Economic Investment Outlook John Pesce, Chief Executive Officer - PowerPoint PPT Presentation

Economic Investment Outlook John Pesce, Chief Executive Officer Blake Rhodes, Fixed Income Specialist

About TCG TCG Mission Statement: We deliver long-term investment and benefit solutions that provide peace of mind. Remember all investing involves risk and past performance is not a guarantee of future returns. 2

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2017 Q1 Review • Over-Arching Themes • Trump First 100 Days • “Repeal & Replace” Failure • Election Season in EU • Brexit Officially Triggered • One Rate Hike by Fed, Two More Expected Remember all investing involves risk and past performance is not a guarantee of future returns. 4

2017 – What to Watch • Key Factors • Tax & Regulation Reform • EU Elections • Brexit Negotiations • Federal Reserve Rate Hikes • Wage, Inflation, Corporate Earnings Growth Remember all investing involves risk and past performance is not a guarantee of future returns. 5

French Elections • On April 23 rd , 2017, France will vote to elect a new leader • Candidate polling in 1st promises to leave the EU • Victory may end French participation in the EU • Likely signal the end of the EU • The European Central Bank has currently commenced to signal future rate hikes, but this would likely be further delayed • Flight to safety: Delay in European Central Bank interest rate hikes would likely slow the pace of US Federal Reserve rate hikes and keep a “lid” on US rates as foreign investors move money to the US for safety Remember all investing involves risk and past performance is not a guarantee of future returns. 7

Current Yield Curve • Since Great Recession, Fed has raised rates three times • December 2015, December 2016, and March 2017. • The Fed raises Target Funds Rate: from 0.0-0.25% to 0.25-0.50% and then to .50%-.75%, now rates sit at .75% - 1% • This created immediate an rise in the very short-term portion of the yield curve each time • Considered “long overdue” by the market— long-term rates have not moved with short-term rates • Since the election, yields rose significantly, then leveled off at year-end • Inflation concerns, faster rate hike path, and potential increased budget deficits are considered contributing factors to rates moving • If growth and earnings outlook continues to improve, rates are likely to rise via market forces quicker than Federal Reserve action • Uncertainty in equities = uncertainty in rates Remember all investing involves risk and past performance is not a guarantee of future returns. 8

Interest Rate Movement Treasury Yield Curve 4.0% 3/31/2014 3.5% 3/31/2017 3.0% 3/31/2016 2.5% 3/31/2015 2.0% 1.5% 1.0% 0.5% 0.0% 3/31/2017 3/31/2016 3/31/2015 3/31/2014 Source: Bloomberg Professional Services, LP. 9 Remember all investing involves risk and past performance is not a guarantee of future returns.

Interest Rates Range-Bound • Interest rates have moved dramatically higher, then leveled off • Uncertainty around previous expectations of inflation & growth US 10 Year Treasury Yield – Post Election 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7% 11/4 11/18 12/2 12/16 12/30 1/13 1/27 2/10 2/24 3/10 3/24 10 Year Source: Bloomberg Professional Services, LP. 10 Remember all investing involves risk and past performance is not a guarantee of future returns.

Global Interest Rate Movements • Have moved higher, remain below levels seen in Q1 2016 • Many Remain negative • Germany • Japan • Future rates will be dependent upon many factors • Policy direction in the US • Central Bank actions • Election results in France and Italy in 2017 • Brexit negotiations • Global trade and growth • Some of this has been “priced - in” already, will in unwind? Remember all investing involves risk and past performance is not a guarantee of future returns. 11

Where is the Stock Market Relatively? • US markets have been able to take advantage of the low IR environment whereas international markets have not done as well S&P 500 Index MSCI ACWI Excluding United States Index 3,000.00 400.00 350.00 2,500.00 300.00 2,000.00 250.00 1,500.00 200.00 150.00 1,000.00 100.00 500.00 50.00 - - Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Bloomberg Professional Services, LP. 12 Remember all investing involves risk and past performance is not a guarantee of future returns.

Why does the Stock Market matter for Bonds? Interest rates move in response to expectations for economic growth Expectations of higher economic growth increases likelihood of inflation Expectations of higher economic growth makes Fed hikes more likely • As economic news improves, investors reach for growth • Divesting of bonds, further pushing prices lower and yields higher. • Interest rates have moved on expectations , not necessarily concrete changes/improvements • There still is much future uncertainty. Remember all investing involves risk and past performance is not a guarantee of future returns. 13

Where are we economically? • Tracking unemployment US Initial Jobless Claims SA US Unemployment Rate (%) 700 12% 600 10% 500 8% 400 6% 300 4% 200 2% 100 0% - Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Source: Bloomberg Professional Services, LP. 14 Remember all investing involves risk and past performance is not a guarantee of future returns.

Where are Rates Relatively? • Tracking Rates US Treasury Yield Curve Rate T Note Constant US Treasury Yield Curve Rate T Note Constant Maturity Maturity 2 Year 10 Year 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0% 1.0% 1.0% 0.0% 0.0% Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Source: Bloomberg Professional Services, LP. 15 Remember all investing involves risk and past performance is not a guarantee of future returns.

Fed Rate Hikes — Will 2017 finally be THE year? • Fed Hiked once in 2015, after predicting multiple hikes • Fed Hiked once in 2016, after predicting multiple hikes • Fed Hikes ???? in 2017, after predicting multiple hikes • The Case for Higher Rates • Unemployment rates near all time lows • Valuations creeping higher • Fed running out of excuses to keep rates below low • GDP Growth improving • Employment numbers strong • Inflation beginning to rise • Should rates rise faster than expectations, could cause ripple effect in fixed income markets and will keep yields low Source: Bloomberg Professional Services, LP. 16 Remember all investing involves risk and past performance is not a guarantee of future returns.

When will the Fed raise rates? • Fed meeting in March hiked rates once Fed Funds Rate Forecast May 2017 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Oct-16 Nov-16 Nov-16 Dec-16 Dec-16 Dec-16 Jan-17 Jan-17 Feb-17 Mar-17 Mar-17 Mar-17 No Hike 1 Hike Source: Bloomberg Professional Services, LP. 17 Remember all investing involves risk and past performance is not a guarantee of future returns.

Probability of Rate Hike in December 2017 Fed Funds Rate Forecast December 2017 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 No Hike 1 Hike 2 Hikes 3 Hikes Source: Bloomberg Professional Services, LP. 18 Remember all investing involves risk and past performance is not a guarantee of future returns.

What do the Experts Say? Source: Fidelity via Philadelphia Federal Reserve. 19 Remember all investing involves risk and past performance is not a guarantee of future returns.

Short-Term Interest Rates Historically • Investment Pool returns track short term Government Bonds Short-Term Rates - Last 15 Years 5% 4% 3% 2% 1% 0% Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Tex Pool Tex Pool Prime Texas Class 2 Year Treasury 3 Month Treasury Source: Bloomberg Professional Services, LP. 20 Remember all investing involves risk and past performance is not a guarantee of future returns.

What does this mean for your district’s investment strategy?

Yield Curve • Normal, upward-sloping yield curve- implies investors expect the economy to grow in the future • Leads to higher inflation • Creates higher interest rates Investors will not commit to purchasing longer-term securities without getting a higher interest rate than those offered by shorter- term securities. Remember all investing involves risk and past performance is not a guarantee of future returns. 22

Yield Curve • Steepening Yield Curve — A steep positively sloped curve results from the Fed maintaining low short-term rates, but investors are expecting rates to rise • Occurs towards the end of a recession • An indication that the economy is about to turn around • Previously the yield curve has been steep with longer term rates being higher than short term rates Remember all investing involves risk and past performance is not a guarantee of future returns. 23