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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.

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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005: What Next For The Post-Election Economy?

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The economic financial market outlook through 2005 what next for the post election economy

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

THE ECONOMIC-POLICY DEBATE OF 2005

* Sharpening A Classic Division Between Republicans And Democrats

--What Kind Of “Ownership Society?”

* Finding A Balance Between Growth & Inequality Vs. A More Equal, Less Efficient Economy

* Ideology Frames The Policy Issues In 2005

--Social Security Reform

--Permanent Tax Cuts

--Tax Reform


Respectable but still sub par growth through 2005 year ago percent change in real gdp

RESPECTABLE, BUT STILL SUB-PAR GROWTH THROUGH 2005Year-Ago Percent Change In Real GDP

7%

Avg., Previous 5 Long Cycles*

Avg. Annual % Chg.,

Forecast

6%

1991-2003=3.4% P.A.

Current Cycle

5%

4%

3%

2%

1%

0%

-1%

-2%

-1

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

Quarters Before And After The Start Of A Recovery

* Cycles beginning in 1960, 1969, 1974, 1981, 1990.

Source: U.S. Department Of Commerce


Iowa s economic recovery lags the national average percent change gross sate domestic product

IOWA'S ECONOMIC RECOVERY LAGS THE NATIONAL AVERAGEPercent Change, Gross Sate/ Domestic Product

4.5%

Forecast

4.0%

3.5%

3.0%

2.5%

Iowa

U.S.

2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

1998-

2001

2002

2003

2004

2005

2006-

2000

08

Sources: Economy.com, Blue Chip Economic Forecast


The economic financial market outlook through 2005 what next for the post election economy

GAUGING "DISINFLATION'S" IMPACT ON CORPORATE "PRICING POWER," COSTS AND PROFIT Year -Ago Percent Change; Non-Financial Corporations

5%

Note: Bars Denote

4%

Recession Periods

Margin

Pressure

3%

Selling Prices

'04Q3

2%

1%

0%

-1%

Unit Labor Costs

-2%

Margin

Expansion

-3%

-4%

Mar-89

Mar-91

Mar-93

Mar-95

Mar-97

Mar-99

Mar-01

Mar-03

Mar-05

Source: U.S. Commerce Dep't.


A yellow flag on inflation year ago percent change non energy cpi goods vs services prices

A "YELLOW FLAG" ON INFLATIONYear-Ago Percent Change, Non-Energy CPI Goods Vs. Services Prices

2.0

4.2

Commodities, Ex. Food &

Energy

1.5

(Left Scale)

3.9

1.0

0.5

3.6

0.0

-0.5

3.3

-1.0

11/04

3.0

-1.5

-2.0

Services, Ex. Energy

2.7

(Right Scale)

-2.5

-3.0

2.4

Jan-1996

Jan-1998

Jan-2000

Jan-2002

Jan-2004

Source: U.S. Dep't Of Labor


Inventories still lean outside the auto industry ratio of inventories to sales

INVENTORIES STILL "LEAN" OUTSIDE THE AUTO INDUSTRYRatio Of Inventories To Sales

1.800

1.550

Autos

1.500

(Left Scale)

1.690

1.450

1.400

1.580

1.350

11/04

1.470

1.300

1.250

1.360

1.200

Excluding Autos

(Right Scale)

1.250

1.150

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Source: U.S. Department Of Commerce


U s exports respond to a weaker dollar

U.S. EXPORTS RESPOND TO A WEAKER DOLLAR

% Rept'g An Increase

Index: 2000=100

64

112

Export Orders, Mfd. Goods

110

(Left Scale)

62

108

12/04

60

106

58

104

102

56

100

54

98

52

96

94

50

92

"Real Trade-Weighted"

48

$*

90

(Right Scale)

46

88

1/14/05

44

86

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

* Based on the dollar's inflation-adjusted, trade-weighted exchange

rate against 44 other currencies.

Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.


The economic financial market outlook through 2005 what next for the post election economy

RAPID-FIRE RATE HIKES FOLLOW AGGRESSIVE POLICY STIMULUSThe Federal Funds Rate Less The PCE "Deflator;" Percent

5.0

4.0

3.0

Avg., 1969-2003=2.6%

2.0

Fed "Easing" During The Sluggish

1.0

1991-92 Recovery

12/04

0.0

Note: Bars Denote

-1.0

Recession Periods

-2.0

Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep't


The economic financial market outlook through 2005 what next for the post election economy

A REPLAY OF THE 1999-2000 INTEREST-RATE “UP CYCLE?” The Treasury Yield Curve, Selected Periods; Yields In Percent

7.3

Federal Funds Target Rate,

5/18/00

5/16/00=6.50%

6.3

6/29/99

5.3

Fed Funds Target Rate,

11/18/98

11/17/98=4.75%

4.3

0

5

10

15

20

25

30

35

Years To Maturity

Source: Bloomberg Financial News, Inc.


Risks in the outlook

“RISKS” IN THE OUTLOOK

* “LOW-QUALITY” SECTORS UNDER FIRE

* THE HOUSING “BUBBLE” BURSTS

* A DOLLAR TAILSPIN

*OIL-PRICE VOLATILITY

* A CHINESE GROWTH RECESSION

* TERRORISM & OTHER GEO-POLITICAL STRAINS

* “BUSH II” ECONOMIC POLICIES


Fiscal deficits in the eye of the storm budget surpluses deficits as a of gdp fiscal years

FISCAL DEFICITS: IN THE EYE OF THE STORM?Budget Surpluses & Deficits As A % Of GDP; Fiscal Years

3%

Forecast,

2006-10

2%

1%

0%

No Tax

Chgs.=2.3% Of

-1%

GDP

Avg. 1982-92=4.3%

Of GDP

-2%

-3%

-4%

-5%

Wi. Tax & Soc.

Sec.

-6%

Chgs.=3.7% Of

GDP

-7%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Source: Congressional Budget Office & WCM Estimates


Hopeful signs of an approaching turn in the u s balance of payments deficit

HOPEFUL SIGNS OF AN APPROACHING TURN IN THE U.S. BALANCE-OF-PAYMENTS DEFICIT

Percent Of GDP*

Index: 2000=100*

6%

115

'04Q3

5%

110

4%

105

3%

100

U.S. Payments Deficit

(Left Scale)

2%

95

Trade-Wtd. U.S. $

(Right Scale)

1%

90

1/14/05=87.9

0%

85

-1%

80

Dec-84

Dec-87

Dec-90

Dec-93

Dec-96

Dec-99

Dec-02

* Four-quarter moving averages; trade-wtd. $ adjusted for relative inflation rates.

Source: U.S. Commerce Dep't


The economic financial market outlook through 2005 what next for the post election economy

IS FOREIGN CONFIDENCE IN THE U.S. STILL INTACT?Net Foreign Direct Investment In The U.S. Plus Foreign Private Portfolio Investment; $ Billions

120

Rolling 4-Quarter

100

Average

'04Q3

80

60

40

Rolling 5-Year Moving

Average

20

0

-20

Mar-85

Mar-88

Mar-91

Mar-94

Mar-97

Mar-00

Mar-03

Source: U.S. Commerce Department


The economic financial market outlook through 2005 what next for the post election economy

THE OUTLOOK FOR S&P 500 EARNINGS GROWTH STILL FAIRLY UPBEATYr.-Ago % Change In S&P 500 Operating Profits*

27%

Forecast*

22%

Avg. Annual % Chg.,

'04Q3-'05Q4

1983-2003=7.2%

17%

12%

7%

2%

-3%

-8%

-13%

-18%

-23%

Mar-97

Sep-98

Mar-00

Sep-01

Mar-03

Sep-04

Mar-06

* First Call "bottom-up" consensus estimate, including goodwill adjustments.

Source: First Call, Inc.


The economic financial market outlook through 2005 what next for the post election economy

S&P 500 PRICE-EARNINGS (P/E) MULTIPLE NOT UNUSUALLY HIGH... S&P 500 P/E Multiple, Based On Consensus, "Bottom-Up" Operating. Earnings Forecasts

27

S&P 500 P/E Multiple

(Left Scale)

23

1/14/05

P/E=16.1x

Avg. P/E, 1983-2003=14.9 Times

19

Forward Operating Earnings

15

11

7

3

Jan-79

Jan-83

Jan-87

Jan-91

Jan-95

Jan-99

Jan-03

Sources: Standard & Poors, Inc., IBES, Federal Reserve Board


The economic financial market outlook through 2005 what next for the post election economy

…AND STILL "CHEAP" AGAINST BONDS, AT CURRENT INTEREST RATESRatio, 10-Yr. Treasury Yield Vs. Earnings-Price Yield (E/P) On S&P 500 Stocks

1.8

1.6

1.4

Avg., 1983-2003=1.016

1.2

1.0

1/14/05

0.8

0.6

0.4

Jan-79

Jan-83

Jan-87

Jan-91

Jan-95

Jan-99

Jan-03

Sources: Standard & Poors, Inc., IBES, Federal Reserve Board


The economic financial market outlook through 2005 what next for the post election economy

BOND MANAGERS POSITIONED FOR HIGHER INTEREST RATES RATES Portfolio "Duration" Vs. Target, In Percent; 4-Wk. Moving Avgs.

104

103

102

101

100

99

"Neutral" (100% Of

12/14/04

Benchmark Duration)

Week

98

97

96

95

94

25-Dec-01

25-Jun-02

24-Dec-02

24-Jun-03

23-Dec-03

22-Jun-04

21-Dec-04

Source: Stone McCarthy Research Associates, Inc.


Low treasury yields vs duration increase the risk of negative returns

LOW TREASURY YIELDS VS. DURATION INCREASE THE RISK OF NEGATIVE RETURNS

Duration (In Years)

Yield (In Percentage Points)

8

5-Yr. Treasury Yield

7

6

5

11/04

4

5-Yr. Treasury Duration

3

2

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Source: Merrill Lynch, Inc.


Competing in a dynamic global environment

COMPETING IN A DYNAMIC GLOBAL ENVIRONMENT

* GLOBAL COMPETITION’S SILVER LINING

--Ongoing Pressure To Boost Productivity Growth Via Tech Investment, Management & Other Innovations

* “MUTED” BUSINESS CYCLE

* MORE FAVORABLE DEMOGRAPHICS

* THE BENEFITS OF A MORE “MARKET-ORIENTED” FORM OF CAPITALISM

--Entrepreneurship & Innovation, More Open, Dynamic Labor & Financial Markets, More Pro-Active Economic Policies


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