I N V E S T M E N T S T R A T E G Y G R O U P
This Is Not 2008 –
Th e C a s e f o r
F u r t h e r E c o n o m i c G r o w t h
a n d S t o c k M a r k e t G a i n s
Leading up to the financial crisis, U.S. consumers were taking on higher and higher levels of debt to buy ever more expensive homes and cars. Figure 1 shows that household debt service reached unsustain-ably high levels which was a major cause of the crisis. While much of this debt resulted in defaults and bad loans on banks balance sheets, household debt ser-vice levels are now at record low levels and indicate a much healthier consumer. Meanwhile, household net worth is now at an all-time high as a result of the housing market recovery and stock market gains.
We are now well into the seventh year of the economic recovery that followed the Great
Recession. While the current economic expansion has not lived up to most expectations,
we have created over 13 million jobs and the stock market has returned over 200%. During
times of market turbulence, similar to what we are currently experiencing, common
concerns we hear are “this feels like 2008” or “what can keep this market going higher?”
This piece points out the significant differences between the economic conditions leading
up to the Great Recession and our current conditions. It also makes the case for further
economic growth and stock market gains.
Figure 1
U.S. Household Debt Service Ratio
(Source: Janney ISG and Bloomberg)
Consumer debt reached unsustainably high levels prior to financial crisis.
Debt service levels are now at historically low levels.
Figure 2
Job Openings Are at an All-Time High
(Source: Janney ISG and Bloomberg)
Figure 3
Conference Board Consumer Confidence
While confidence was deteriorating by 2007, it continues to move higher today.
HEALTHY CONSUMER AND LABOR MARKET While labor markets were deteriorating in 2008, they are now showing significant improvement. Job
creation has been very steady with over 13 million jobs created since the crisis, while the unemploy-ment rate has steadily fallen from over 10% to its current 5.1%. Figure 2 shows that while job open-ings were falling by 2008, they are now making new all-time highs. All of this is resulting in a rebound of consumer confidence as shown in Figure 3.
A healthy, confident consumer is able and willing to make big-ticket purchases. While home and car sales were falling going into 2008, they are both currently exhibiting solid recoveries and are at their highest levels since 2005 as shown in Fig-ures 4 and 5. This healthy consumer supports our overweight of the Consumer Discretionary and Consumer Staples sectors.
Figure 5
U.S. Auto Sales (SAAR)
(Source: Janney ISG and Bloomberg)
Highest since 2005
Higher interest rates and tighter credit conditions engineered by the Federal Reserve (Fed) cause recessions. The Fed started aggressively raising interest rates in 2004 which ultimately led to tight credit conditions and financial stress by 2007. Note that the stock market peaked in October of 2007, long after the Fed started raising interest rates. Figure 6 illustrates the tight monetary policy pur-sued by the Fed leading up to the financial crisis. This figure also shows the very easy credit condi-tions in place since the crisis. Considering that the Fed has not even started raising rates, tight credit conditions that harm the economy and stock mar-ket should not be in the foreseeable future. These easy credit conditions are also being pursued by most other global central banks which was not the case heading into the financial crisis.
EASY CREDIT AND HEALTHY BANKS
Figure 4
U.S. NAHB Homebuilder Index (SAAR)
(Source: Janney ISG and Bloomberg)
Highest since 2005
Figure 6
U.S. Federal Funds Target Rate
(Source: Janney ISG and Bloomberg)
Fed induced tight credit conditions by 2007.
Fed maintaining very easy credit conditions
HEALTH CARE BENEFITS FROM A STRONG CONSUMER AND HEALTHY FINANCIAL SYSTEM
In addition to Consumer Discretionary, Consumer Staples, and Financial stocks, we favor the Health Care sector. The Health Care sector benefits from a strong consumer and further economic growth. The pace of health care expenditure growth should continue to exceed that of the overall economy—with pent-up demand for health care services, lower unemployment levels, rising commercial insurance membership, and aging demographics bolstering the sector.
Easy Fed monetary policy settings and very low levels of financial stress indicators are indicative Figure 7
U.S. Financial Conditions that Deteriorated well Before the 2008 Crisis, Remain well Behaved Today
(Source: Janney ISG and BCA Research)
.
© BCA Research 2014
* SOURCE: FEDERAL RESERVE BANK OF CHICAGO ** 3-MONTH LIBOR OVER 3-MONTH T-BILL RATE *** SOURCE: BARCLAYS
**** AVERAGE OF SMALL AND LARGE BUSINESSES, SOURCE: FEDERAL RESERVE
%
BP
s
BP
s BP
s
2008 2010 2012 2014 2007 2009 2011 2013 2015 -50
0 50 100
0 250 500 750 1000 -200
0 200 400 600
-500 0 500 1000 1500 -2
0 2 4
-2 0 2 4
U.S. LEVERAGE INDICATORS: C&I LENDING STANDARDS (ABOVE ZERO = TIGHTENING STANDARDS, BELOW ZERO = EASING STANDARDS)****
U.S. LEVERAGE INDICATORS: Baa-RATED CORPORATE BOND OAS*** U.S. FINANCIAL RISK INDICATORS: TED SPREAD**
U.S. FINANCIAL RISK INDICATORS: ABS OPTION-ADJUSTED SPREAD*** U.S. NATIONAL FINANCIAL CONDITIONS INDEX*
The easy monetary policy settings put in place by the Fed since the crisis have enabled the banks to return to health. Figure 7 shows several financial system stress indicators that we monitor. The top panel shows the Chicago Federal Reserve’s Na-tional Financial Conditions Index which includes financial conditions in money markets, debt and equity markets, and the banking system. The second panel includes measures of credit risk. When these credit risk indicators rise, default risk is considered to be increasing. The third panel shows whether bank lending standards are easing or tightening. All of these indicators were point-ing to financial system stress by the middle of 2007 but remain very calm today.
Table 1: Actionable Investment Ideas For Further Economic Growth
Company Name Ticker Forward P/E Earnings Growth Dividend Yield RatingCredit Notes Coverage
Consumer Discretionary
Consumer stocks are the major beneficiary of a strong consumer with many industries showing strong fundamentals including home builders, restaurants, drug stores, and consumer staple stocks.
CHIPOTLE MEXICAN GRILL INC CMG 38.19 21.37 - - Gaining share with best combination of growth and store level returns. S&P/CS
MCDONALD’S CORP MCD 19.73 7.89 3.48 A- Largest fast food restaurant in the world with significant dividend. S&P/CS
WALT DISNEY CO/THE DIS 18.30 11.90 1.81 A Iconic consumer brands with a strong management team. S&P
COSTCO WHOLESALE CORP COST 26.52 9.94 1.11 A+ Consistent earnings track record with strong cash flow and balance sheet. S&P/CS
APPLE INC AAPL 11.89 16.98 1.71 AA+ Apple platform has over 90% customer retention and is returning cash. S&P/CS
AMAZON.COM INC AMZN 72.18 47.77 - AA- E-commerce continues to take share and AMZN is the dominant force. S&P/CS
CVS HEALTH CORP CVS 17.95 14.68 1.26 BBB+ Largest pharmacy health care provider well positioned for aging demographics. S&P/CS
PEPSICO INC PEP 19.58 5.96 2.91 A Dominant brands well positioned for higher discretionary spending. S&P
PROCTER & GAMBLE PG 18.33 7.57 3.70 AA- Blue chip consumer product firm with significant dividend yield. S&P
CONSUMER DISCRETIONARY ETF XLY - - - - Offers diversified exposure to 87 Consumer Discretionary stocks.
ISHARES U.S. HOME
CONSTRUCTION ETF ITB - - - - Offers diversified exposure to 38 home construction stocks.
Financials
The Financial sector has healed from the financial crisis and is well positioned to extend the needed credit and insurance for pent-up consumer expenditures.
ALLSTATE CORP ALL 10.87 9.70 2.00 A- Solid returns, valuation support and is returning cash to shareholders. S&P/CS/J DISCOVER FINANCIAL SERVICES DFS 9.38 8.90 1.96 BBB- Industry leading revenue growth, solid credit quality and buying back shares. S&P/CS/J
JPMORGAN CHASE & CO JPM 9.77 6.90 2.75 A Top management and deep bench with risk reduction as a catalyst. S&P/CS
WELLS FARGO & CO WFC 11.65 11.71 2.85 A+ Solid management and well positioned for consumer credit needs. S&P/CS
SIMON PROPERTY GROUP INC SPG 32.56 7.55 3.07 A Real estate that is well positioned for a healthy consumer. S&P/CS
FINANCIAL SELECT SECTOR SPDR
ETF XLF - - - - Includes 88 stocks for broad-based financial sector exposure.
SPDR S&P REGIONAL BANKING ETF KRE - - - - Includes 90 equally-weighted regional bank stocks.
ISHARES U.S. INSURANCE ETF IAK - - - - Includes 64 U.S. insurance provider stocks.
Health Care
The Health Care Sector is a major beneficiary of job growth, increased insurance coverage (Obamacare), an aging population and future high levels of healthcare spending.
MEDTRONIC PLC MDT 15.18 6.90 1.90 A Very diverse product line, strong cash flow, valuation and dividend support. S&P/CS
BRISTOL-MYERS SQUIBB CO BMY 35.51 13.58 2.42 A+ Multiple catalysts driving Immuno-Oncology franchise. S&P/CS
MCKESSON CORP MCK 15.23 15.77 0.49 BBB+ Drug distribution benefitting from strong pricing with cross-sell opportunities. S&P/CS GILEAD SCIENCES INC GILD 9.00 6.52 0.41 A- HCV market still in early stage while stock is trading well below historical
levels. S&P
HCA HOLDINGS INC HCA 15.06 10.96 - - Hospital fundamentals are solid with HCA levered to many growth categories. S&P
VANGUARD HEALTH CARE ETF VHT - - - - Cap-weighted basket of 318 companies offers broad exposure.
ISHARES U.S. MEDICAL DEVICES
ETF IHI - - - - Cap-weighted basket of 49 manufacturers and distributors.
ISHARES U.S. HEALTHCARE
PROVIDER ETF IHF - - - - Cap-weighted basket of 50 health care providers.
ISHARES US PHARMACEUTICALS
ETF IHE - - - - Cap-weighted basket of 41 pharmaceutical companies.
Definitions:
Forward P/E - Current stock price divided by EPS consensus estimate for the next four quarters.
Earnings Growth Estimate - Mean broker estimate of the compounded annual growth rate of the operating eps over the company’s next full business cycle (typically 3-5 years). Dividend Yield - Trailing 12 month dividend per share divided by share price
JANNEY MONTGOMERY SCOTT LLC www.janney.com
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This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an of-fer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral com-mentary, technical analysis or trading strategies that differ from the opinions expressed within. Indexes are hypothetical portfolios of specified securities, the performance of which is used as a benchmark in judging the relative performance of securities. Indexes are unmanaged portfolios and do not guarantee future performance.
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