Syncing the Cycles Economic and Market Cycles in

  • Slides: 37
Download presentation
Syncing the Cycles: Economic and Market Cycles in Investment Planning Presented by Bob Pugh,

Syncing the Cycles: Economic and Market Cycles in Investment Planning Presented by Bob Pugh, CFA, CFP® President, Insight Wealth Management, Inc. The AAII Washington DC Metro Chapter Saturday, February 23, 2019

 Disclaimer This slide show, presentation, related discussion, and all other materials provided are

Disclaimer This slide show, presentation, related discussion, and all other materials provided are to be considered general educational information rather than investment advice for any individual or group of individuals. Specific investment advice for any individual or group of individuals must be based on a detailed evaluation of their personal needs and circumstances. Nothing in this presentation should be considered a recommendation to buy or sell any securities. Past performance is no guarantee of future results. Investors should research the various asset classes and available securities to find those that are most suitable to their specific needs. While this presentation and related discussion may refer to specific ETFs and other securities, other products in the same categories are available from other providers. Investors should ensure that the product(s) they select suit their specific needs. www. insightwealth. com

Bob Pugh, CFA, CFP® Brief Biography n President, Insight Wealth Management. Inc. , an

Bob Pugh, CFA, CFP® Brief Biography n President, Insight Wealth Management. Inc. , an independent Registered Investment Adviser in Gainesville, VA, providing fee-only, fiduciary wealth and investment management, and financial planning services to individuals, families, businesses and non-profit organizations since 2005. Member of the Schwab Advisor Services network of select independent advisors for custody and brokerage of client assets. n National Association of Personal Financial Advisors (NAPFA) – member and Registered Financial Advisor (www. napfa. org), member of the Financial Planning Association (www. fpanet. org), CFA Institute (www. cfainstitute. org) and the National Association for Business Economics (www. nabe. com). Member of American Mensa, and former Testing Coordinator and Public Relations Officer for the Metropolitan Washington Mensa chapter (www. mwm. org). n President of the CFA Society of Washington, DC, 2005 to 2007, and Eastern Region Presidents Council Representative, CFA Institute, 2009 to 2011. n Over thirty years of experience as an economist, financial educator and analyst, portfolio manager, and personal financial planner in the private and public sectors. Experience includes serving as an economic analyst with the Central Intelligence Agency, director of investment research at another firm, and senior financial analyst in municipal government. n Graduate degrees in global political economy from The Johns Hopkins University, School of Advanced International Studies, and in financial economics from the University of North Carolina at Greensboro n Full-time and adjunct faculty member experience with numerous colleges and universities, including nine years as a member of the Practitioner Faculty in Finance with The Johns Hopkins University’s (JHU) Carey School of Business, and with the JHU School of Medicine, teaching graduate-level courses in investment analysis, portfolio management, and corporate finance, and continuing education in the JHU Business of Medicine program. Taught CFA Exam review for twenty years, including all three levels of the CFA program for the CFA Society of Washington, DC, the World Bank, Fidelity, Merrill Lynch and other organizations. n Community Volunteer, currently serving as Chair of the board of the Health Systems Agency of Northern Virginia. n Contact information available at www. insightwealth. com

Introduction Those who have knowledge, don't predict. Those who predict, don't have knowledge. Lao

Introduction Those who have knowledge, don't predict. Those who predict, don't have knowledge. Lao Tzu n Predicting or timing the economy or markets with consistent accuracy over the long-term is impossible. n Our goal is to learn and apply analysis of economic and market fundamentals in a probabilistic manner to increase the likelihood of success. n This process is analogous to the card-counter at the blackjack table. Remembering the cards that have been played increases the chances of making the correct choice going forward. The player will still not be correct every time, but will be correct more often. www. insightwealth. com

Economics “Positive economics is in principle independent of any particular ethical position or normative

Economics “Positive economics is in principle independent of any particular ethical position or normative judgments. As Keynes says, it deals with ‘what is, ’ not with ‘what ought to be. ’ Its task is to provide a system of generalizations that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision. scope, and conformity with experience of the predictions it yields. In short, positive economics is, or can be, an ‘objective’ science, in precisely the same sense as any of the physical sciences. ” Milton Freidman, “Essays in Positive Economics, ” 1953 But on the other hand; “The economic world is driven primarily by random jumps. Yet the common tools of finance were designed for random walks in which the market always moves in baby steps. Despite increasing empirical evidence that concentration and jumps better characterize market reality, the reliance on the random walk, the bell-shaped curve, and their spawn of alphas and betas is accelerating, widening a tragic gap between reality and the standard tools of financial measurement. ” Mandelbrot and Taleb, 2005 "If you lined all the economists in the country up end to end, they would still point in all directions. " President Harry S. Truman “Probability is not a mere computation of odds on the dice or more complicated variants; it is the acceptance of the lack of certainty in our knowledge and the development of methods for dealing with our ignorance. ” Nassim Nicholas Taleb www. insightwealth. com

Economics is an art rather than a science. Some try to quantify economic relationships

Economics is an art rather than a science. Some try to quantify economic relationships in the same way as physicists analyze the natural world, and to assume away all other aspects of human existence, but such efforts are in vain. The best economic analysis comes from those with the broadest view of the widest range of factors, and who are able to integrate and synthesize that information into a coherent, actionable conclusion. www. insightwealth. com

The Nature of Cycles n n n Economies and markets are subject to irregular,

The Nature of Cycles n n n Economies and markets are subject to irregular, unpredictable cycles. Short-term equity market fluctuations are not correlated with economic market cycles nor indicators. Equity markets provide a leading indicator of economic or business cycles. In recent history, all economic cycle inflection points have been preceded by equity market inflection points, but not all market inflections precede economic inflections. Long-term, equity market performance is highly correlated with economic fundamentals. www. insightwealth. com

Equity Markets and the Business/Economic Cycle n If you expect a turning point in

Equity Markets and the Business/Economic Cycle n If you expect a turning point in the business/economic cycle, expect the equity markets to turn first. n The best time to reduce equity market exposure is just prior (varying amounts of time) to the peak of the business/economic cycle. n The best time to increase equity market exposure is just prior (varying amounts of time) to the trough of the business/economic cycle. n This is a buy low/sell high strategy rather than market timing. n An asset allocation strategy with regular, methodical rebalancing is consistent with this pattern without the need to forecast or predict. www. insightwealth. com

Equity Markets and the Business/Economic Cycle www. insightwealth. com

Equity Markets and the Business/Economic Cycle www. insightwealth. com

Top-Down Investment Analysis Global, Regional or National Macro Economy/Market Asset Class/Sector/Industry Firm www. insightwealth.

Top-Down Investment Analysis Global, Regional or National Macro Economy/Market Asset Class/Sector/Industry Firm www. insightwealth. com

Business Cycle Peak Peak Contraction/ Recession Expansion Trough www. insightwealth. com

Business Cycle Peak Peak Contraction/ Recession Expansion Trough www. insightwealth. com

Investing Styles and Allocations During the Business Cycle n n n Early Expansion –

Investing Styles and Allocations During the Business Cycle n n n Early Expansion – aggressive, cyclical, growth equity, small cap; avoid fixed-income as yields rise Expansion – increasingly conservative as peak nears; value, large cap equity; increase fixedincome as interest rates stabilize Peak through Contraction – defensive, counter cycle, high-dividend equity; increased allocation to fixed-income as yields fall www. insightwealth. com

Business Cycle and Sector Rotation (graphic courtesy of i. Shares/Blackrock) www. insightwealth. com

Business Cycle and Sector Rotation (graphic courtesy of i. Shares/Blackrock) www. insightwealth. com

Business Cycle and Sector Rotation (graphic courtesy of i. Shares/Blackrock) www. insightwealth. com

Business Cycle and Sector Rotation (graphic courtesy of i. Shares/Blackrock) www. insightwealth. com

Time Horizons and Economic. Based Investing n If you are going to invest for

Time Horizons and Economic. Based Investing n If you are going to invest for a long time horizon and have no concern about volatility in the meantime, structure an aggressive equity portfolio, forget about it, and go fishing. n Problem is that most portfolios have a much shorter time horizon, need to generate income, have risk constraints, and can’t ignore volatility. www. insightwealth. com

Time Horizons and Economic-Based Investing - Short-Term n n n Neither technical analysis nor

Time Horizons and Economic-Based Investing - Short-Term n n n Neither technical analysis nor fundamental analysis works because short-term market fluctuations are largely random and unpredictable. Economic fundamentals have little or no impact over short periods. Generally, less than a full business cycle or even a phase of the cycle. Indicators can fluctuate wildly. Examples: ¨ ¨ ¨ Volatility (VIX) Fund Flows Relative Value Fed Model (spread between Treasuries and AAA or BBB bonds) Sentiment Surveys Insider Trades www. insightwealth. com

Time Horizons and Economic-Based Investing – Medium Term n n n The medium-term is

Time Horizons and Economic-Based Investing – Medium Term n n n The medium-term is defined as a single, full business cycle. The business cycle is the context for which economic indicator analysis is most useful. Put together the pieces of a complex, dynamic puzzle to project a picture of the economy. Different analysts use and/or emphasize different indicators Process is largely a “Rorschach Test” and people derive different conclusions from the same indicators www. insightwealth. com

Time Horizons and Economic-Based Investing – Medium Term Useful indicators fall into several categories:

Time Horizons and Economic-Based Investing – Medium Term Useful indicators fall into several categories: n n n n n GDP and components Indexes of leading, lagging, and coincident indicators Employment Productivity Industrial production Capacity utilization ISM indexes Manufacturers'’ shipments, inventories and orders Inventories and sales n n n n n Residential construction and home sales Consumer confidence and sentiment indexes, and consumer spending Retail trade and food service sales Personal income and spending Prince indexes Commodities data Federal Reserve and monetary data Trade International Others www. insightwealth. com

Time Horizons and Economic-Based Investing – Long-Term n n n The long-term refers to

Time Horizons and Economic-Based Investing – Long-Term n n n The long-term refers to time periods longer than a single business cycle. Likely the most rewarding for the patient investor. Market and economic indicators are generally useless this far out. Relevant factors include secular trends such as globalization, climate change, politics, demographics, and flows of capital and other resources. Based on growth of productive capacity in economies and industries around the world. Study of history vastly more useful than mathematics and statistics. www. insightwealth. com

Equity n Equity (Stock or index) Price Composed of: ¨ Earnings per share –

Equity n Equity (Stock or index) Price Composed of: ¨ Earnings per share – objective, measured from financial statements, depends on economic and sectoral performance ¨ Price multiple – psychological, difficult to predict, expectations driven by economy to some extent www. insightwealth. com

Earnings Growth OPERATING EARNINGS/SHARE (Q 4 2018 forward are estimates) source of data: S&P

Earnings Growth OPERATING EARNINGS/SHARE (Q 4 2018 forward are estimates) source of data: S&P Dow Jones Indices, S&P Earnings and Estimate Report, January 31, 2019 $50. 00 $45. 00 $40. 00 $35. 00 $30. 00 $25. 00 3/ 31 /2 01 5 6/ 30 /2 01 5 9/ 30 /2 01 12 5 /3 1/ 20 15 3/ 31 /2 01 6 6/ 30 /2 01 6 9/ 30 /2 01 12 6 /3 1/ 20 16 3/ 31 /2 01 7 6/ 30 /2 01 7 9/ 30 /2 01 12 7 /3 1/ 20 17 3/ 31 /2 01 8 6/ 30 /2 01 8 9/ 30 /2 01 12 8 /3 1/ 20 18 3/ 31 /2 01 9 6/ 30 /2 01 9 9/ 30 /2 01 12 9 /3 1/ 20 19 $20. 00 www. insightwealth. com

Price/Earnings Ratio OPERATING EARNINGS P/E Average since Q 4 1988 - 18. 86 (Q

Price/Earnings Ratio OPERATING EARNINGS P/E Average since Q 4 1988 - 18. 86 (Q 4 2018 forward are estimates) source of data: S&P Dow Jones Indices, S&P Earnings and Estimate Report, January 31, 2019 28. 00 26. 00 24. 00 22. 00 20. 00 18. 00 16. 00 18 /3 1/ 20 01 8 12 /2 9/ 30 01 8 /2 6/ 30 01 8 /2 17 3/ 31 20 7 /3 1/ 12 /2 01 7 www. insightwealth. com 9/ 30 /2 01 6/ 30 01 7 /2 16 3/ 31 /3 1/ 20 01 6 12 /2 9/ 30 01 6 /2 01 6 6/ 30 /2 15 3/ 31 /3 1/ 20 01 5 12 /2 9/ 30 01 5 /2 6/ 30 3/ 31 /2 01 5 14. 00

Interest Rates www. insightwealth. com

Interest Rates www. insightwealth. com

Debt to GDP Ratio www. insightwealth. com

Debt to GDP Ratio www. insightwealth. com

Unemployment www. insightwealth. com

Unemployment www. insightwealth. com

Inflation www. insightwealth. com

Inflation www. insightwealth. com

Demand www. insightwealth. com

Demand www. insightwealth. com

Demand www. insightwealth. com

Demand www. insightwealth. com

Monetary Policy www. insightwealth. com

Monetary Policy www. insightwealth. com

Monetary Policy www. insightwealth. com

Monetary Policy www. insightwealth. com

Yield Curve www. insightwealth. com

Yield Curve www. insightwealth. com

Real GDP www. insightwealth. com

Real GDP www. insightwealth. com

Current Risk Factors n n n n Federal Reserve policy U. S. Politics, especially

Current Risk Factors n n n n Federal Reserve policy U. S. Politics, especially the 2020 election Geopolitical - China, North Korea, Russia, Iran, etc. Overheating Economy Trade Valuations Earnings growth Debt and deficits (longer term) www. insightwealth. com

Conclusions n n n Economic recovery, earnings growth and bull market since 2009 continues

Conclusions n n n Economic recovery, earnings growth and bull market since 2009 continues Market volatility increasing Preponderance of economic indicators do not point to significant slowing of economic growth soon Economy may be over heating Federal Reserve “normalizing” monetary policy Establish your view of where we are in the business/economic cycle and structure your portfolio to get ahead of expected changes www. insightwealth. com

Sources of Free Economic Data n n n n n Federal Reserve Economic Data

Sources of Free Economic Data n n n n n Federal Reserve Economic Data http: //research. stlouisfed. org/ Federal Reserve Board http: //www. federalreserve. gov/econresdata/default. htm Census Bureau Economic Indicators https: //www. census. gov/econ/ Census Bureau http: //www. census. gov/ Bureau of Labor Statistics http: //www. bls. gov/ Bureau of Economic Analysis http: //www. bea. gov/ Bank for International Settlements http: //www. bis. org/about/index. htm International Monetary Fund http: //www. imf. org/external/data. htm S&P Index Data https: //us. spindices. com/indices/equity/sp-500 www. insightwealth. com

Further Reading – Web Sites n n n n St. Louis Federal Reserve Publications

Further Reading – Web Sites n n n n St. Louis Federal Reserve Publications http: //www. stlouisfed. org/publications/research_and_data. cfm Federal Reserve Board http: //www. federalreserve. gov/publications/default. htm National Bureau of Economic Research http: //www. nber. org/ National Association for Business Economics http: //www. nabe. com/ www. insightwealth. com

Questions and Answers Questions? Bob is available for a free, no-obligation initial consultation and

Questions and Answers Questions? Bob is available for a free, no-obligation initial consultation and portfolio review. Insight Wealth Management, Inc. 7250 Heritage Village Plaza Suite 101 Gainesville, VA 20155 www. insightwealth. com (703) 753 -6082 www. insightwealth. com