2019 ECONOMIC FORECAST AND FINANCIAL MARKET UPDATE

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1 2019 ECONOMIC FORECAST AND FINANCIAL MARKET UPDATE January 14, 2019 Scott Colbert, CFA Executive Vice President Director of Fixed Income & Chief Economist

2 GLOBAL GROWTH EXPECTATIONS HAVE SLOWED Source: International Monetary Fund 1

3 GLOBAL PURCHASING MANAGERS INDEX ROLLS OVER China Slowdown Higher Interest Rates Stronger Dollar Higher Energy Prices Trade 49 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 JPM Global Manufacturing PMI JPM Global Services PMI Source: Bloomberg 2

4 THE LENGTH AND STRENGTH OF U.S. EXPANSIONS Cumulative Real GDP Growth Since Prior Peak, Percent 54% 44% 34% Prior Expansion Peak 4Q48 1Q80 2Q53 3Q81 3Q57 3Q90 2Q60 1Q01 4Q69 4Q07 4Q73 3 RD LONGEST 2Q60-4Q69 LONGEST 3Q90-1Q01 24% 14% 2 ND LONGEST 4Q07 - TODAY 4% -6% Source: BEA, NBER, JP Morgan Number of Years 3

U.S. TOTAL DOMESTIC DEBT GDP HEADWIND 400% Debt as a % GDP Financial Household Business Federal State & Local Peak = 371% Current = 326% 350% 300% 250% 200% 150% 100% 50% 0% 1952

5 U.S. TOTAL DOMESTIC DEBT GDP HEADWIND 400% Debt as a % GDP Financial Household Business Federal State & Local Peak = 371% Current = 326% 350% 300% 250% 200% 150% 100% 50% 0% Source: Flow of Funds Accounts, Federal Reserve Indicates Recession 4

LIMITATIONS ON FISCAL POLICY The 2019 Federal Budget, CBO Baseline Forecast, USD Trillions $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Total Spending: $4.5tn Other: $499bn (11%) Net int.

6 LIMITATIONS ON FISCAL POLICY The 2019 Federal Budget, CBO Baseline Forecast, USD Trillions $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Total Spending: $4.5tn Other: $499bn (11%) Net int.: $390bn (9%) Non-Defense Disc.: $693bn (15%) Defense: $669bn (15%) Social Security: $1,043bn (23%) Medicare & Medicade: $1,177bn (26%) Total Government Spending Borrowing: $981bn (22%) Other: $238bn (5%) Social Insurance: $1,231bn (28%) Corp.: $276bn (6%) Income: $1,744bn (39%) Sources of Financing Federal Budget Surplus/Deficit -12% % of GDP, , 2018 CBO Baseline -10% -8% -6% -4% -2% 0% 2% 2017: -3.5% CBO Forecast 4% Federal Net Debt (accumulated deficits) % of GDP, , 2018 CBO Baseline, End of Fiscal Year 120% 100% 80% 60% 40% 2017: 76.5% 2028: -5.1% 2028: 96.2% CBO Forecast 20% Source: JP Morgan, CBO, BEA, Treasury Dept 5

7 62.7% 2004 40.3 65.9% 2014 41.9 62.7% 2024* 42.4 60.9% 2.0% 1.5% 1.0% 0.5% 0.0% 1.1% 1.4% 1.4% 1.9% 2.2% 0.5% 1.9% 1.0% 1.3% 1.6% 0.

7 DEMOGRAPHICS AND PRODUCTIVITY DRIVERS OF ECONOMIC GROWTH DRIVERS OF GDP GROWTH U.S. AVERAGE YEAR-OVER-YEAR PERCENT CHANGE 4.0% 3.5% 3.0% 2.5% 3.2% 3.2% GROWTH IN WORKERS + GROWTH IN REAL OUTPUT PER WORKER GROWTH IN REAL GDP 3.0% 3.0% Labor Forces Ages and Exits Median Age Participation Rate % % % 2024* % 2.0% 1.5% 1.0% 0.5% 0.0% 1.1% 1.4% 1.4% 1.9% 2.2% 0.5% 1.9% 1.0% 1.3% 1.6% 0.9% 68-'77 78-'87 88-'97 98-'07 08-'17 *BLS Estimate BLS Estimates Avg Annual Growth Labor Force 0.4% Real GDP 2.2% Source: JP Morgan, Bureau of Labor Statistics 6

CONSUMER FINANCES POSITIVE WEALTH EFFECT 3Q18, Trillions of Dollars Outstanding, Not Seasonally Adjusted $130.0 $120.0 Total Assets: $124.9tn 3Q07 Peak: $83.8tn 1Q09 Low: $72.0tn $110.0 $100.0 $90.

8 CONSUMER FINANCES POSITIVE WEALTH EFFECT 3Q18, Trillions of Dollars Outstanding, Not Seasonally Adjusted $130.0 $120.0 Total Assets: $124.9tn 3Q07 Peak: $83.8tn 1Q09 Low: $72.0tn $110.0 $100.0 $90.0 $80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 Source: JP Morgan, BEA Homes: 23% Other Tangible: 5% Deposits: 9% Pension Funds: 21% Other Financial Assets: 42% Other Non-Revolving: 1% Revolving*: 6% Auto Loans: 7% Other Liabilities: 9% Student Debt: 10% Total Liabilities: $15.9tn Mortgages: 66% 7

9 THE ECONOMIC CYCLE HAS PEAKED Source: JP Morgan, CBO, BEA 8

10 EMPLOYMENT NO SIGNS OF ROLLING OVER Total average job growth at 190k/month since January 2010, 190k/month private only Lost 8.9 million jobs during recession 20 million jobs created during recovery Source: Bureau of Labor Statistics 9

11 UNEMPLOYMENT FALLS WHILE WAGES RECOVER Source: Bureau of Labor Statistics, Bloomberg 10

12 U.S./CHINA TRADE DEFICIT CONTINUES TO GROW 550 Billions($) Imports from China Exports to China Imports from China Exports to China $400 BILLION Source: Bloomberg 11

13 LEADING ECONOMIC INDICATORS TIMING FOR THE NEXT RECESSION 120 Monthly Average Average Recovery: 71 Months (After Moving Above Prior Peak) Recession Timing: Feb 23 Current Recovery: 21 Months Months Months Months Source: Bloomberg 12

14 INVERTED CURVE TIMING FOR THE NEXT RECESSION (10 YR 2 YR YIELD) Avg Spread: 92 bps High: 280 bps Low: -199 bps bps 0 Current: 20 bps Months Steep 104 Months Steep 60 Months Steep 138 Months steep (and counting) 91 Month Recovery 119 Month Recovery 72 Month Recovery 164 Month Recovery (and counting) Recession Timing: -2 Feb Source: Bloomberg 13

15 FED FUNDS RATE VS INFLATION NOT RESTRICTIVE bps AVERAGE SPREAD PRIOR TO RECESSION: 325 BPS 7 FED FUNDS RATE 400 bps bps PERCENT Years 0 bps X+ Years 2 1 CORE CPI INFLATION 3+ Years Source: Bloomberg 14

16 3 PRIOR FED HIKES VS. CURRENT FOMC VS. MARKET EXPECTATIONS Source: Bloomberg, BofA/Merrill Lynch 15

17 YIELD CURVE FLATTENS AS FED TIGHTENS 6% 5% 4% 3% 6/29/ /29/ /31/ FED FUNDS RATE INCREASE: 425 BPS 06/29/ % 06/29/ % 2% 12/16/2015 1% 0% 3M 1Y 2Y 3Y 5Y 7Y 10Y 30Y MATURITY/TERM Source: Bloomberg 16

18 YOU THINK OUR RATES ARE LOW? 10-YEAR GOVERNMENT BOND YIELDS (%) 12/31/ RECORD SPREAD Japan Germany France U.K. Spain Italy AVERAGE U.S. Source: Bloomberg 17

19 INFLATION BENIGN BUT TURNING UP FROM BOTTOM 6% 5% CPI (YOY) 4% Core CPI (YOY) 3% 2% 1% 0% -1% -2% Averages CPI (YOY): 2.3% Core CPI (YOY): 2.3% -3% Source: Bloomberg 18

20 U.S. DOLLAR INDEX Keep inflation down Hurts Emerging Markets Source: Bloomberg 19

21 INDEX RETURNS AFTER THE ELECTION as of 12/31/2018 S&P % MSCI Emerging Markets 15.9% Russell Mid Cap 13.2% Russell % MSCI EAFE 11.2% Aggregate Bond Index 2.4% 0.0% 10.0% 20.0% 30.0% 40.0% Source: Bloomberg 20

22 YTD EQUITY RETURNS as of 12/31/2018 Aggregate Bond Index 0.1% S&P % Russell Mid Cap -9.1% Russell % MSCI EAFE -13.8% MSCI Emerging Markets -14.5% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% Source: Bloomberg 21

23 S&P 500 PRICE INDEX CHARACTERISTIC MAR OCT DEC INDEX LEVEL 1,527 1,565 2,507 P/E RATIO (FWD.) 27.2x 15.7x 14.4x DIVIDEND YIELD 1.1% 1.8% 2.3% 10-YR TREASURY 6.2% 4.7% 2.7% +271% % +101% % -57% Source: JP Morgan 22

24 S&P 500 INDEX: FORWARD P/E RATIO 26x 24x 22x 20x +1 Std. dev.: 19.3x 18x 16x 14x 12x 25-year average: 16.1x -1 Std. dev.: 12.9x Current: 14.4x 10x 8x Source: JP Morgan 23

25 S&P 500 INDEX: FORWARD P/E RATIO VALUE MEASURE DESCRIPTION LATEST 25-YEAR AVG* STD.DEV. OVER/UNDER-VALUED P/E Forward P/E 14.4x 16.1x -0.5 CAPE Shiller s P/E DIVIDEND YIELD Dividend Yield 2.3% 2.0% -0.8 P/B Price to Book P/CF Price to Cash Flow EY SPREAD EY minus Baa Yield 1.8% -0.1% -1.0 Source: JP Morgan 24

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28 FREQUENCY OF STOCK MARKET DECLINES The recent return of stock market volatility is a reminder that market corrections are a normal part of stock market action. Corrections are common occurrences, and a correction does not preclude future strong returns. STOCK MARKET CORRECTIONS 1/1/1928 6/30/2018 MAGNITUDE OF CORRECTION 5% OR MORE 10% OR MORE 15% OR MORE 20% OR MORE Number of Corrections Average Number of Corrections Each Year Historical % of Corrections Moving to Next Stage (e.g., 10% decline moving to a 15% decline) 32% 44% 58% N/A Source: Ned Davis Research, Inc. T_250A Copyright 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at For data vendor disclaimers refer to Not FDIC Insured May Lose Value No Bank Guarantee 27

29 HOUSING AND STOCKS VS. GDP (EXPENSIVE) Internet Bubble Housing Bubble 28

30 S&P 500: 30-YEAR HISTORY OF CORRECTIONS 3,500 3,000 S&P 500 2,500 2,000 1,500 1, Drawdown (%) Source: Bloomberg 29

Reading the Tea Leaves: Investing for 2010 and Beyond

Reading the Tea Leaves: Investing for 2010 and Beyond Wednesday, April 28, 2010; 8:00 AM - 9:15 AM Moderator: Maria Bartiromo, Anchor, CNBC's Closing Bell With Maria Bartiromo Speakers: Nick Calamos, President