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Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric PowerPoint Presentation
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Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric Plamper Manoj Patil Agenda Economic Overview Actual GDP GDP Gap Monetary/Fiscal Policy Stock Market Outlook Key Drivers Predictions Economic Overview

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Presentation Transcript
slide1

Economics/

Capital Market Outlook

Business Finance 824

4/30/02

Chris Bushman

Karl Forster

Dave Mayrer

Mark Neustadt

Eric Plamper

Manoj Patil

agenda
Agenda
  • Economic Overview
    • Actual GDP
    • GDP Gap
    • Monetary/Fiscal Policy
  • Stock Market Outlook
    • Key Drivers
    • Predictions
economic overview
Economic Overview

Natural

Resources

Physical

Capital

Labor

Force

Technology

Potential

Output

Consumer Demand

Embedded

Inflation

Business Demand

Output Gap

Output

(GDP)

Unemployment

Rate

Government Demand

Net Foreign Demand

Inflation

Change in Inventories

Demand for

Liquidity

Inflation

Premium

Federal

Reserve

Policy

Interest Rates

economic overview4
Economic Overview

Natural

Resources

Physical

Capital

Labor

Force

Technology

Potential

Output

Consumer Demand

Embedded

Inflation

Business Demand

Output Gap

Output

(GDP)

Unemployment

Rate

Government Demand

Net Foreign Demand

Inflation

Change in Inventories

Demand for

Liquidity

Inflation

Premium

Federal

Reserve

Policy

Interest Rates

actual gdp6

Consumption Quarterly % Change

Actual GDP

University of Michigan Consumer Sentiment

actual gdp7

Investment Quarterly % Change

Actual GDP

Government Quarterly % Change

actual gdp8
Actual GDP

Change in Inventory Quarterly % Change

Inventory to Sales Ratio

  • Absolute Inventories at Low Levels
  • Inventory to Sales Ratio at low Level
  • Change in inventory trend could be reversing
economic overview9
Economic Overview

Natural

Resources

Physical

Capital

Labor

Force

Technology

Potential

Output

Consumer Demand

Embedded

Inflation

Business Demand

Output Gap

Output

(GDP)

Unemployment

Rate

Government Demand

Net Foreign Demand

Inflation

Change in Inventories

Demand for

Liquidity

Inflation

Premium

Federal

Reserve

Policy

Interest Rates

economic overview10
Economic Overview

Natural

Resources

Physical

Capital

Labor

Force

Technology

Potential

Output

Consumer Demand

Embedded

Inflation

Business Demand

Output Gap

Output

(GDP)

Unemployment

Rate

Government Demand

Net Foreign Demand

Inflation

Change in Inventories

Demand for

Liquidity

Inflation

Premium

Federal

Reserve

Policy

Interest Rates

unemployment
Unemployment
  • Output gap
  • slack
  • March: 5.7%
  • Claims
  • Extended
  • benefits cloud
  • data
  • Consumer
  • impacts
inflation

CPI

Inflation
  • Productivity
  • impacts
  • Imports
  • Includes food
  • & energy

% Change

Q4 2001

GDP Deflator

  • Broader
  • measure
  • Similar drivers
economic overview13
Economic Overview

Natural

Resources

Physical

Capital

Labor

Force

Technology

Potential

Output

Consumer Demand

Embedded

Inflation

Business Demand

Output Gap

Output

(GDP)

Unemployment

Rate

Government Demand

Net Foreign Demand

Inflation

Change in Inventories

Demand for

Liquidity

Inflation

Premium

Federal

Reserve

Policy

Interest Rates

monetary policy
Monetary Policy

Fed Funds Rate

  • 40-yr. Low
  • 2-4 months more
  • on hold
  • Consumer
  • borrowing
  • Business
  • borrowing

Money Supply Growth

  • 9/11 change
  • Recent tightening
  • (inflation)
economic outlook
Economic Outlook
  • Below long term average growth
  • Above long term average unemployment
stock market outlook
Stock Market Outlook

Predictions

  • 5-7% stock market returns for 2002
  • 3-4% bond market returns for 2002
      • No interest rate increases in the near term
      • Still an attractive alternative for risk averse investors
      • We expect stable returns for 2002
  • Both of these projections are lower than past returns
stock market outlook17
Stock Market Outlook

Value or Growth?

  • Value outperforms when:
      • Expansive Monetary Policy
      • Economic Recoveries
      • High Valuations for Growth
  • We expect Value stocks to outperform Growth stocks in the near term
      • Since Value has been outperforming Growth for some time now, the questions is how long this trend will continue. We predict at least for the coming year.
stock market outlook19
Stock Market Outlook

Asset Class

  • Small-cap and Mid-cap stocks will be the top performers
      • Small and Mid-cap stocks perform worst during corrections and best during recoveries
stock market outlook21
Stock Market Outlook

Corporate Earnings

  • Earnings will begin growing especially later in the year
  • Earnings will be stronger than in the past two years
      • Expansionary Monetary Policy should begin taking effect
      • Expansionary Fiscal Policy – Reduced Tax Rates (personal and corporate level)
stock market outlook22
Stock Market Outlook

Sectors

  • Cyclical Sectors will outperform Defensive and Growth Sectors
  • The best performing sectors will be
        • Consumer Discretionary
        • Energy
        • Industrials
        • Materials
stock market outlook23
Stock Market Outlook

Valuation

  • Valuations are still on the high side relative to historic averages
  • We expect valuations to contract
    • High P/E ratios relative to the past will generally revert back to the mean
    • Earnings will increase faster than stock prices causing P/E ratios to fall
stock market outlook25
Stock Market Outlook

The Best Place to be in 2002

  • Small-cap Value stocks
  • Cyclical stocks