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Simply a correction or a looming bear market?

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Our Investment Management team is hosting an exclusive webinar and conference call Friday at 10 a.m. (CST) to discuss recent market noise and reconsidering long term economic themes. To join us at this web conference, click here, or dial in (at least five minutes prior to the call) to 1-888-466-9845 and passcode: 9381 467#

Corrections

Stock market corrections (a decline of 10 percent) are a normal and healthy part of a bull market. We have all been concerned that we haven’t seen a correction since 2011, as the markets went virtually straight up with very little volatility. And then came August 2015.

We think this is a correction: a violent reaction to four primary factors.

  • Valuations — Currently the market trades at a slight premium, as measured by Price-to-Earnings (P/E) multiples. Prior to last week’s trading, the market traded at approximately 17 times earnings. We think the market will trade at 16 times earnings, and if you assume the S&P 500 will earn $120 in 2016, the S&P 500 should trade at 1920.
  • Earnings scare — Perhaps the market is now fairly valued; however if earnings estimates are in question, then the valuation of the market is wrong and prices may move lower.
  • Global economic slowdown–China and other emerging markets are clearly slowing. China represents 14.1 percent of global nominal GDP.
  • Lack of confidence in central bankers– Most historical bear markets have come from Federal Reserve tightening and upcoming economic recessions.
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U.S. economy

The recent economic news was surprisingly good for the United States and even for Europe, perhaps suggesting that China is not the be-all and end-all of the world economy. U.S. housing data was especially strong this week with housing starts and existing-home sales reaching post-recovery highs. Those strong numbers should have a trickle-down effect on the U.S. economy as those homes are financed, furnished and remodeled.

China

China’s economy has slowed throughout the past few years and clearly is not growing at a 7 percent rate, the country’s official GDP growth estimate. Other variables such as electricity consumption, rail car volumes and airline traffic all point to a growth rate slowdown, but not a collapse. The question is how will China’s slowdown affect the U.S. economy?

U.S. exports to China account for 8 percent of total exports and only 1.2 percent of GDP. Admittedly, exports to other Asian economies account for another 15 percent of exports, but the risks of a widespread Asian financial crisis resembling what happened in 1997 and 1998 are quite low.

Many have cited the Chinese stock market as an indicator of their economic outlook. The 40 percent decline in the Chinese stock market since June has nothing to do with any deterioration in the Chinese economy, just as the 58 percent surge in the first half of this year didn’t reflect a genuine improvement in economic fundamentals. It’s worth remembering that the Shanghai composite index is still up by 38 percent throughout the past 12 months.

Central bankers

The Federal Reserve (the Fed) has been clear that its decision to hike rates will be data-dependent. But is it also market dependent? We don’t think the Fed will ignore what is happening in the financial markets. The probability of liftoff in September has been reduced significantly. Most bear markets (a decline of 20 percent) come from Fed tightening and upcoming economic recessions. The Fed doesn’t want to commit a “policy mistake” and be blamed for a bear market or a recession.

Europe just initiated a quantitative easing program earlier this year. This should bolster both its economy and investor sentiment, and mitigate downside pressure on its markets.

China’s policymakers also have plenty of scope for further stimulus, both monetary and fiscal. In fact, as I write this, China has lowered interest rates.

U.S. Stock Market

The last time we saw a correction using closing prices was in 2011, when from May to August the S&P 500 declined 11.1 percent. Last year we saw a correction in October; it was slightly less than a 10 percent correction and recovered quickly. Following are current returns as of this writing:
current returns 8/26/15

Some markets, such as commodities, are in a bear market:
commodities in a bear market

There is clearly a revaluation of global growth.

Conclusion

What does this mean for equities? Based on the recent market correction, it will be difficult for the S&P 500 to reach new highs in 2015. However, the average decline of all corrections greater than 5 percent since the 1920s may indicate that we are close to the lows for this year. The average peak-to-trough decline during a 5+ percent correction is -12 percent, which implies a low of 1870 on the S&P 500 or 3 percent lower at the time of this publication. Potential positive catalysts for the market to go back to recent highs include clarity on the Fed and China.

What does this mean for interest rates? Clearly, the Federal Open Market Committee (FOMC) might use recent turbulence as a reason to postpone initiation of liftoff for rates — the risk of being accused of making a policy mistake will likely mean there is no adjustment of rates at the September meeting. However, if we are correct that recent market turbulence has merely been a valuation reset, and longer-term economic outlooks remain reasonably stable, we expect rates to begin an upward move in the near future.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

DISCLOSURE AND IMPORTANT CONSIDERATIONS:

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.* is a wholly owned subsidiary of UMB Financial Corporation, and an affiliate of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2015. UMB Financial Corporation. All Rights Reserved.

*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.

 

Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.

Securities and Insurance products are:

NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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What doesn’t matter: the non-drivers of the economy

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In a world where a constant stream of economic data and commentary is the norm, it’s crucial to be able to sift through what really matters (see my post from last week for those insights) to make better-informed investment decisions. Now, let’s look at what doesn’t really matter when assessing the driving forces of the economy. We’ll assess why “Fed Talk” and high frequency economic data are oftentimes deemed important, yet have very little relevance.

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Fed Talk
The Federal Open Market Committee (FOMC) consists of 12 members. All of them have their own opinions on the state of the economy.  As the old joke goes, if you have 12 economists in a room you will get 14 opinions.

The Fed develops forecasts like many Wall Street prognosticators, and their track record is very similar: not better, but not worse.  One would think since they hold the cards, their track record should be superior. However, you don’t need to be glued to your computer waiting for the next Fed press conference. Watch what they actually do, not what they say.

High-Frequency Economic Data
The high-frequency weekly indicators are meant to be accurate in observing economic trends in real time.  However, these data points can be misleading when observed point-to-point.

Take mortgage applications in 2015 for example; this data is released every Wednesday. Looking at one week in January, it indicates mortgage applications were up 49 percent. Then, a week in February recorded applications down 13 percent. The point is that just because you can track the data, doesn’t mean it is a helpful economic indicator.

The variety of data points we have at our fingertips today is nearly unfathomable. As investors look for more efficient ways to use the data at hand, remember to track the U.S. dollar, employment and global GDP. Take what the Fed says with a grain of salt and rather, watch what they do. And if you have high-frequency economic data in front of you, remember – just because it can be tracked, doesn’t mean it’s delivering information that should be used.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

DISCLOSURE AND IMPORTANT CONSIDERATIONS:

UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals.  UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.

 

Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.

Securities and Insurance products are:

NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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What really matters: the drivers of today’s economy

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Every day we are bombarded with data and opinions meant to help investors manage their portfolios. Much of the data can be ignored, because unfortunately most of it is just that—data. As investors, we only want to explore the kind of data that becomes useful information. My team and I will figure out what you need to know to grasp where the market is heading by uncovering what really matters when forecasting economic activity. In a world where a constant stream of economic data and commentary is the norm, it’s crucial to be able to sift through what really matters to make better-informed investment decisions.

The important variables to monitor over the next year will be the U.S. dollar, employment and key global issues.

I visited The Streetrecently to share my insights.

Watch…

 

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The U.S. Dollar

The U.S. dollar (the dollar) has become increasingly important because of two key functions.

1) its impact on corporate earnings in the United States.

2) global economic conditions and its ability to provide insight into relative interest rates.

Let’s take a look at the short-term and long-term impact of the dollar on the economy.

Short-term:

With the recently-strengthened dollar, the fast increase is what had a meaningful impact on our economy. A strong dollar makes exported goods and services that are produced in the United States more expensive. Numerous conglomerates have cited the strong dollar as a headwind that has negatively affected corporate earnings, stating that this will be a driver putting downward pressure on earnings and stock prices due to the translation impact1 and competitive concerns2. However, small businesses which typically do not have as much international exposure will not be as negatively affected by a strong dollar. Also, the United States is a net importer; in the first quarter we exported $2.08 trillion and imported $2.63 trillion. Commodities are negatively correlated with the dollar and as it strengthens, commodity prices will fall. This will be a positive for companies that use commodities as an input variable and for the general consumer.  We expect continued strength in the dollar.

Long-term:

We see that the dollar typically strengthens when the U.S. economy is outpacing its peers. In addition, we think the United States will soon be hiking interest rates while lowering rates is popular elsewhere around the world. This would suggest more upside for the dollar. However, we think Europe will show signs of economic growth and this should cause the dollar to stabilize. It is imperative that we pay attention to the dollar. It matters more than investors realize.

To learn more about the value of the U.S. dollar, check out my video from earlier this year.

Employment
Jobs are one of the most important variables to an economy.  As jobs are created, consumer confidence increases and over time, wages increase.

Short-term:

What matters are jobs, jobs and more jobs. Job creation is the critical component in breaking the U.S. economy free from being “stuck in the mediocre-growth-mud.” In the short run, it is not critical what kinds of jobs are created, or whether they are high or low paying. Rather, it’s more important to focus on job growth and a low unemployment rate. Those variables alone will increase consumer confidence and move the markets. This year we expect that an average of 250,000 jobs will be created per month, similar to 2014.

Long-term:

The quality of jobs and wage growth remains in question. It appears there are some structural changes developing.

The U-6 is one of the ways the Bureau of Labor Statistics more critically measures long-term growth. The U-6 is calculated by adding the marginally attached workers (people who have become discouraged and stopped looking for employment) and part-time workers to the unemployment rate. This puts the U-6 at 10.8 percent, almost twice the rate of the unemployment rate (5.5 percent).

The jobs created have been in lower-paying industries, such as retail and leisure and hospitality. In addition, part-time employment due to economic reasons has not improved since 2010. This indicates a skill mismatch and a potential structural change developing.

The labor market appears to be tightening; unemployment has improved significantly since 2009, yet there appears to be limited wage pressure.  We think once the U-6 breaches 10 percent, wage inflation will appear on the horizon. Employment matters.

Global Gross Domestic Product (GDP)
We operate in a global economy.  What happens overseas can have a material impact on the U.S. economy.

Short-term:

All eyes are on Europe. Whether Europe can successfully manage Greece and enter a recovery phase is up in the air. Europe’s economy has been growing very slowly. Similar to the United States in 2009, lower interest rates and quantitative easing by the European Central Bank are now critical to global economic and market activity. Approximately 10 percent of our exports go to the Eurozone. The consensus GDP growth in Europe is 1.5 percent in 2015.  As monetary stimulus and green shoots of growth sprout in Europe, risk-based assets should perform well around the globe.

Long-term:

China is important to the global economy for two primary reasons:

  1. China represents the second largest economy in the world. The U.S., the largest economy, has a $16.8 trillion economy, while China’s economy is only $13.3 trillion.
  2. Even more important than size is growth rate. In 1985, China represented 3 percent of global GDP and the U.S. represented 25 percent. Today, China represents 14 percent and the U.S. has dropped to 19 percent. Even though the Chinese economy is smaller than the U.S. economy, it has been growing at a faster pace.  In 2010, China was growing at a pace of 10.5 percent.  Growth in 2014 slowed to 7.4 percent, although the data from their government has been questioned by many.

The real risk is if China’s economic activity slows to less than 6 percent growth. For a country with 1.4 billion people a slowdown would send a ripple throughout the world’s economy, as China’s imports will wane. We operate in a worldwide economy and ignoring these global variables is not an option.

Remember to check back for “What Doesn’t Matter: The non-drivers of the economy” next week!

[1] Translation is negatively impacted because sales generated outside the U.S. must be converted into dollars for financial reporting purposes. Therefore, a higher dollar = lower sales in dollars. So focus on sales ex-currency impacts.

[1] Example: Airbus, a European airline manufacturer, becomes price competitive versus Boeing, a U.S. airline manufacturer when the Euro weakens relative to the Dollar.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

DISCLOSURE AND IMPORTANT CONSIDERATIONS:

UMB Private Wealth Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals.  UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Banking and trust services offered through UMB Private Wealth Management, a division within UMB Bank, n.a.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Private Wealth Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Private Wealth Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Private Wealth Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Private Wealth Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.

*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.

Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions.

Securities and Insurance products are:

NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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2015 economic forecast: ready for liftoff

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After several years of slow-growing momentum in the U.S. economy, we have deemed 2015 the year of economic “lift-off.”

Lift-off is a term the Federal Reserve (Fed) typically uses to reference a transition from lower rates to a rising rate environment. For our forecast this year, however, this term can actually be applied broadly to the entire U.S. economy, signaling that meaningful improvement has arrived and will likely continue. So what will fuel this economic lift-off, and are there any variables to consider that may cause us to reconsider whether or not the economy is truly ready for launch?

Check out KC’s interview with The Street to see a short summary of his predictions. For the full story, keep reading.

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Where we’ve been

reverse-liftoff

The United States has been stuck in a below potential, moderately-growing economy since 2009. Most recently, we saw 2.2 percent real or inflation-adjusted GDP growth in 2013 – followed by a small improvement to 2.4 percent growth last year. So it shouldn’t come as a surprise that we anticipate additional improvement in 2015; but will this be a low-altitude lift-off near 2.7 percent or something more powerful, closer to 3.1 percent growth?
economic growth

Fuel

The economy is fueled by many factors, but there are a few that carry more weight than others. If you are familiar with UMB, you’ll note that we are driven by what the data tells us, not by what people say; the goal being to understand the difference between the signal and the noise.

This year we think the primary driver of growth will be the consumer.  We think there will be three key variables to watch that should drive consumption and economic activity.
fuel

Jobs are one of the most telling and powerful variables in the economic formula. Most of the time, though, headline unemployment is the only data indicator used in reporting. We don’t think the value of that indicator is very significant. We prefer to hone in on actual job creation or payroll growth because it tells more of the story. The country has seen marked improvement in average monthly payroll growth since 2011, and with that, GDP has correlated nicely. In 2013, approximately 194,000 jobs were created per month (GDP at 2.2 percent); in 2014, the number was 246,000 (GDP at 2.4 percent) and we anticipate the labor market will stabilize or improve slightly, increasing to somewhere around 250,000 per month in 2015. Historically speaking, when the United States creates 3 million jobs a year, the economy grows faster than 3 percent.
unemployment

One of our favorite signals to forecast payroll growth is availability of credit. Businesses need to know credit is available prior to expanding and hiring workers.  Payroll growth and the willingness of banks to lend are highly correlated by as much as 85 percent.  Today banks are open for business and lending standards are accommodative.
unemployment

Consumer confidence has been improving and we think will continue to improve due to the labor market, stock and home prices, and of course lower energy costs. As we stated, the employment landscape is in excellent condition and on an upward trajectory. This adds to the formula for upward movement, along with a stock market that is up more than 200 percent over the last five years, home prices are up 30 percent over the last three years.  As I have said before, when consumers feel good, they consume. This certainly seems to be the case.
confidence

Credit makes the world go ’round, and banks and credit are the lifeblood of the economy. Unfortunately over the past few years, millions of Americans were cut off from credit but today will once again have access to credit. From 2006 – 2009 nearly 5 million Americans, roughly the population of metropolitan Atlanta, defaulted on their mortgages. When you default on a loan, you are cut off from credit. Fast forward seven years after a default and that blemish has been expunged from your credit record, thus giving millions of Americans access to credit once again. With that, demand for bank loans has improved significantly. In 2007 loan demand was growing just shy of 10 percent, then dried up during the Great Recession, and resurfaced to nearly 8.0 percent in 2014. In other words, consumers and businesses are willing to borrow and consume yet again.

Houston we have a problem…or do we? 

All indicators are telling us that things look positive, but as with any mission, we must explore possible hazards that could cause a ‘failure to launch.’ Let’s hone in on a few key variables:

Employment – Yes jobs have been created, but job quality has been in question for a few years. Now, though, we can see improvements. The national quit rate is on the rise, which tells us that employees are finding better paying employment.
employmentHousing – Household formation data typically follows the economic cycle. When economic conditions are favorable, young people can find jobs. They move out of their parents’ homes and create their own household, increase consumption and create housing demand.  Unfortunately, employment among the millennial generation (age 15-35) is incredibly low, indicating that many of them are unable to move out and create a household. Perhaps a more relevant group would be millennials aged 25-35, revealing that approximately 25 percent of them are not working, due to either unemployment or remaining in school. However, we feel confident that as the economy improves, this generation will have an easier time securing work, creating households of their own and thereby creating housing demand.  Housing has not made a significant contribution to GDP over the last several years. This year we think housing starts will reach 1.2 million and add close to 0.50 percent to real GDP, which will be material.
housingGeopolitical – The U.S. economy operates on a global scale and we always have to be mindful of the geopolitical risks that exist. Most recently, we’ve had to a take a close look at potential action coming from the European Central Bank, as Europe has been on the brink of a recession for some time now. In addition, Russia has been put in a difficult situation with the price of oil down nearly 50 percent. Russia has a losing hand as a country where 68 percent of its exports come from oil and gas. While this proves problematic for some countries overseas, non-oil producing countries, such as Europe and Asia, will have a boost of stimulus through lower oil prices. Overall, we mark this as a risk, but not particularly threatening to our forecast in the United States since consumers will have an estimated additional $100 -$150 million of disposable income.
geopoliticalPolicy Mistake – As previously mentioned, a Fed liftoff will occur when it begins to raise overnight rates up from the zero rate that’s been in place for several years.  This could be called a “policy mistake” if the Fed were to begin pushing rates up before the economy is healthy enough to handle higher borrowing rates.  We think that this is a very remote possibility, as inflation is still quite low and the Fed has little incentive to move rates up early or in a dramatic fashion.  In fact, the interest rate liftoff that we think will begin later in the year will actually be good news, because it will signal that the central bank sees a US economy that is healthy enough to withstand more normalized rates.  We think the Fed will move in a rational, measured manner that will not threaten the economic expansion.
policy mistakeCleared for Lift-Off – Through careful consideration of what factors are fueling our economy and what could pose a risk to launch, we believe the U.S. economy is officially ready for lift-off.
cleared for lift-off

Here’s what we anticipate for this year:

  • GDP growth between 2.7 percent and 3.1 percent, supported by a robust labor market as businesses create new jobs
  • Nearly 250,000 jobs created on average per month; this will drive unemployment down to 5.5 percent and many discouraged workers will return to the work force
  • Another good year in domestic equities
  • Corporate America will see 4.0 percent revenue growth and 6.0 percent earnings growth, which should lead to 10 percent total returns in the equity market
  • Interest rates will be on the move this year, expecting both short-term and long-term rates to increase

In all, the above data and research proves that the economy is certainly prepared for a lift-off. Whether we will see GDP near 2.7 percent or slightly more significant at 3.1 percent, the year ahead is looking brighter than we have seen for quite some time.
When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

 

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.*  is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2015. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

Securities and Insurance products are:

Not FDIC Insured  *  No Bank Guarantee  *  Not a Deposit  *  Not Insured by any Government Agency  *  May Lose Value

 

 


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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What’s happening with oil? (part II)

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Our Chief Investment Officer continues to answer questions about oil prices, today focusing on the impact on the consumer, corporate earnings and macro economy. Take a look at yesterday’s video if you missed it.

 

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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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What’s happening with oil? (part I)

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Our Chief Investment Officer answers your questions about oil prices:

  • How low will oil prices go and for how long
  • What does it mean for the consumer?
  • What does it mean to corporate earnings and financial markets
  • Can we see attractive returns in the equity markets without the contribution of the energy sector?

Check back tomorrow for part II!

 

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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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More holiday sales = economic growth (Part II)

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Our Chief Investment Officer reports on the outcome of his predictions made before Black Friday.

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Before Thanksgiving, we suggested that today’s consumers are financially healthier than in past years, which, we think, will drive a robust holiday spending season.

Some of the numbers reported appeared to be a bit Grinch-like. The National Retail Federation reported that Thanksgiving weekend sales were down 11 percent and online sales posted negative growth as well.

Our research at UMB leads us to a more cheerful conclusion, for two primary reasons.

  • Black Friday appears to be losing its reserve. You may recall that in the past retailers competed with one another to be the first store to open on Friday morning. Then they began opening the stores on Thanksgiving. Fast forward to today, when many retailers have promotional items on display prior to the holiday. Perhaps Black Friday has become Black November, meaning that the window of shopping days to be analyzed has become longer than just one weekend.
  • Several online retailers announced robust sales gains. We believe online sales are growing nearly 30 percent this season. We think this is due to the adoption of mobile technology. Since online retailers are open 24/7, so is the option to shop. We are also seeing a shift from brick and mortar stores to online retailers and we expect this trend to continue.

The retail sales data, along with other recently released economic data, supports our forecast of greater than 3 percent GDP growth in the fourth quarter, giving us nice momentum into 2015.

In Part I of this report, we anticipated material job growth this holiday season. The non-farm payroll growth in November proved that to be accurate with a gain of 321,000 jobs, again, supporting GDP growth of well over 3 percent.

Clearly the labor market is strengthening. Unemployment stands at 5.8 percent, and we think it will continue to head lower throughout 2015. Job openings are at a level we haven’t seen since 2001.

The labor market, along with higher stock and home prices and lower energy costs, has boosted consumer confidence. So it was no surprise to us that the University of Michigan’s Consumer Confidence Index has risen to a seven-year high.

Lastly, manufacturing data in the United States is hovering around a three-year high, also supporting our GDP forecast.

The bottom line is that all signs are leading us to believe that consumption will continue at a healthy pace. Since consumption is almost 70 percent of GDP, we think economic growth in 2015 will be between 3 to 3.5 percent; significantly higher than what we have seen throughout the last five years.

Given our optimistic economic outlook, we expect to see favorable returns in the stock market. In 2015 we expect 4 percent revenue growth and 6 percent earnings growth — that should lead to 10 percent total returns.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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More holiday sales = economic growth

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Black Friday is only 10 days away! Will you brave the mall? As you stand in the long lines, we’ll give you some tidbits to think about with how your purchases play a part in boosting the economy this holiday season.

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This year retailers are expecting much more than a lump of coal. Major retailers and shipping companies are expecting holiday sales to increase more than 4 percent. We haven’t seen 4 percent growth since 2011. Throughout the last decade, holiday sales have averaged 2.9 percent growth.

Many retailers have already announced significant hiring plans to meet the demand—so seasonal workers may be up as much as 10 percent from last year. A couple of primary shipping companies are even doubling their holiday workforce largely due to demand coming from e-commerce.
1So while you can see that most of the economic data in the United States supports a rather jolly shopping season, we can’t ignore some risks that could shake consumer confidence. A correction in the stock market, or signs of a recession in Europe are events that would in – fact, affect this forecast.

However, we strongly believe that consumers are in better financial health for a number of reasons:

  • Household net worth is at an all time high. This is due to higher stock and home prices.
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  • The labor market is solid. Unemployment is less than 6 percent and job growth has been increasing at a nice pace. These employment gains should continue as there are 4.8 million job openings, a level we haven’t seen since 2001.
  • You are probably noticing lower prices at the pump as well. That translates to more disposable income in consumer’s pockets.
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  • And finally, consumer confidence has been trending up since the Great Recession. And when we feel good about things, we consume.

There are even more factors that point to a better holiday season than last year:

  • Last year the government shutdown in the fourth quarter may have shaken consumer confidence and affected spending – we aren’t facing that situation this year.
  • Unseasonably cold and stormy weather led to some store closings across the nation.
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  • Lastly, in 2013 there were six fewer shopping days between Thanksgiving and Christmas compared to 2012. This year there is one additional day, which makes year over year comparable sale easier to beat.

We think this holiday shopping season will support our forecast of 3 percent economic growth in the fourth quarter.  We also expect to see positive returns in the domestic stock markets.

I wish all of you a happy and healthy holiday season. I’ll be back to deliver part two of this forecast after Thanksgiving.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Presidential Terms: What does it matter to the economy?

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It’s election day! Last week we gave you our take on the economic impact of midterm elections.

Now let’s talk about the effects of the presidential cycle.

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Elections and the markets
Investors want to know what the midterm election will do to the markets. Historical data tells us that midterm election years are historically poor performing years in the stock markets.

Let’s step back and review the presidential cycle. Here’s what we found from analyzing 142 years of data:

  • worst performing: year two
    • average return of 2.7 percent
  • best performing: year three
    • equity markets gain on average 12.3 percent

One possible reason for the poor performance in the second year of the presidential cycle (which is also the midterm election year) could be that policy makers remove stimulus after a presidential election, leaving  the worst of the restrictive policy in year two of the presidential term.

Does party matter?
I hear many complaints about a Democrat in the White House being bad for business. Of course, everyone has a right to share opinions, but I’ll stick to fact-based data. I make the assumption that stock market returns are a proxy for business conditions. Going back to 1901, using the Dow Jones Industrial Average as a barometer, the best-performing markets have occurred with a democratic president. Further, the average return under a democratic president is 7.9 percent versus 3 percent with a republican president.

What if we are correct and the Republicans control Congress with President Obama in the White House? What can we expect from the equity markets? Historically that separation of control produces the best returns in the Dow. The average return in that scenario has been 9.8 percent. The worst returns – 1.7 percent – have been seen when the Republicans are in total control of Washington.

Perhaps our founding fathers structured it that way, to ensure no single party would have total control, at least not for long. Perhaps the financial markets don’t like abrupt changes and uncertainty. Gridlock ensures nothing will get done quickly and any policy tweaks will be relatively small.

 

We cannot disagree with data, but keep in mind that elections do matter on many fronts. So find a way to tolerate all those campaign ads, and go out and exercise your constitutional right to vote. If there’s any silver lining to having your political party in control of one side and your opposing party the other, remember it may be a good thing for the financial markets.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Midterm elections: What does it matter to the economy?

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Elections are vital for more than just ensuring the democratic process (and inundating you with political campaign ads). They also decide which politicians will be making serious fiscal decisions for us. With the midterm elections being held next week, we want to discuss just how they affect the economy.

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Control change in Congress
The race worth watching in the midterm elections this year will be in the Senate. At this early stage we believe there is a slightly better than 50 percent chance that the Republican Party will win control of the Senate. As for the House, the Republican majority does not appear to be changing hands.

Currently, Democrats control the Senate with 53 seats and two Independents that both caucus with the Democrats. Republicans hold the remaining 45 seats.

Here’s the math that leads us to our conclusion that the Republicans have the edge this time:

  • 36 contested seats
    • 21 will go to the Democrats
      • These include seven Democrats in states that supported Mitt Romney in the presidential election. These seven states have substantially lower approval ratings of President Obama than the national average.
    • 15 will go to the Republicans
      • Only one of the Republicans up for reelection is in a state that President Obama carried.

Our research tells us that incumbency is a powerful thing.  During an average election cycle, 90 percent of incumbents win reelection. The Republicans need six additional seats to have the majority, which means it’s going to be close. This is why we put the odds at only slightly better than a coin toss.

What we find interesting is looking past the 2014 Senate race and into the 2016 cycle where we see the opposite happening. Out of the 24 Republicans up for reelection, seven are in states that supported President Obama, meaning the Senate may see a yo-yo effect in 2016.

Why it matters
Why does it matter if the Republicans control Congress? If they are in control, we believe Congress will focus its attention on a few major issues:

  • Spending and other fiscal issues – The debt ceiling will once again be a discussion point in March 2015. A Republican-controlled Congress may look for spending concessions.
  • The 2016 budget –The Republicans made a big deal out of the Senate’s failure to pass a budget in the past, so now it’s their turn to get it done. If Paul Ryan is Chairman of the Ways and Means Committee, we could see discussions around tax reform and changes to Medicare and Medicaid.
  • Immigration reform – This could be put on the back burner, which forces it to be addressed by our 2016 presidential candidates.

Stay tuned for part II of this topic on election day—November 4!

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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