The Economy and Markets in 2018 - PKF Texas · 2018-03-06 · ©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of

©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of BBH & C5. “BBH” and “BBH & Co.” are registered service marks of Brown Brothers Harriman & Co.

The Economy and Markets in 2018

6 March 2018

G. Scott Clemons, CFAChief Investment Strategist

140 BroadwayNew York, NY [email protected]

@GSClemons

G. Scott Clemons

©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of BBH & Co.“BBH” and “BBH & Co.” are registered service marks of Brown Brothers Harriman & Co.

BBH is a global financial institution with over 5,000 employees in 18 offices worldwide and expertise in Private

Banking, Investment Management, and Investor Services. Our Private Banking business serves both corporate

and private clients throughout the cycle of wealth creation, transition and preservation in three primary

products: Private Wealth Management, Corporate Advisory & Banking and Private Equity.

About Private Wealth Management

Assets under management: $32.1 billion*

Clients we serve:

• Current/former private business owners• Business executives• Affluent families• Endowments • Foundations

Client minimum: $10 million

Average client size: $24.1 million*

Locations: New York, Boston, Charlotte, Chicago, Nashville, Philadelphia, Wilmington

*Total Private Banking AUM as of December 31, 2017

Brown Brothers Harriman Snapshot

2

©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of BBH & Co."BBH" and "BBH & Co." are registered service marks of Brown Brothers Harriman & Co.

The Art of Analysis

3

“The necessary knowledge is that of what to observe …”

— Edgar Allan Poe

The Murders in the Rue Morgue (1841)


Roadmap of the Domestic Economy

4

Housing Market

Labor Market

Personal Consumption GDP

Wealth Effect

Income Effect

Deleveraging Savings


The Housing MarketHousing Prices Rising at a Steady Pace

5

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

50

100

150

200

250

300

Source: National Association of Realtors, BBH Analysis Data updated through January 2018

Median Home Price (left hand scale)

Year-over-Year Change

(right hand scale)

2000 2002 2004 2006 2010 2012 2014 2016 2018

$000s


Regional Housing PricesYear-over-Year Percent Change as of December 2017

6

2.6%2.8%

3.4% 3.6%

5.2% 5.4% 5.4% 5.5% 5.6%5.9%

6.1% 6.3%

6.8% 6.9%7.1%

7.4% 7.4% 7.5%

9.2%

11.1%

12.7%

0%

2%

4%

6%

8%

10%

12%

14%

Sources: S&P/Case Shiller, BBH Analysis


The Labor Market18.2 Million Jobs Added Since the Financial Crisis

7

0%

2%

4%

6%

8%

10%

12%

-1000

-800

-600

-400

-200

0

200

400

600

Source: Bureau of Labor Statistics, BBH Analysis Data updated through January 2018

Monthly Net Job Gains

Unemployment Rate

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018


Varying Measures of Unemployment

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Headline

Unemployment


4.1%

8.2%

2.1%

Broad Unemployment

College Unemployment

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018


Wither Wages?

9

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Nominal Average Hourly Earnings Growth (year over year)



Household Debt to Assets

10

0%

5%

10%

15%

20%

25%

30%

1957 1967 1977 1987 1997 2007 2017

25.3%

15.5%

Source: Federal Reserve, BBH Analysis Data updated through 3Q 2017


Household Debt to Disposable Income

11

0%

20%

40%

60%

80%

100%

120%

140%

132.9%

104.6%

Source: Federal Reserve, BBH Analysis Data updated through 3Q 2017

1957 1967 1977 1987 1997 2007 2017


Household Savings as a Percentage of Disposable Income

12

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Source: Bureau of Economic Analysis, BBH Analysis Data updated through December 2017

1957 1967 19 77 1987 1997 2007 2017


Roadmap of the Domestic Economy

13

Housing Market

Labor Market

Personal Consumption GDP

Wealth Effect

Income Effect

Deleveraging Savings

?


Contributions to GDP Growth

14

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2010 2011 2012 2013 2014 2015 2016 2017

Personal Consumption

Business Spending

Government Spending

Net Exports

Source: Bureau of Economic Analysis, BBH Analysis Data updated through 4Q 2017


Economic ActivityLeading Economic Indicators Show No Cause for Concern

15

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

20

40

60

80

100

120

1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Sources: U.S. Conference Board, National Bureau of Economic Research, BBH Analysis Data as of December 2017

Index of Leading Economic Indicators (lhs)

Year over Year Change (rhs)


Corporate Earnings

16

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

S&P 500 Operating Earnings Growth (yoy)

Consensus

Expectations

Source: Standard and Poors, BBH Analysis Data updated through March 1, 2018


Market ValuationsPrice-to-Earnings Ratio on Trailing 12 Month Operating Earnings

17

0

5

10

15

20

25

30

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

+ 2 standard deviations

+ 1 standard deviation

- 2 standard deviations

- 1 standard deviation

Average

Source: Standard & Poors, BBH Analysis Data updated through 1 March 2018

25.6x

20.6x

15.6x

10.6x

5.6x

21.7x


Monetary Policy and Interest RatesFed Funds Target Currently 1.25-1.50%

18

0%

5%

10%

15%

20%

25%

30%

35%

40%

Probability of 3 rate hikes in 2018

Probability of 4 rate hikes in 2018

Source: Bloomberg, BBH Analysis Data updated through March 1., 2018


Bond Market ImplicationsTotal One Year Returns from Treasuries Under Rising Rate Scenarios

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Scenario 1 2-Year Portfolio 5-Year Portfolio 10-Year Portfolio 30-Year Portfolio

No change in interest rates 2.25% 2.64% 2.86% 3.14%

Scenario 2

Interest rates increase by 50 basis points 1.77% 0.79% -0.97% -5.90%

Scenario 3

Interest rates increase by 100 basis points 1.30% -1.03% -4.70% -14.25%

Scenario 4

Interest rates increase by 200 basis points 0.35% -4.60% -11.89% -29.12%

Source: Bloomberg Data as of 1 March 2018, BBH Analysis


Asset Allocation Implications

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• Corporate earnings growth is key to a continued rise in

equity markets, particularly given full valuations and

rising interest rates.

• Equities provide the best protection against inflation,

and potential for asset growth.

• Price volatility is back.

• Fixed income plays a role of stability and liquidity

more than return. Assuming excess credit or duration

risk is unwise.

• High quality real estate can act as a “quasi-bond,” while

adding inflation protection.


Economic Conclusions

21

• Fundamentals are sound. Economic growth remains

healthy, driven by personal consumption.

• Personal consumption is a key driver of corporate

revenues, and therefore corporate earnings, as well.

This is particularly important as interest rates continue

to rise.

• Investors will have to distinguish between those risks

that threaten to impair price and those that threaten to

impair value.

©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of BBH & C5. “BBH” and “BBH & Co.” are registered service marks of Brown Brothers Harriman & Co.

The Economy and Markets in 2018

6 March 2018

G. Scott Clemons, CFAChief Investment Strategist

140 BroadwayNew York, NY [email protected]

@GSClemons

G. Scott Clemons

Documents

The Economy and Markets in 2018 - PKF Texas · 2018-03-06 · ©2018 Brown Brothers Harriman & Co. Confidential & Proprietary. Not to be reproduced without the explicit consent of