Econ 106M: The Future of the US Economy
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The document analyzes the current state and future outlook of the US economy. It finds that the economy reached a tipping point in 2014 when the Federal Reserve began tapering quantitative easing and raising interest rates, leading to a strong US dollar, high market volatility, and divergence between US and global growth. Going forward, continued rate hikes could put pressure on equity valuations, though a moderate pace of hikes may be sustainable if US economic fundamentals remain strong relative to other nations. Strategic investment opportunities may arise from foreign exchange and international stock selection.
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Econ 106M: The Future of the US Economy
- 1. Econ 106M: The Future of US Economy Zhuo “Kenny” Chen Rishab Khandelwal Yangyifan “Kim” Wang Zhiyu “Jack” Wang Vandana Bhairi 1
- 2. The Future of US Economy 2 Table of Contents Diagnosis Tipping Point Investment Strategy
- 3. The Future of US Economy 3 Table of Contents Diagnosis Tipping Point Investment Strategy
- 4. Diagnosis Tipping Point Investment Strategy The Future of US Economy 4 Federal Funds Rate 0 1 2 3 4 5 6 7 8 9 Jan90 Jul90 Jan91 Jul91 Jan92 Jul92 Jan93 Jul93 Jan94 Jul94 Jan95 Jul95 Jan96 Jul96 Jan97 Jul97 Jan98 Jul98 Jan99 Jul99 Jan00 Jul00 Jan01 Jul01 Jan02 Jul02 Jan03 Jul03 Jan04 Jul04 Jan05 Jul05 Jan06 Jul06 Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 Jul11 Jan12 Jul12 Jan13 Jul13 Jan14 Jul14 Jan15 Jul15 Percentage FFR Source: FRED
- 5. Diagnosis Tipping Point Investment Strategy The Future of US Economy 5 Economic Indicators GDP Employment Home Sales Inflation Foreign Influence
- 6. Diagnosis Tipping Point Investment Strategy The Future of US Economy 6 GDP Growth Rate 14000 14500 15000 15500 16000 16500 17000 17500 18000 18500 BillionsofDollars GDP -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. Lo
- 7. Diagnosis Tipping Point Investment Strategy The Future of US Economy 7 GDP & GDP Gap Source: International Financial Statistics y = 0.0047x - 83.473 65 75 85 95 105 115 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 Industrial production index -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 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 GDP Gap (from 2008)
- 8. Diagnosis Tipping Point Investment Strategy The Future of US Economy 8 Employment 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Jan90 Jun91 Nov92 Apr94 Sep95 Feb97 Jul98 Dec99 May01 Oct02 Mar04 Aug05 Jan07 Jun08 Nov09 Apr11 Sep12 Feb14 Jul15 Percentage Unemployment Rate 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13 Jan14 May14 Sep14 Jan15 May15 Sep15 Percentage Unemployment Rate (after 2008) 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 Jan08 Jun08 Nov08 Apr09 Sep09 Feb10 Jul10 Dec10 May11 Oct11 Mar12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 Initial Claims Source: US Bureau of Labor Statistics 127500 129500 131500 133500 135500 137500 139500 141500 143500 Jan08 Jun08 Nov08 Apr09 Sep09 Feb10 Jul10 Dec10 May11 Oct11 Mar12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 ThousandsofPersons Non-Farm Payroll
- 9. Diagnosis Tipping Point Investment Strategy The Future of US Economy 9 Home Sales 3500000 3700000 3900000 4100000 4300000 4500000 4700000 4900000 5100000 5300000 5500000 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13 Jan14 May14 Sep14 Jan15 May15 Sep15 numberofsales Existing Home Sales 75.0 80.0 85.0 90.0 95.0 100.0 105.0 110.0 115.0 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 Pending Home Sale Index Source: Economic Research, Federal Reserve Bank of St. Louis
- 10. Diagnosis Tipping Point Investment Strategy The Future of US Economy 10 Consumer Price Index 210.228210 215 220 225 230 235 240 Jan08 May08 Sep08 Jan09 May09 Sep09 Jan10 May10 Sep10 Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13 Jan14 May14 Sep14 Jan15 May15 Sep15 CPI -3% -2% -2% -1% -1% 0% 1% 1% 2% Feb08 May08 Aug08 Nov08 Feb09 May09 Aug09 Nov09 Feb10 May10 Aug10 Nov10 Feb11 May11 Aug11 Nov11 Feb12 May12 Aug12 Nov12 Feb13 May13 Aug13 Nov13 Feb14 May14 Aug14 Nov14 Feb15 May15 Aug15 CPI growth rate Source: Economic Research, Federal Reserve Bank of St. Louis
- 11. Diagnosis Tipping Point Investment Strategy The Future of US Economy 11 Personal Consumption Expenditure -0.0005 0 0.0005 0.001 0.0015 0.002 0.0025 0.003 0.0035 Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10 Jan11 Jun11 Nov11 Apr12 Sep12 Feb13 Jul13 Dec13 May14 Oct14 Mar15 Aug15 Core Growth rate 97.000 99.000 101.000 103.000 105.000 107.000 109.000 111.000 Jan08 Jun08 Nov08 Apr09 Sep09 Feb10 Jul10 Dec10 May11 Oct11 Mar12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 BillionsofDollars Core PCE 9000.0 9500.0 10000.0 10500.0 11000.0 11500.0 12000.0 12500.0 Jan08 Jun08 Nov08 Apr09 Sep09 Feb10 Jul10 Dec10 May11 Oct11 Mar12 Aug12 Jan13 Jun13 Nov13 Apr14 Sep14 Feb15 Jul15 BillionofDollars PCE -2% -1% -1% 0% 1% 1% 2% Feb08 Jul08 Dec08 May09 Oct09 Mar10 Aug10 Jan11 Jun11 Nov11 Apr12 Sep12 Feb13 Jul13 Dec13 May14 Oct14 Mar15 Aug15 PCE Growth Source: Economic Research, Federal Reserve Bank of St. Louis
- 12. Diagnosis Tipping Point Investment Strategy The Future of US Economy 12 Foreign Influence 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 China SSE Composite Index Source: Yahoo Finance 70.00 75.00 80.00 85.00 90.00 95.00 100.00 105.00 110.00 Jan2006 May2006 Sep2006 Jan2007 May2007 Sep2007 Jan2008 May2008 Sep2008 Jan2009 May2009 Sep2009 Jan2010 May2010 Sep2010 Jan2011 May2011 Sep2011 Jan2012 May2012 Sep2012 Jan2013 May2013 Sep2013 Jan2014 May2014 Sep2014 Jan2015 May2015 Sep2015 Brazil Real Effective Exchange Rate Based on Consumer Price Index
- 13. Diagnosis Tipping Point Investment Strategy The Future of US Economy 13 Table of Contents Diagnosis Tipping Point Investment Strategy
- 14. Diagnosis Tipping Point Investment Strategy The Future of US Economy 14 Federal Funds Rate Hike Probability Source: CME 20.6% 17.6% 10.1% 79.4% 71.0% 48.3% 0 11.4% 36.8% December January March Federal Fund Rate Hike Probability No Hike 25 Bps 50 Bps
- 15. Diagnosis Tipping Point Investment Strategy The Future of US Economy 15 Taylor Rule & Effective FFR 0.00 2.00 4.00 6.00 8.00 10.00 Taylor Rule and Effective Federal Funds Rate Frequency: Quarterly Effective Federal Funds Rate Frequency: Quarterly Taylor Rule Suggested Interest Rate Source: Economic Research, Federal Reserve Bank of St. Louis
- 16. Diagnosis Tipping Point Investment Strategy The Future of US Economy 16 Capacity Utilization Rate (% Change from Previous Year) & Effective FFR -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 Source: Economic Research, Federal Reserve Bank of St. Louis
- 17. Diagnosis Tipping Point Investment Strategy The Future of US Economy 17 Treasury and FFR Yield Spread 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 Six Month Treasury Bill Rates and Effective Federal Funds Rate Frequency: Monthly Six Month Treasury Rate Frequency: Monthly FEDFUNDS Source: Economic Research, Federal Reserve Bank of St. Louis
- 18. Diagnosis Tipping Point Investment Strategy The Future of US Economy 18 Treasury and FFR Yield Spread 0.00 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 Source: Economic Research, Federal Reserve Bank of St. Louis
- 19. Diagnosis Tipping Point Investment Strategy The Future of US Economy 19 Financial Stress Index and FFR -2.000 -1.000 0.000 1.000 2.000 3.000 4.000 5.000 6.000 7.000 Financial Stress Index and Effective Federal Funds Rate Frequency: Monthly St. Louis Fed Financial Stress Index Frequency: Monthly FEDFUNDS Rate Hike Rate Hike Source: Economic Research, Federal Reserve Bank of St. Louis
- 20. Diagnosis Tipping Point Investment Strategy The Future of US Economy 20 Consumer Sentiment Index (% Change from Previous Year) and FFR -40.0 -20.0 0.0 20.0 40.0 University of Michigan: Consumer Sentiment Index© and Effective Federal Funds Rate Frequency: Monthly University of Michigan: Cosumer Sentiment Index Frequency: Monthly Effective Federal Funds Rate Rate HikeRate Hike Source: Economic Research, Federal Reserve Bank of St. Louis
- 21. Diagnosis Tipping Point Investment Strategy The Future of US Economy 21 Table of Contents Diagnosis Tipping Point Investment Strategy
- 22. Diagnosis Tipping Point Investment Strategy The Future of US Economy 22 Post-financial Crisis - 2014 S&P 500 and FED Easing 2008 - 2015 Source: Bespoke Investment Research QE Bull Market 2008 - 2014
- 23. Diagnosis Tipping Point Investment Strategy The Future of US Economy 23 2014 - Now QE Taper Rate Hike Strong Dollar Strong US vs. Weak Global High Volatility & Low Dispersion
- 24. Diagnosis Tipping Point Investment Strategy The Future of US Economy 24 Equity Market & FFR 0 1 2 3 4 5 6 7 8 9 0 20 40 60 80 100 120 140 4/1/90 4/1/91 4/1/92 4/1/93 4/1/94 4/1/95 4/1/96 4/1/97 4/1/98 4/1/99 4/1/00 4/1/01 4/1/02 4/1/03 4/1/04 4/1/05 4/1/06 4/1/07 4/1/08 4/1/09 4/1/10 4/1/11 4/1/12 4/1/13 4/1/14 4/1/15 S&P 500 P/E Ratio and Federal Fund Rate S&P 500 P/E Ratio Over the years Historical federal fund rate -80.00% -60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 211 221 231 241 251 261 271 281 291 301 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
- 25. Diagnosis Tipping Point Investment Strategy The Future of US Economy 25 Equity & 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
- 26. Diagnosis Tipping Point Investment Strategy The Future of US Economy 26 Financial Sector & Interest Rate Hike Source: Yahoo Finance Name Ticker Financial Services IYG Financials IYF S&P 500 ^GPSC Three-year Treasury SHY
- 27. Diagnosis Tipping Point Investment Strategy The Future of US Economy 27 Consumers Benefit from Strong Dollar Source: Yahoo Finance Name Ticker Consumer Discretionary XLY Consumer Staples XLP S&P 500 ^GPSC US Dollar Index UUP
- 28. Diagnosis Tipping Point Investment Strategy The Future of US Economy 28 Robust Earnings in Technology and Healthcare Source: Yahoo Finance Name Ticker Information Technology IYW Healthcare IYH S&P 500 ^GPSC
- 29. Diagnosis Tipping Point Investment Strategy The Future of US Economy 29 Portfolio Allocation Equities 40% Fixed Income 30% Currencies 30% Portfolio Composition Portfolio Holdings Composition Equities 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%
- 30. Diagnosis Tipping Point Investment Strategy The Future of US Economy 30 Q&A Questions?