Economic and Political Update
Financial Planning & Analysis Conference
Economic and Political Update Jerry Webman
Session 1 Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful. Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such. The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentation materials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presented the materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download for personal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, reposting or resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may be directed to [email protected] or to Mary Walter, Senior Manager - Licensing and Rights at 919-402-4835..
2016 Outlook: Modest Growth with Volatility Ahead, and Oh Yes, the Election Jerry A. Webman, Ph.D., CFA Chief Economist May 2016 Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency and involve investment risks, including the possible loss of the principal amount invested. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc., 225 Liberty Street, New York, NY 10281-1008 © 2016 OppenheimerFunds Distributor, Inc. All rights reserved.
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
2
1-1
The duration and magnitude of the current bull market pales in comparison to those of the past Bull Market Cumulative Advance (%)
Duration and Magnitude of Past Secular Bulls S&P 500 Index
Growth of 100 from Start of Secular Bull Markets S&P 500 Index 400
1400% 1200%
350
1982-1999
1000%
1942-1966 Average
800%
2015
250
600%
200
400% 200% 0%
1987
300
2009Present 0
1946
150
100 200 Bull Market Duration (Months)
300
100
0 1942-1966
5 Bull Market Duration (Years) 1982-1999
10
2009-Present
Source: Bloomberg, 4/30/16. Index definitions can be found on Page 30. Past performance does not guarantee future results. 3
U.S. recession unlikely, consumer doing better University of Michigan Consumer Sentiment Index 110
Average Hourly Earnings +2% Y/Y
100 90
Gasoline Prices Since April 2014 -46%
80 70
Home Prices +5.5% Y/Y
60 50 1978
1988
1998
2008
Source: Bloomberg, University of Michigan, Bureau of Labor Statistics, American Automobile Association, S&P-Case/Shiller 20 City Home Price Index, quarterly data as of 12/31/15. 4
1-2
Few signs of equity market exuberance S&P 500 10-Year Total Return Minus Barclays LT Treasury Bonds 10-Year Total Return 400%
Stocks outperform
300 200 100 0
Bonds outperform
-100 -200
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bloomberg, 4/30/16. Index definitions can be found on Page 30. Past performance does not guarantee future results. 5
Prolonged bout of international underperformance unlikely to be repeated Index Total Returns (%, in USD) 300 250 200
S&P 500 Index MSCI EAFE Index MSCI EM Index
150 100 50 0 2009
2011
2013
2015
Source: Bloomberg 4/30/16 U.S. equity represented by S&P 500 Index, developed international represented by MSCI EAFE Index, emerging markets represented by MSCI EM Index. Please refer to disclosure statements for Index definitions on Page 30 . 7
1-3
Few signs of the excesses found at end of past cycles
1929
1980
2000
2008
Today
20.9%
11.03%
10.97%
10.05%
7.5%
Inflation
1.2%
14.8%
3.7%
5.6%
1.4 %
Valuation
20.2x
9.9x
30.4x
17.7x
16.5x
51%
68.7%
97.8%
132.3%
104.4% and falling
Bank Credit
Household Debt as a % of Disposable Personal Income
Source: Robert Shiller, the Federal Reserve and Haver Analytics, 2/29/16. Past performance does not guarantee future results. 8
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
9
1-4
Developed Markets at Mid-cycle Pause Recovery
Equities
Expansion
High Yield
Slowdown
Credit
Contraction
Duration
Source: OppenheimerFunds’ proprietary research of the U.S. Business Cycle Leading Indicator, 12/31/15. Annualized monthly returns of the defined risk premia from January 1970 – December 2013. Risk Premia are defined as follows: US Equity Premium = S&P 500 - Citigroup US 7-10 YR Treasury. High Yield Premium = Citigroup High Yield Cash Pay BB Rated (7-10)YR - Citigroup USBIG Corp BBB Rated (7-10)YR. Credit Premium = Citigroup USBIG Corp BBB Rated - Citigroup US 7-10 YR Treasury. Duration Premium = Citigroup US 7-10 YR Treasury – Citigroup 90day T-Bill. Please see Page 30 for index definitions. Past performance does not guarantee future results.
10
U.S. policy risked diverging sharply from much of the rest of the world
Y/Y Percent Change
Consumer Price Index, Inflation Target and Last Rate Move by Select Countries 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0%
TIGHTENING
Flag depicts Central Bank target
14.3%
TIGHTENING
EASING TIGHTENING EASING EASING EASING EASING EASING EASING
EASING EASING EASING
7.0%
4.4% 0.4% -0.9%
-0.8%
-0.1%
0.5%
0.5%
1.5%
2.0%
2.3%
0.0%
Source: Ned Davis Research, Bloomberg 4/30/16. 11
1-5
The transmission mechanism of Fed policy to the global economy is the rise in the U.S. dollar U.S. Dollar Index (DXY)
27% Increase in U.S. Dollar
105 100 95 90 85 80
End of QE
75 70 2011
2012
2013
2014
2015
2016
Source: Bloomberg, 4/6/16. The U.S. dollar index indicates the general value of the US dollar by averaging the exchange rates between the US dollar and major world currencies. 12
Credit: Spreads widened when the Fed started talking about tightening policy and have recently declined as Fed guidance turned dovish Barclays U.S. Aggregate Credit Index Average Option Adjusted Spread
Basis Points
200
160
“something on the order of six months” after the end of asset purchases.
“I consider it “Global economic and appropriate to financial developments proceed cautiously in “…an increase…is pose risks.” adjusting policy. warranted sooner – Janet Yellen Further policy easing rather than later” – Jeffrey Lacker may be appropriate if the situation warrants” “…at every meeting – Janet Yellen it’s on the table.” – James Bullard
– Janet Yellen
120
End of QE 80 Dec-13
“…it’s time to normalize interest rates.” “…after a couple of meetings.”
-John Williams
-Janet Yellen
Dec-14
Dec-15
Source: BarclaysLive, Bloomberg, 4/30/16.
13
1-6
China: Inept Policy Increased Outflows, Slowing Growth Billions
China Estimated Capital Flow 12-Month Rolling Sum
$600
End of QE
$400 $200 $0 -$200 -$400 -$600 -$800
The PboC is neither God nor a magician who can turn uncertainties into certainties.” - Zhou Xiaochuan
-$1,000 -$1,200 -$1,400 2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: National Bureau of Statistics of China, Bloomberg, 3/31/16. Latest data available.
2016
14
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
15
1-7
Interest Rates Likely to Stay Low for Long 10-Year Treasury Rate and Nominal Gross Domestic Product (GDP) Y/Y Percent Change (10-Year Moving Average) 15
Treasuries Oversold
12 Correlation
0.92
9 6 3
Treasuries Overbought
April ‘16 3.23% 1.84%
1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 10-Year U.S. Treasury Rate
Nominal GDP (Real GDP + Consumer Price Index)
Sources: U.S. Bureau of Economic Analysis and Bloomberg, as of 4/30/16. Nominal GDP is smoothed over 10 years, and as of 3/31/16. Forecasts may not be achieved. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on Page 30. Past performance does not guarantee future results. 16
Credit increasingly more attractive, cycle is not over Spread of High Yield over Treasuries Credit Suisse High Yield Bond Index (1986 to 2016) 2000 bp
Barclays High Yield Bond Index Sector Performance 1/14 – 3/16 115 110
100 = January 27, 2014
105 1500 bp
100
9 Other Sectors
95 90 85
1000 bp
80 75 70
500 bp
Energy
65 60 55
0 bp
Source of chart data: Credit Suisse Research, Barclays 3/31/2016. Index definitions can be found on slide 30. Past performance does not guarantee future results. 17
1-8
Credit growth not excessive Growth of Domestic Non Financial Debt 16% 14% 12% 10% 8% 6% 4% 2% 0%
Total
Last 12 Months
Households
Businesses
State & Local Gov'ts
Federal government
2007 Peak
Source: Federal Reserve 9/30/15. Latest data available. 18
Credit fundamentals still sound, no wall of maturities Barclays U.S. High Yield Index Weighted Average Leverage Ratio
$600
8.5x
7.9
7.0 6.5 6.0 5.5 5.0
7.1
7.2
7.0 6.5
6.3 5.8 5.4
6.3
507
$500
6.6 5.7
5.5
5.7 5.7 5.7
5.5
Billions of Dollars
8.0 7.5
JP Morgan High Yield Index Maturities by Year
4.5
$400 $300
3.5
$0
243
262
192
$200 $100
4.0
255
98
139
52 2016 2017 2018 2019 2020 2021 2022 2023 or later
Source: Bloomberg. For illustrative purposes only. A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The Treasury yield curve plotted above compares the one-day, three-month, two-year, five-year, ten-year, and 30-year U.S. Treasury date. Index definitions can be found on Page 30. Past performance does not guarantee future results. 19
1-9
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
20
EM is Projected to be the Driver of Global Growth EM Contribution to Global GDP Growth 5
Y/Y % Change
4
4.4% 45.7%
4.3%
3.8%
58.8%
3.0%
3 2
70.4%
98.4% 54.3% 41.2%
1 0
29.6% 1.6% 1988
Developed Markets
1998
2008
Emerging Markets
2018
Forecast
Source: Bloomberg and bank credit analyst (BCA), 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 21
1 - 10
EM: The Long-Term Story
Source: U.S. Census Bureau and China National Bureau of Statistics. Past performance does not guarantee future results. 22
China’s economic transition proceeding Industrial production has been slowing for five years
Consumption continues to grow rapidly
16% China Industrial Production
$3.5 China Retail Sales Value
14%
$3.0 $2.5
12%
Trillions
Y/Y Percent Change
24% Increase
10%
$2.3
$2.0 $1.5
8%
$2.9
$1.8 $1.3
$1.0 6% 4% 2011
$0.5 2012
2013
2014
2015
$0.0
2016
Source: National Bureau of Statistics of China, Bloomberg, 1/31/16. Latest data available.
1 - 11
2009
2011
2013
2015
23
EM Equities: Cheap to history, fundamentals stabilizing Markit Emerging Market Manufacturing PMI
MSCI Emerging Market Index Price to Book Ratio 3.50
MSCI EM TTM P/B
Markit EM Mfg. PMI
52.00
Average
3.00
51.50
2.50
51.00 50.50
2.00
50.00 1.50
49.50
1.00
49.00
0.50
48.50
0.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
48.00 Nov-12
May-13
Nov-13
May-14
Nov-14
Source: Bloomberg 4/30/16. Chart 2 Source: Markit 3/31/16.
May-15
Nov-15
24
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
25
1 - 12
Economy Predicts Elections
Misery Index (Unemployment Rate + Inflation) Down in Last Year of Term: Incumbent Wins
Misery Index (Unemployment Rate + Inflation) Up in Last Year of Term: Opposition Wins
Misery Index Incumbent Party Opposition Party Up or Down Candidate Candidate
Misery Index Up or Down
1960 1968 1980 2000 2008 Exceptions
1964
1992
Unchanged
1972 1984 1988 1996
1976
Incumbent Party Opposition Party Candidate Candidate
2004
Source: Bloomberg, 12/31/15 26
But Elections Don’t Predict markets
Dow Jones Industrial Average Annualized Return during each party’s 4 year terms since 1928 Democrats
Republican
FDR 1932-1936
30.1%
Clinton 1992-1996
16.9%
Clinton 1996-2000
16.1%
Wilson 1912-1916
12.0%
JFK/LBJ 1960-1964
10.7%
Truman 1948-1952
9.4%
Obama 2008-2012
8.8%
FDR/Truman 1944-1948
6.5%
LBJ 1964-1968
2.2%
FDR 1940-1944
2.1%
Carter 1976-1980 Wilson 1916-1920 FDR 1936-1940
-1.1% -5.0% -6.6%
Coolidge Reagan Eisenhower G HW Bush T Roosevelt Reagan Harding/Coolidge Eisenhower McKinley/Roosevelt Taft Nixon/Ford Nixon G W Bush G W Bush Hoover
1924-1928 1984-1988 1952-1956 1988-1992 1904-1908 1980-1984 1920-1924 1956-1960 1900-1904 1908-1912 1972-1976 1968-1972 2004-2008 2000-2004 1928-1932 -29.6%
24.8% 15.5% 15.5% 10.7% 7.0% 6.9% 5.2% 4.9% 3.8% 2.4% 0.2% 0.1% -1.8% -2.2%
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 27
1 - 13
Waiting for “Your Team” to Win Before You Invest? Growth of $10,000 Since 1945 in the Dow
The Markets Actually Like Divided Government Gains for Stocks (DJIA) 1901–2014
$1,300,000
Divided Government
7.0% Annualized Returns 975,000
650,000
Unified Government
4.6% Annualized Returns
325,000
0 1945
1955
1965
1975
1985
1995
2005
2015
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 28
Conclusion
Hating the Government Is Not an Investment Strategy “Americans always do the right thing but only after exhausting all other options.”
— Winston Churchill
29
1 - 14
Index Definitions The S&P 500 Index is a market capitalization weighted index of the 500 largest domestic U.S. Stocks. The Barclays High Yield Bond Index covers the universe of fixed rate, non-investment- grade debt. The Barclays US Aggregate Credit Index is the credit component of the Barclays US Aggregate Index. The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The Consumer Price Index represents changes in prices of all goods and services purchased for consumption by urban households. The Credit Suisse High Yield Bond Index covers the universe of fixed rate, non-investment grade debt. The MSCI Emerging Market Index is a free-float weighted equity index designed to measure the equity market performance of the emerging markets. The MSCI EAFE Index is designed to measure developed market equity performance, excluding the U.S. and Canada. GMAG Risk Premia: 1. US Duration Premium: US Treasuries 10Yr – US T-bills 3-month. For the 10Yr Treasuries, Citigroup UST 10Yr total return index is used from 1980 onward. Prior to 1980, history is backfilled with estimated total returns using 10Yr yields from Bloomberg between 1970 and 1980. 2. US High Yield Premium: US High Yield – US Investment Grade Credit, using the Credit Suisse US High Yield Index and the Barclays US Aggregate Credit Index. 3. US Credit Premium: US Investment Grade – US Treasuries, using the Barclays Capital US Aggregate Credit excess return index from 1988 onward. Prior to 1988, we backfill the excess returns using the Barclays Capital US Aggregate Credit Total Return Index minus estimated duration-equivalent US Treasury total returns. 4. US Equity Premium: MSCI US Total Return index – US Treasuries 10Yr. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
30
Disclosures These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on January 31, 2016, and are subject to change based on subsequent developments. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be volatile. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by visiting oppenheimerfunds.com. Investors should read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 © 2016 OppenheimerFunds Distributor, Inc. All rights reserved. DT0430.002.0416
31
1 - 15
Economic and Political Update Jerry Webman
Session 1 Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful. Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such. The materials contained in this presentation should not be considered to be in the public domain. Speeches and presentation materials contained here are proprietary works protected by copyright to AICPA and/or to the individual or entity who presented the materials at the conference. All rights are reserved. The authorized use of materials on this page is limited to download for personal reference by authorized users of the conference materials download area. Reproduction, redistribution, reuse, reposting or resale by any party in any form, format or media without express permission is strictly prohibited. Permissions requests may be directed to [email protected] or to Mary Walter, Senior Manager - Licensing and Rights at 919-402-4835..
2016 Outlook: Modest Growth with Volatility Ahead, and Oh Yes, the Election Jerry A. Webman, Ph.D., CFA Chief Economist May 2016 Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency and involve investment risks, including the possible loss of the principal amount invested. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc., 225 Liberty Street, New York, NY 10281-1008 © 2016 OppenheimerFunds Distributor, Inc. All rights reserved.
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
2
1-1
The duration and magnitude of the current bull market pales in comparison to those of the past Bull Market Cumulative Advance (%)
Duration and Magnitude of Past Secular Bulls S&P 500 Index
Growth of 100 from Start of Secular Bull Markets S&P 500 Index 400
1400% 1200%
350
1982-1999
1000%
1942-1966 Average
800%
2015
250
600%
200
400% 200% 0%
1987
300
2009Present 0
1946
150
100 200 Bull Market Duration (Months)
300
100
0 1942-1966
5 Bull Market Duration (Years) 1982-1999
10
2009-Present
Source: Bloomberg, 4/30/16. Index definitions can be found on Page 30. Past performance does not guarantee future results. 3
U.S. recession unlikely, consumer doing better University of Michigan Consumer Sentiment Index 110
Average Hourly Earnings +2% Y/Y
100 90
Gasoline Prices Since April 2014 -46%
80 70
Home Prices +5.5% Y/Y
60 50 1978
1988
1998
2008
Source: Bloomberg, University of Michigan, Bureau of Labor Statistics, American Automobile Association, S&P-Case/Shiller 20 City Home Price Index, quarterly data as of 12/31/15. 4
1-2
Few signs of equity market exuberance S&P 500 10-Year Total Return Minus Barclays LT Treasury Bonds 10-Year Total Return 400%
Stocks outperform
300 200 100 0
Bonds outperform
-100 -200
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Bloomberg, 4/30/16. Index definitions can be found on Page 30. Past performance does not guarantee future results. 5
Prolonged bout of international underperformance unlikely to be repeated Index Total Returns (%, in USD) 300 250 200
S&P 500 Index MSCI EAFE Index MSCI EM Index
150 100 50 0 2009
2011
2013
2015
Source: Bloomberg 4/30/16 U.S. equity represented by S&P 500 Index, developed international represented by MSCI EAFE Index, emerging markets represented by MSCI EM Index. Please refer to disclosure statements for Index definitions on Page 30 . 7
1-3
Few signs of the excesses found at end of past cycles
1929
1980
2000
2008
Today
20.9%
11.03%
10.97%
10.05%
7.5%
Inflation
1.2%
14.8%
3.7%
5.6%
1.4 %
Valuation
20.2x
9.9x
30.4x
17.7x
16.5x
51%
68.7%
97.8%
132.3%
104.4% and falling
Bank Credit
Household Debt as a % of Disposable Personal Income
Source: Robert Shiller, the Federal Reserve and Haver Analytics, 2/29/16. Past performance does not guarantee future results. 8
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
9
1-4
Developed Markets at Mid-cycle Pause Recovery
Equities
Expansion
High Yield
Slowdown
Credit
Contraction
Duration
Source: OppenheimerFunds’ proprietary research of the U.S. Business Cycle Leading Indicator, 12/31/15. Annualized monthly returns of the defined risk premia from January 1970 – December 2013. Risk Premia are defined as follows: US Equity Premium = S&P 500 - Citigroup US 7-10 YR Treasury. High Yield Premium = Citigroup High Yield Cash Pay BB Rated (7-10)YR - Citigroup USBIG Corp BBB Rated (7-10)YR. Credit Premium = Citigroup USBIG Corp BBB Rated - Citigroup US 7-10 YR Treasury. Duration Premium = Citigroup US 7-10 YR Treasury – Citigroup 90day T-Bill. Please see Page 30 for index definitions. Past performance does not guarantee future results.
10
U.S. policy risked diverging sharply from much of the rest of the world
Y/Y Percent Change
Consumer Price Index, Inflation Target and Last Rate Move by Select Countries 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0%
TIGHTENING
Flag depicts Central Bank target
14.3%
TIGHTENING
EASING TIGHTENING EASING EASING EASING EASING EASING EASING
EASING EASING EASING
7.0%
4.4% 0.4% -0.9%
-0.8%
-0.1%
0.5%
0.5%
1.5%
2.0%
2.3%
0.0%
Source: Ned Davis Research, Bloomberg 4/30/16. 11
1-5
The transmission mechanism of Fed policy to the global economy is the rise in the U.S. dollar U.S. Dollar Index (DXY)
27% Increase in U.S. Dollar
105 100 95 90 85 80
End of QE
75 70 2011
2012
2013
2014
2015
2016
Source: Bloomberg, 4/6/16. The U.S. dollar index indicates the general value of the US dollar by averaging the exchange rates between the US dollar and major world currencies. 12
Credit: Spreads widened when the Fed started talking about tightening policy and have recently declined as Fed guidance turned dovish Barclays U.S. Aggregate Credit Index Average Option Adjusted Spread
Basis Points
200
160
“something on the order of six months” after the end of asset purchases.
“I consider it “Global economic and appropriate to financial developments proceed cautiously in “…an increase…is pose risks.” adjusting policy. warranted sooner – Janet Yellen Further policy easing rather than later” – Jeffrey Lacker may be appropriate if the situation warrants” “…at every meeting – Janet Yellen it’s on the table.” – James Bullard
– Janet Yellen
120
End of QE 80 Dec-13
“…it’s time to normalize interest rates.” “…after a couple of meetings.”
-John Williams
-Janet Yellen
Dec-14
Dec-15
Source: BarclaysLive, Bloomberg, 4/30/16.
13
1-6
China: Inept Policy Increased Outflows, Slowing Growth Billions
China Estimated Capital Flow 12-Month Rolling Sum
$600
End of QE
$400 $200 $0 -$200 -$400 -$600 -$800
The PboC is neither God nor a magician who can turn uncertainties into certainties.” - Zhou Xiaochuan
-$1,000 -$1,200 -$1,400 2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: National Bureau of Statistics of China, Bloomberg, 3/31/16. Latest data available.
2016
14
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
15
1-7
Interest Rates Likely to Stay Low for Long 10-Year Treasury Rate and Nominal Gross Domestic Product (GDP) Y/Y Percent Change (10-Year Moving Average) 15
Treasuries Oversold
12 Correlation
0.92
9 6 3
Treasuries Overbought
April ‘16 3.23% 1.84%
1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 10-Year U.S. Treasury Rate
Nominal GDP (Real GDP + Consumer Price Index)
Sources: U.S. Bureau of Economic Analysis and Bloomberg, as of 4/30/16. Nominal GDP is smoothed over 10 years, and as of 3/31/16. Forecasts may not be achieved. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on Page 30. Past performance does not guarantee future results. 16
Credit increasingly more attractive, cycle is not over Spread of High Yield over Treasuries Credit Suisse High Yield Bond Index (1986 to 2016) 2000 bp
Barclays High Yield Bond Index Sector Performance 1/14 – 3/16 115 110
100 = January 27, 2014
105 1500 bp
100
9 Other Sectors
95 90 85
1000 bp
80 75 70
500 bp
Energy
65 60 55
0 bp
Source of chart data: Credit Suisse Research, Barclays 3/31/2016. Index definitions can be found on slide 30. Past performance does not guarantee future results. 17
1-8
Credit growth not excessive Growth of Domestic Non Financial Debt 16% 14% 12% 10% 8% 6% 4% 2% 0%
Total
Last 12 Months
Households
Businesses
State & Local Gov'ts
Federal government
2007 Peak
Source: Federal Reserve 9/30/15. Latest data available. 18
Credit fundamentals still sound, no wall of maturities Barclays U.S. High Yield Index Weighted Average Leverage Ratio
$600
8.5x
7.9
7.0 6.5 6.0 5.5 5.0
7.1
7.2
7.0 6.5
6.3 5.8 5.4
6.3
507
$500
6.6 5.7
5.5
5.7 5.7 5.7
5.5
Billions of Dollars
8.0 7.5
JP Morgan High Yield Index Maturities by Year
4.5
$400 $300
3.5
$0
243
262
192
$200 $100
4.0
255
98
139
52 2016 2017 2018 2019 2020 2021 2022 2023 or later
Source: Bloomberg. For illustrative purposes only. A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The Treasury yield curve plotted above compares the one-day, three-month, two-year, five-year, ten-year, and 30-year U.S. Treasury date. Index definitions can be found on Page 30. Past performance does not guarantee future results. 19
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Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
20
EM is Projected to be the Driver of Global Growth EM Contribution to Global GDP Growth 5
Y/Y % Change
4
4.4% 45.7%
4.3%
3.8%
58.8%
3.0%
3 2
70.4%
98.4% 54.3% 41.2%
1 0
29.6% 1.6% 1988
Developed Markets
1998
2008
Emerging Markets
2018
Forecast
Source: Bloomberg and bank credit analyst (BCA), 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 21
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EM: The Long-Term Story
Source: U.S. Census Bureau and China National Bureau of Statistics. Past performance does not guarantee future results. 22
China’s economic transition proceeding Industrial production has been slowing for five years
Consumption continues to grow rapidly
16% China Industrial Production
$3.5 China Retail Sales Value
14%
$3.0 $2.5
12%
Trillions
Y/Y Percent Change
24% Increase
10%
$2.3
$2.0 $1.5
8%
$2.9
$1.8 $1.3
$1.0 6% 4% 2011
$0.5 2012
2013
2014
2015
$0.0
2016
Source: National Bureau of Statistics of China, Bloomberg, 1/31/16. Latest data available.
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2009
2011
2013
2015
23
EM Equities: Cheap to history, fundamentals stabilizing Markit Emerging Market Manufacturing PMI
MSCI Emerging Market Index Price to Book Ratio 3.50
MSCI EM TTM P/B
Markit EM Mfg. PMI
52.00
Average
3.00
51.50
2.50
51.00 50.50
2.00
50.00 1.50
49.50
1.00
49.00
0.50
48.50
0.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
48.00 Nov-12
May-13
Nov-13
May-14
Nov-14
Source: Bloomberg 4/30/16. Chart 2 Source: Markit 3/31/16.
May-15
Nov-15
24
Agenda •
The secular bull in developed markets is intact
•
Sources of recent volatility
•
Rates (still) low for long; credit cycle not over
•
The EM transition
•
The election
25
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Economy Predicts Elections
Misery Index (Unemployment Rate + Inflation) Down in Last Year of Term: Incumbent Wins
Misery Index (Unemployment Rate + Inflation) Up in Last Year of Term: Opposition Wins
Misery Index Incumbent Party Opposition Party Up or Down Candidate Candidate
Misery Index Up or Down
1960 1968 1980 2000 2008 Exceptions
1964
1992
Unchanged
1972 1984 1988 1996
1976
Incumbent Party Opposition Party Candidate Candidate
2004
Source: Bloomberg, 12/31/15 26
But Elections Don’t Predict markets
Dow Jones Industrial Average Annualized Return during each party’s 4 year terms since 1928 Democrats
Republican
FDR 1932-1936
30.1%
Clinton 1992-1996
16.9%
Clinton 1996-2000
16.1%
Wilson 1912-1916
12.0%
JFK/LBJ 1960-1964
10.7%
Truman 1948-1952
9.4%
Obama 2008-2012
8.8%
FDR/Truman 1944-1948
6.5%
LBJ 1964-1968
2.2%
FDR 1940-1944
2.1%
Carter 1976-1980 Wilson 1916-1920 FDR 1936-1940
-1.1% -5.0% -6.6%
Coolidge Reagan Eisenhower G HW Bush T Roosevelt Reagan Harding/Coolidge Eisenhower McKinley/Roosevelt Taft Nixon/Ford Nixon G W Bush G W Bush Hoover
1924-1928 1984-1988 1952-1956 1988-1992 1904-1908 1980-1984 1920-1924 1956-1960 1900-1904 1908-1912 1972-1976 1968-1972 2004-2008 2000-2004 1928-1932 -29.6%
24.8% 15.5% 15.5% 10.7% 7.0% 6.9% 5.2% 4.9% 3.8% 2.4% 0.2% 0.1% -1.8% -2.2%
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 27
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Waiting for “Your Team” to Win Before You Invest? Growth of $10,000 Since 1945 in the Dow
The Markets Actually Like Divided Government Gains for Stocks (DJIA) 1901–2014
$1,300,000
Divided Government
7.0% Annualized Returns 975,000
650,000
Unified Government
4.6% Annualized Returns
325,000
0 1945
1955
1965
1975
1985
1995
2005
2015
Source: Bloomberg, 12/31/15. Index definitions can be found on Page 30. Past performance does not guarantee future results. 28
Conclusion
Hating the Government Is Not an Investment Strategy “Americans always do the right thing but only after exhausting all other options.”
— Winston Churchill
29
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Index Definitions The S&P 500 Index is a market capitalization weighted index of the 500 largest domestic U.S. Stocks. The Barclays High Yield Bond Index covers the universe of fixed rate, non-investment- grade debt. The Barclays US Aggregate Credit Index is the credit component of the Barclays US Aggregate Index. The J.P. Morgan Domestic High Yield Index is designed to mirror the investable universe of the U.S. dollar domestic high yield corporate debt market. The Consumer Price Index represents changes in prices of all goods and services purchased for consumption by urban households. The Credit Suisse High Yield Bond Index covers the universe of fixed rate, non-investment grade debt. The MSCI Emerging Market Index is a free-float weighted equity index designed to measure the equity market performance of the emerging markets. The MSCI EAFE Index is designed to measure developed market equity performance, excluding the U.S. and Canada. GMAG Risk Premia: 1. US Duration Premium: US Treasuries 10Yr – US T-bills 3-month. For the 10Yr Treasuries, Citigroup UST 10Yr total return index is used from 1980 onward. Prior to 1980, history is backfilled with estimated total returns using 10Yr yields from Bloomberg between 1970 and 1980. 2. US High Yield Premium: US High Yield – US Investment Grade Credit, using the Credit Suisse US High Yield Index and the Barclays US Aggregate Credit Index. 3. US Credit Premium: US Investment Grade – US Treasuries, using the Barclays Capital US Aggregate Credit excess return index from 1988 onward. Prior to 1988, we backfill the excess returns using the Barclays Capital US Aggregate Credit Total Return Index minus estimated duration-equivalent US Treasury total returns. 4. US Equity Premium: MSCI US Total Return index – US Treasuries 10Yr. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.
30
Disclosures These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on January 31, 2016, and are subject to change based on subsequent developments. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be volatile. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by visiting oppenheimerfunds.com. Investors should read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 © 2016 OppenheimerFunds Distributor, Inc. All rights reserved. DT0430.002.0416
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