Export Orders, Mfd. GoodsExport Orders, Mfd. Goods(Left Scale)(Left Scale)
% Rept'g An Increase% Rept'g An Increase Index: 2000=100Index: 2000=100
1/14/051/14/05
RAPID-FIRE RATE HIKES FOLLOW RAPID-FIRE RATE HIKES FOLLOW AGGRESSIVE POLICY STIMULUSAGGRESSIVE POLICY STIMULUS
The Federal Funds Rate Less The PCE "Deflator;" The Federal Funds Rate Less The PCE "Deflator;" PercentPercent
-2.0-2.0
-1.0-1.0
0.00.0
1.01.0
2.02.0
3.03.0
4.04.0
5.05.0
Jan-90Jan-90 Jan-92Jan-92 Jan-94Jan-94 Jan-96Jan-96 Jan-98Jan-98 Jan-00Jan-00 Jan-02Jan-02 Jan-04Jan-04
12/0412/04
Avg., 1969-2003=2.6%Avg., 1969-2003=2.6%
Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep'tSources: Bloomberg Financial News, Inc., U.S. Commerce Dep't
Fed "Easing" During The Sluggish Fed "Easing" During The Sluggish 1991-92 Recovery1991-92 Recovery
Note: Bars Denote Note: Bars Denote Recession PeriodsRecession Periods
A REPLAY OF THE 1999-2000 A REPLAY OF THE 1999-2000 INTEREST-RATE “UP CYCLE?” INTEREST-RATE “UP CYCLE?”
The Treasury Yield Curve, Selected Periods; Yields The Treasury Yield Curve, Selected Periods; Yields In PercentIn Percent
4.34.3
5.35.3
6.36.3
7.37.3
00 55 1010 1515 2020 2525 3030 3535Years To MaturityYears To Maturity
Fed Funds Target Rate, Fed Funds Target Rate, 11/17/98=4.75%11/17/98=4.75%
5/18/005/18/00
Source: Bloomberg Financial News, Inc.Source: Bloomberg Financial News, Inc.
6/29/996/29/99
11/18/9811/18/98
Federal Funds Target Rate, Federal Funds Target Rate, 5/16/00=6.50%5/16/00=6.50%
““RISKS” IN THE OUTLOOKRISKS” IN THE OUTLOOK
* “LOW-QUALITY” SECTORS UNDER FIRE* “LOW-QUALITY” SECTORS UNDER FIRE
* THE HOUSING “BUBBLE” BURSTS* THE HOUSING “BUBBLE” BURSTS
* A DOLLAR TAILSPIN* A DOLLAR TAILSPIN
*OIL-PRICE VOLATILITY*OIL-PRICE VOLATILITY
* A CHINESE GROWTH RECESSION* A CHINESE GROWTH RECESSION
* TERRORISM & OTHER GEO-POLITICAL STRAINS* TERRORISM & OTHER GEO-POLITICAL STRAINS
* “BUSH II” ECONOMIC POLICIES* “BUSH II” ECONOMIC POLICIES
FISCAL DEFICITS: IN THE EYE OF THE FISCAL DEFICITS: IN THE EYE OF THE STORM?STORM?
Budget Surpluses & Deficits As A % Of GDP; Fiscal Budget Surpluses & Deficits As A % Of GDP; Fiscal YearsYears
-7%-7%
-6%-6%
-5%-5%
-4%-4%
-3%-3%
-2%-2%
-1%-1%
0%0%
1%1%
2%2%
3%3%
19701970 19751975 19801980 19851985 19901990 19951995 20002000 20052005 20102010
Source: Congressional Budget Office & WCM EstimatesSource: Congressional Budget Office & WCM Estimates
Avg. 1982-92=4.3% Avg. 1982-92=4.3% Of GDPOf GDP
No Tax No Tax Chgs.=2.3% Of Chgs.=2.3% Of
GDPGDP
Forecast, Forecast, 2006-102006-10
Wi. Tax & Soc. Wi. Tax & Soc. Sec. Sec.
Chgs.=3.7% Of Chgs.=3.7% Of GDPGDP
HOPEFUL SIGNS OF AN APPROACHING HOPEFUL SIGNS OF AN APPROACHING TURN IN THE U.S. BALANCE-OF-TURN IN THE U.S. BALANCE-OF-
PAYMENTS DEFICITPAYMENTS DEFICIT
-1%-1%
0%0%
1%1%
2%2%
3%3%
4%4%
5%5%
6%6%
Dec-84Dec-84 Dec-87Dec-87 Dec-90Dec-90 Dec-93Dec-93 Dec-96Dec-96 Dec-99Dec-99 Dec-02Dec-028080
8585
9090
9595
100100
105105
110110
115115
'04Q3'04Q3
Source: U.S. Commerce Dep'tSource: U.S. Commerce Dep't
1/14/05=87.91/14/05=87.9
* Four-quarter moving averages; trade-wtd. $ adjusted for relative inflation rates.* Four-quarter moving averages; trade-wtd. $ adjusted for relative inflation rates.
Percent Of GDP*Percent Of GDP* Index: 2000=100*Index: 2000=100*
U.S. Payments DeficitU.S. Payments Deficit(Left Scale)(Left Scale)
Trade-Wtd. U.S. $Trade-Wtd. U.S. $(Right Scale)(Right Scale)
IS FOREIGN CONFIDENCE IN THE U.S. STILL IS FOREIGN CONFIDENCE IN THE U.S. STILL INTACT?INTACT?
Net Foreign Direct Investment In The U.S. PlusNet Foreign Direct Investment In The U.S. Plus Foreign Private Portfolio Investment; $ Billions Foreign Private Portfolio Investment; $ Billions
-20-20
00
2020
4040
6060
8080
100100
120120
Mar-85Mar-85 Mar-88Mar-88 Mar-91Mar-91 Mar-94Mar-94 Mar-97Mar-97 Mar-00Mar-00 Mar-03Mar-03Source: U.S. Commerce DepartmentSource: U.S. Commerce Department
'04Q3'04Q3
Rolling 4-Quarter Rolling 4-Quarter AverageAverage
Rolling 5-Year Moving Rolling 5-Year Moving AverageAverage
THE OUTLOOK FOR S&P 500 EARNINGS GROWTH THE OUTLOOK FOR S&P 500 EARNINGS GROWTH STILL FAIRLY UPBEATSTILL FAIRLY UPBEAT
Yr.-Ago % Change In S&P 500 Operating Profits*Yr.-Ago % Change In S&P 500 Operating Profits*
-23%-23%
-18%-18%
-13%-13%
-8%-8%
-3%-3%
2%2%
7%7%
12%12%
17%17%
22%22%
27%27%
Mar-97Mar-97 Sep-98Sep-98 Mar-00Mar-00 Sep-01Sep-01 Mar-03Mar-03 Sep-04Sep-04 Mar-06Mar-06* First Call "bottom-up" consensus estimate, including goodwill adjustments.* First Call "bottom-up" consensus estimate, including goodwill adjustments.
Source: First Call, Inc.Source: First Call, Inc.
Forecast*Forecast*'04Q3-'05Q4'04Q3-'05Q4Avg. Annual % Chg., Avg. Annual % Chg.,
1983-2003=7.2%1983-2003=7.2%
S&P 500 PRICE-EARNINGS (P/E) MULTIPLE NOT S&P 500 PRICE-EARNINGS (P/E) MULTIPLE NOT UNUSUALLY HIGH... UNUSUALLY HIGH...
S&P 500 P/E Multiple, Based On Consensus, "Bottom-Up" S&P 500 P/E Multiple, Based On Consensus, "Bottom-Up" Operating. Earnings ForecastsOperating. Earnings Forecasts
33
77
1111
1515
1919
2323
2727
Jan-79Jan-79 Jan-83Jan-83 Jan-87Jan-87 Jan-91Jan-91 Jan-95Jan-95 Jan-99Jan-99 Jan-03Jan-03Sources: Standard & Poors, Inc., IBES, Federal Reserve BoardSources: Standard & Poors, Inc., IBES, Federal Reserve Board
S&P 500 P/E MultipleS&P 500 P/E Multiple(Left Scale)(Left Scale)
1/14/05 1/14/05 P/E=16.1xP/E=16.1xAvg. P/E, 1983-2003=14.9 Times Avg. P/E, 1983-2003=14.9 Times
Forward Operating EarningsForward Operating Earnings
……AND STILL "CHEAP" AGAINST BONDS, AT AND STILL "CHEAP" AGAINST BONDS, AT CURRENT INTEREST RATESCURRENT INTEREST RATES
Ratio, 10-Yr. Treasury Yield Vs. Earnings-Price Yield (E/P) On Ratio, 10-Yr. Treasury Yield Vs. Earnings-Price Yield (E/P) On S&P 500 StocksS&P 500 Stocks
0.40.4
0.60.6
0.80.8
1.01.0
1.21.2
1.41.4
1.61.6
1.81.8
Jan-79Jan-79 Jan-83Jan-83 Jan-87Jan-87 Jan-91Jan-91 Jan-95Jan-95 Jan-99Jan-99 Jan-03Jan-03Sources: Standard & Poors, Inc., IBES, Federal Reserve BoardSources: Standard & Poors, Inc., IBES, Federal Reserve Board
Avg., 1983-2003=1.016Avg., 1983-2003=1.016
1/14/051/14/05
BOND MANAGERS POSITIONED FOR HIGHER BOND MANAGERS POSITIONED FOR HIGHER INTEREST RATES RATES INTEREST RATES RATES
Portfolio "Duration" Vs. Target, In Percent; 4-Wk. Portfolio "Duration" Vs. Target, In Percent; 4-Wk. Moving Avgs.Moving Avgs.
9494
9595
9696
9797
9898
9999
100100
101101
102102
103103
104104
25-Dec-0125-Dec-01 25-Jun-0225-Jun-02 24-Dec-0224-Dec-02 24-Jun-0324-Jun-03 23-Dec-0323-Dec-03 22-Jun-0422-Jun-04 21-Dec-0421-Dec-04Source: Stone McCarthy Research Associates, Inc.Source: Stone McCarthy Research Associates, Inc.
12/14/04 12/14/04 WeekWeek
"Neutral" (100% Of "Neutral" (100% Of Benchmark Duration)Benchmark Duration)
LOW TREASURY YIELDS VS. DURATION LOW TREASURY YIELDS VS. DURATION INCREASE INCREASE
THE RISK OF NEGATIVE RETURNSTHE RISK OF NEGATIVE RETURNS
22
33
44
55
66
77
88
Dec-92Dec-92 Dec-94Dec-94 Dec-96Dec-96 Dec-98Dec-98 Dec-00Dec-00 Dec-02Dec-02 Dec-04Dec-04
Duration (In Years)Duration (In Years) Yield (In Percentage Points)Yield (In Percentage Points)
11/0411/04
5-Yr. Treasury Yield5-Yr. Treasury Yield
5-Yr. Treasury Duration5-Yr. Treasury Duration
Source: Merrill Lynch, Inc.Source: Merrill Lynch, Inc.
COMPETING IN A DYNAMIC COMPETING IN A DYNAMIC GLOBAL ENVIRONMENTGLOBAL ENVIRONMENT
* GLOBAL COMPETITION’S SILVER LINING* GLOBAL COMPETITION’S SILVER LINING
--Ongoing Pressure To Boost Productivity Growth Via Tech --Ongoing Pressure To Boost Productivity Growth Via Tech
Investment, Management & Other InnovationsInvestment, Management & Other Innovations
* “MUTED” BUSINESS CYCLE* “MUTED” BUSINESS CYCLE
* MORE FAVORABLE DEMOGRAPHICS* MORE FAVORABLE DEMOGRAPHICS
* THE BENEFITS OF A MORE “MARKET-ORIENTED” FORM * THE BENEFITS OF A MORE “MARKET-ORIENTED” FORM
OF CAPITALISM OF CAPITALISM
--Entrepreneurship & Innovation, More Open, Dynamic Labor & --Entrepreneurship & Innovation, More Open, Dynamic Labor &
Financial Markets, More Pro-Active Economic PoliciesFinancial Markets, More Pro-Active Economic Policies