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2011 Economic and Financial Market Outlook

2011 Economic and Financial Market Outlook. January 2011. Michael Dawkins David Guhde Senior Portfolio Manager Senior Director BNY Mellon Wealth Management BNY Mellon Wealth Management. 2. Employment Far Behind Normal Recovery EXPECTED TO REMAIN HIGH FOR QUITE SOME TIME.

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2011 Economic and Financial Market Outlook

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  1. 2011 Economic and Financial Market Outlook January 2011 Michael Dawkins David Guhde Senior Portfolio Manager Senior Director BNY Mellon Wealth Management BNY Mellon Wealth Management

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  3. Employment Far Behind Normal Recovery EXPECTED TO REMAIN HIGH FOR QUITE SOME TIME U.S. Unemployment Rate, Seasonally Adjusted 17.0% PERCENT 9.8% Civilian Unemployment Rate Broader Unemployment Rate* As of 11/30/10. Source: Bureau of Labor Statistics, Haver Analytics *Includes officially unemployed, those who want a job but stopped looking, and those who need full-time jobs but can only find part-time work, measured as a percentage of the civilian labor force plus all the marginally attached workers.

  4. Economic and Policy Headwinds to Growth UNUSUALLY HIGH DEGREE OF UNCERTAINTY • Demographic shifts • Global deficit • Tax policy • Investor psychology • Ongoing credit crunch for smaller companies • Entitlement costs • Unwind of stimulative policies • High unemployment • Re-regulation

  5. Business Confidence Remains Low NFIB Index of Small Business Optimism As of 11/30/10. Sources: National Federation of Independent Businesses and Ned Davis Research

  6. Consumer Confidence at Historically Low Levels Conference Board's Consumer Confidence Index, 1970-2010 As of 12/31/10. Sources: The Conference Board and Haver Analytics

  7. Households Reducing Debt Household Debt as Percentage of Disposable Personal Income 117.6% As of 9/30/10. Household debt includes home mortgage and consumer credit. Source: Ned Davis

  8. Housing Market Still ChallengedDEMAND WAS PULLED FORWARD BY TAX INCENTIVE Month’s Supply of Existing Homes 11/30/10, 9.3 Median Price of Existing Homes – Percent Change from Year Ago 11/30/10, 1.2% Source: Ned Davis, Haver Analytics, National Association of Realtors

  9. Election Positive Catalyst for Equity Markets S&P 500 Performance by Partisan Control, 1928-2009 DCongress R President R Senate D House R President D Congress D President R Congress R President R Congress D President Source: StrategasRP

  10. Election Year Cycle Bodes Well for Equity Market S&P 500 Total Return by Presidential Year, 1928-Present Source: StrategasRP

  11. Historical Market Returns Returns as of 12/31/10, unless noted otherwise. Standard deviations are calculated based on monthly data for the trailing 10 years. Source: Morningstar. *As of 11/30/10; **Returns are for periods through 6/30/10 and represent Thomson Financial’s Private Equity Performance Index; standard deviation is not available.

  12. Investors Continue to Flock to Bond Funds Net Fund Flows By Asset Class, 12-Month Moving Average 36 $ BILLIONS 16 4 0 -4 -16 08 10 04 06 90 92 94 96 98 00 02 82 84 86 88 Equity Funds Bond Funds As of 11/30/10. Sources: Investment Company Institute and Ned Davis Research

  13. Treasury Yields Hovering Near Historic Lows 10-Year Constant Maturity Treasury Note Yields 16 PERCENT 14 12 10 8 6 3.36% 4 2 1983 1988 1993 2003 2008 1998 As of 1/3/11. Source: Ned Davis

  14. Strong Relative Bond Performance Unlikely to Repeat S&P 500 vs. Barclays Capital Long-Term Treasury Bonds Relative 10-Year Total Returns 600 480 PERCENTAGE POINTS 360 240 Mean 120 0 -74.2% -120 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 As of 12/31/10. Source: Ned Davis

  15. Core Inflation Slowing Dramatically INVESTORS FEAR DEFLATION Year-over-Year Percent Change in Consumer Price Index, Less Food and Energy As of 11/30/10. Source: Bureau of Labor Statistics

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  17. Longer-term Concerns Federal Budget, and as a Percentage of Gross Domestic Product As of 11/4/10. Source: U.S. Treasury, Office of Management and Budget, Haver Analytics

  18. Hedging Against Future InflationINFLATION PROTECTION RELATIVELY INEXPENSIVE Expected Inflation: Yield Difference between Nominal Treasury and TIPS As of 12/31/10. Source: U.S. Treasury, Federal Reserve Board, Haver Analytics

  19. The Dollar Trade-Weighted Dollar Avg = 97.5 Avg = 92.7 Avg = 90.3 Avg = 89.3 Avg = 87.3 Avg = 85.9 Avg = 83.8 Avg = 83.0 2003 2004 2005 2006 2007 2008 2009 2010 As of 12/31/10. Source: Bloomberg.

  20. Continued Strong Growth in Emerging Markets Real Gross Domestic Product (GDP) As of 10/1/10. Sources: International Monetary Fund and BNY Mellon Wealth Management

  21. U.S. GDP Forecast SLOW U.S. RECOVERY, BUT DOUBLE DIP RECESSION UNLIKELY BNY Mellon Wealth Management GDP Estimates Sources: 4Q08-3Q10: Bureau of Economic Analysis; 2010-2011: BNY Mellon Wealth Management

  22. S&P 500 Operating Earnings Estimates CONSISTENT WITH SLOW GROWTH SCENARIO S&P 500 Earnings and BNY Mellon Wealth Management Estimates $ DOLLARS As of 11/30/10. Earnings represent trailing four-quarter earnings per share. Source: Standard & Poor’s and BNY Mellon Wealth Management

  23. U.S. Equity Valuations SupportiveBUT INVESTORS NOT FOCUSED ON FUNDAMENTALS Stock Market Valuation S&P 500 P/E Ratio Inverted 10-Year Treasury Yield As of 12/31/10. Sources: Bloomberg and Baseline

  24. Cash as Percentage of Assets As of 6/30/10. Source: StrategasRP

  25. M&A Activity ImprovingCATALYST FOR IMPROVED MARKET SENTIMENT Number and Value of U.S. M&A Deals, Quarterly As of 12/31/10. Source: StrategasRP

  26. Another Bull Market Run UnlikelyMORE HEADWINDS THAN TAILWINDS 1982 2010 18% 0% Federal Funds Rate 15% 3.4% 10-Year Bond Yield -3% -10% Budget Deficit-to-GDP Ratio 62% 118% Hsehold Dbt as % of Disp. Pers. Inc. 10% 0% Inflation Rate 10% 5% Savings Rate 25y 53y Baby Boomer Population 69% 35% Tax Rates (Highest Marginal) 10.8% 9.8% Unemployment Rate 8.0x 17.5x S&P 500 P/E Ratio (Trailing 1-Year) 6% 1.8% S&P 500 Dividend Yield Source: David Rosenberg. Gluskin Sheff + Associates Inc. and BNY Mellon Wealth Management.

  27. Asset Class Outlook MoreAttractive LessAttractive Asset Class U.S. Large Cap Equities U.S. Small/Mid Cap Equities International Developed Equities Emerging Markets Equities High Yield Bonds Treasuries Municipal Bonds Commodities Real Estate (REITs) Private Equity Hedge Funds (Long/Short)

  28. Recommended Balanced Portfolio Structure *Limited to qualified investors only and where appropriate. As of 12/1/10.

  29. Strategic ArchitectureNEW INVESTMENT SOLUTIONS INTRODUCED IN THE LAST 2 YEARS

  30. Fixed Income Sector Returns Selected Sector Returns As of 12/31/10. Source: Barclays Capital

  31. Corporate Spreads Down From Recent Highs U.S. Corporate Bond Yield Spreads As of 12/31/10. Source: Barclays Capital

  32. Muni Yields as a Percentage of TreasuriesCREDIT AND SAFETY CONCERNS CAUSED SPREADS TO WIDEN DRAMATICALLY AAA 30-Year Municipal Bond Yields as Percentage of 30-Year Treasury Yields As of 12/31/10. Source: Bloomberg LP

  33. Municipal Credit Quality Returns OPPORTUNITIES FOR WELL RESEARCHED ISSUE SELECTION Credit Quality Returns As of 12/31/10. Source: Barclays Capital

  34. BNY Mellon Wealth Management LARGE CAP EQUITY VS. S&P 500 Sector Weights as of 12/31/10 Sources: BNY Mellon Wealth Management and FactSet

  35. Correlations Likely to Remain Elevated Median 63-Day Correlation of S&P 500 Stocks to the S&P 500 Index +3 CORRELATION +2 +1 Mean -1 -2 Daily data 4/20/72 - 12/31/10. Source: Ned Davis Research, Inc.

  36. Globalization of Investments A Key Trend Total Capitalization of U.S. vs. Rest of World • U.S. represents less than 1/2 of global market cap • Potential for currency gains • Valuations are reasonable $12.7 trillion 43% $16.9 trillion 57% As of 12/31/10. Source: Factset

  37. Emerging Market Capitalizations MSCI Emerging Markets vs. MSCI ACWI and ACWI ex-U.S. All years as of 12/31. Source: Factset

  38. Private Equity Trends and Opportunities HIGHEST PERFORMANCE DURING AND FOLLOWING ECONOMIC DOWNTURNS Private Equity Returns by Vintage Year vs. U.S. GDP Growth Should be excellent vintage years POOLED MEAN NET IRR BY VINTAGE (%) YEAR-OVER-YEAR U.S. GDP GROWTH (%) NM NM NM NM Recovery Years Other Years U.S. GDP Growth U.S. Private Equity Benchmark Statistics as of 3/31/10. Sources: Bureau of Economic Analysis, Federal Reserve Board, Cambridge Associates LLC

  39. Opportunistic Private Equity Areas Distressed Assets Mezzanine Debt • Opportunity in small and mid-market due to limited funding from traditional sources (banks, BDC’s & hedge funds) • Seek equity-like returns with credit-like protection and enhanced position in capital structure • Current environment provides • Better structured security • More stable underlying capital structure $BILLIONS • $1.3 trillion in High Yield and Leveraged Loans set to mature by 2015 • Difficult financing and operational environment creates vast array of distressed opportunities • Commercial and residential mortgage-backed securities • Corporate debt • Commercial loans • Consumer debt Source: Standard & Poors, Leveraged Loan Report, 2009 Source: BNYM-Alcentra and Internal Analysis

  40. Objective-Driven Investing MANAGING WEALTH TO SERVE BOTH LIFESTYLE AND WEALTH TRANSFER NEEDS Lifestyle Wealth Transfer Wealth Preservation Income Generation Wealth Accumulation Generational Transfer Legacy Funding Lifestyle Portfolio Wealth Transfer Portfolio Total Portfolio

  41. 2010-2020: WHY THE MOST CRITICAL DECADE • Extreme Investing Environment • A Challenging, Dynamic Landscape • Multi-dimensional Recovery Challenges The Most Critical Decade FUNDAMENTAL CHANGES SLOW, SPORADIC GROWTH POLICY HEADWINDS CHANGED BELIEFS

  42. 2010 to 2020: The Most Critical Decade Dynamic, Seamless Planning A Different Quality of Client-Advisor Engagement Investment Innovation and Rigorous Discipline

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