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Economics/ Capital Market Outlook Business Finance 824 4/30/02 Chris Bushman Karl Forster Dave Mayrer Mark Neustadt Eric - PowerPoint PPT Presentation


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Slide1 l.jpg

Economics/

Capital Market Outlook

Business Finance 824

4/30/02

Chris Bushman

Karl Forster

Dave Mayrer

Mark Neustadt

Eric Plamper

Manoj Patil


Agenda l.jpg
Agenda

  • Economic Overview

    • Actual GDP

    • GDP Gap

    • Monetary/Fiscal Policy

  • Stock Market Outlook

    • Key Drivers

    • Predictions


Economic overview l.jpg
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 l.jpg
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 l.jpg

Consumption Quarterly % Change

Actual GDP

University of Michigan Consumer Sentiment


Actual gdp7 l.jpg

Investment Quarterly % Change

Actual GDP

Government Quarterly % Change


Actual gdp8 l.jpg
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 l.jpg
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 l.jpg
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 l.jpg
Unemployment

  • Output gap

  • slack

  • March: 5.7%

  • Claims

  • Extended

  • benefits cloud

  • data

  • Consumer

  • impacts


Inflation l.jpg

CPI

Inflation

  • Productivity

  • impacts

  • Imports

  • Includes food

  • & energy

% Change

Q4 2001

GDP Deflator

  • Broader

  • measure

  • Similar drivers


Economic overview13 l.jpg
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 l.jpg
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 l.jpg
Economic Outlook

  • Below long term average growth

  • Above long term average unemployment


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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 l.jpg
    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 l.jpg
    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 l.jpg
    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 l.jpg
    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 l.jpg
    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 l.jpg
    Stock Market Outlook

    The Best Place to be in 2002

    • Small-cap Value stocks

    • Cyclical stocks


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