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2017 Outlook: A new era of populism, stimulus and growth
Timothy Hopper, Ph.D., Chief Economist
Brian Nick, CAIA, Chief Investment Strategist
January 12, 2017
2017 Outlook agenda
Economic forecast
Rising populism portends a global shift toward fiscal
spending and faster economic growth.
Forecasts for U.S. GDP growth and interest rates have
increased since the 2016 elections. Will the U.S. finally
break out of subnormal growth?
Overall, global economies remain stable with expectations
for modest improvement in 2017.
Investment outlook
Improving economic data and a rollout of pro-growth public
policies should help diversified investors in 2017.
Equity: Non-U.S. developed and emerging-market stocks
appear more attractive based on lower valuations,
compared to U.S. stocks.
Fixed income: Bonds are likely to struggle near term due to
rising interest rates.
2
The rise of populism globally
Rising populism is a reaction to slow growth
Lack of effective governmental response to
financial crisis
Overreliance on monetary policy to the exclusion of
necessary fiscal spending
Trend gained momentum in 2016
Started in European periphery with Greece in 2011
Turning points: Brexit in U.K. and Trump in the U.S.
Policy shift expected in U.S. and Europe
Potential to escape sub-normal growth pattern since
the financial crisis
More fiscal spending, particularly infrastructure,
to stimulate economic growth
Expected faster GDP growth would lead to rising
wages, consumer spending and higher inflation
3
Modestly faster global growth in 2017, except China
4
GDP growth forecasts (%)*
Real GDP growth Forecasted real GDP growth
2016 2017 2018 4Q16 1Q17 2Q17 3Q17 4Q17
U.S. 1.6 2.6 3.4 2.3 2.8 2.7 2.4 2.7
China 6.7 6.6 6.4 6.6 6.5 6.4 6.5 6.8
Eurozone 1.6 1.7 2.1 1.3 1.4 1.5 1.7 2.1
Japan 1.0 1.1 1.3 0.9 1.0 1.2 0.8 1.4
* Quarterly GDP for China and the Eurozone are reported as year-over-year growth rates, while quarterly GDP for the U.S. and Japan are reported at
seasonally adjusted annual rates (SAAR).
Sources: Haver Analytics, TIAA.
0
1
2
3
4
5
6
2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4
2016 average: 1.6%
U.S. GDP growth slowed to 1.6% in 2016
Growth accelerated to 2.5% in second half with improving oil prices, stabilizing dollar and declining inventories
5
* Seasonally adjusted annual rate. Note: Q416 is an estimate.
Sources: Haver Analytics/TIAA.
Real U.S. GDP growth
Quarterly (%), SAAR*
We have reached full employment
Demand for workers expected to exceed supply in 2017, leading to rising wages and higher consumer spending
6
Real wages still stagnant
Year-over-year % change
Total non-farm payrolls
Net change, monthly, in thousands, seasonally adjusted
-3
-2
-1
0
1
2
3
4
5
2008 2010 2012 2014 2016
Data as of May 31, 2016.
Sources: Bureau of Labor Statistics, TIAA, and Federal Reserve. Data as of November 30, 2016.
-1000
-800
-600
-400
-200
0
200
400
600
2008 2009 2010 2011 2012 2013 2014 2015 2016
Jobs recovery has been uneven, causing widespread underemployment
Education and services sectors have grown, while construction, manufacturing and goods production have not recovered since
great recession.
Underemployment remains in about 40% of the economy.
7
60
70
80
90
100
110
120
130
2008 2009 2010 2011 2012 2013 2014 2015 2016
Education
Leisure & hospitality
Private services
Government
Construction
Goods-producing
Manufacturing
Employment indexes by category
100 = January 2008.
Data as of November 30, 2016. Source: Haver Analytics.
Wage growth disparity influences political climate
Wage growth remains stagnant—negative for bottom quartile, only the top quartile has recovered.
8
-5
0
5
10
15
20
-5
0
5
10
15
20
97 00 03 06 09 12 15
%(t
hre
e-m
onth
movin
g a
vera
ge)
%(t
hre
e-m
onth
movin
g a
vera
ge)
Average 75th percentile 25th percentile
Gray bars indicate recession periods.
Data as of September 30, 2016. Sources: Federal Reserve Bank of Atlanta, Haver Analytics, DB Global Markets Research.
Consumer spending has been slow to recover
The meager recovery in personal spending helps to explain the slow economic recovery.
9
PCE Growth after recessions
% Growth following each trough, in quarters
100
102
104
106
108
110
112
114
116
118
120
trough 2 4 6 8 10 12 14 16 18 20
1970
1975
1980
1982
1991
2001
2009
%
Current recovery
X-axis shows the number of quarters during recovery following recession trough.
Sources: Bureau of Economic Analysis, TIAA.
Capital orders suggest late stage cycle
Capital orders have flattened since 2012—an important factor in slow economic growth.
There is potential for increased capital investment if pro-growth tax and regulatory reforms are adopted.
10
New Orders for Core Capital Goods*
Billions of dollars
Data as of November 30, 2016. Source: Census Bureau.
45
50
55
60
65
70
75
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Inflation remains below the Fed’s 2% target
Inflation has remained comfortably below the Fed’s 2% target. Wage pressures and inflationary growth policies are likely to raise
inflation’s course in 2017.
11
Year-over-year inflation rate
Consumer Price Index, all items, % change from year ago
Data as of November 30, 2016. Source: Haver Analytics.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016
Fed target
Oil prices have stabilized
12
West Texas Intermediate
Dollars per barrel, weekly prices
Data as of December 27, 2016. Sources: Haver.
0
20
40
60
80
100
120
140
160
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S. growth has been slow, but remarkably stable
Sub-normal growth reflects the lack of fiscal stimulus, inconsistent growth across sectors, underemployment and regulatory
uncertainty.
Consumers have contributed roughly 1.6% to growth over the past several years, while private fixed investment has lagged at
about 1%.
13
Legend abbreviations: X is net exports, FI is capital investment, PCE is consumer spending, G is government spending, and GDP is gross domestic product.
* Data as of December 31, 2016, including forecast for fourth quarter. Sources: Bureau of Economic Analysis and TIAA.
Real GDP, 2012–present
Percent contributions by category
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2012 2013 2014 2015 2016
G X FI PCE GDP
*
The Trump effect: Hope for normal growth
Rising stock markets and consumer sentiment post-election
reflect hope for a return to normal economic growth.
Policy agenda is expected to be pro-growth and inflationary.
Campaign platform includes lower corporate and personal tax
rates, deregulation, infrastructure spending and retention of
manufacturing jobs.
Potential risks include resistance in Congress, budget deficits
and negative impact on trade.
Economic policy remains uncertain with Trump not yet
in office.
14
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
GDP and interest-rate estimates rise following 2016 elections
TIAA increases its GDP forecasts to 2.6% in 2017 and 3.4% in 2018.
Fed increases its estimate to three 0.25% increases in fed funds rate, targeting 1.38% by end of 2017.
Risk of faster rate hikes in 2018 because Fed underestimates potential impact of fiscal reform and deregulation.
10-Year Treasury yield is expected to reach 3.2% in 2017.
15
U.S. 10-Year Treasury yield
Daily closing values
Data as of December 31, 2016. Source: Haver Analytics.Source: TIAA.
Evolving U.S. growth and interest-rate forecasts (%)
Pre-election Post-election
2017 2018 2017 2018
GDP 2.2 2.3 2.6 3.4
10-year
Treasury yield2.50 3.00 3.20 3.75
Target federal
funds rate1.13 1.88 1.38 2.63
Global trade slows…to what?
Global trade to GDP ratio has slowed to 1:1, after growing from 2:1 to 3:1 from 2002 to 2008.
Trade slowdown reflects global growth recession that is now easing. Trade is not expected to increase global growth in the
near term.
16
Global trade
Sources: World Bank, TIAA.
0
1,000
2,000
3,000
4,000
5,000
6,000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
The dollar has strengthened with rising rates
The dollar has risen since the election amid rising interest rates and prospects for faster growth.
17
Dollar Index (DXY)
2007–Present
Data as of December 31, 2016. Source: Investing.com
70
75
80
85
90
95
100
105
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Major currencies likely to stabilize in 2017
The rising U.S. dollar is not expected to reach parity with Euro or surge to 130 yen.
18
Foreign exchange rates vs. U.S. dollar
Period ending
2016 2017
Euro 1.05 1.10
Yen 117 115
Renminbi (yuan) 6.94 7.4
Brazilian real 3.25 3.25
2016 data are actual rates as of December 31, 2016. Source: Bloomberg.
2017 data are TIAA forecasts.
Major economic regions are stable
Eurozone growth is likely to improve to nearly 2% amid increasing political pressure for fiscal spending.
Japan continues to struggle, but is likely to improve as Abe pursues plans for increased spending.
China is likely to pursue stimulus to stabilize growth during a difficult transition to a consumer-driven economy.
19
Real GDP Growth Year-over-Year (%)
-20
-15
-10
-5
0
5
10
15
20
25
2007 2009 2011 2013 2015
China US Europe Japan
Data as of June 30, 2016. Sources: China National Bureau of Statistics; Eurostat; U.S. Commerce Department; TIAA.
35
40
45
50
55
60
65
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Non-manufacturing PMI
Manufacturing PMI
China’s slowing growth reflects economic transition
Services sector outpaces manufacturing in transition to consumer-driven economy.
20
China’s manufacturing vs. nonmanufacturing PMIs (monthly, seasonally adjusted) Level: > 50 = expansion; <50 = contraction
PMI: Purchasing Managers’ Index is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders,
inventory levels, production, supplier deliveries and the employment environment.
Data as of May 31, 2016. Source: China Federation of Logistics & Purchasing/Haver Analytics.
Economic outlook summary
We expect global economic growth to accelerate modestly
with stronger consumer spending rising inflation, and tighter
labor markets.
The rise of political populism may bring a new era in which
governments put greater emphasis on fiscal spending to
stimulate growth.
We have raised our forecast for 2017 U.S. GDP growth to
2.6%, a faster pace than in Europe and Japan. In emerging
markets, we expect further stimulus from China as it
gradually transitions to a more consumer-led economy.
The post-election prospect of tax and regulatory reform,
combined with infrastructure spending, has raised hope that
the U.S. may finally break out of a sub-normal growth pattern
since the Great Recession.
21
2016 markets in review: a good year for investors
Equities led by small-caps outperformed fixed income, given the rise in interest rates from very low levels.
Despite high valuation, U.S. equities continued to outpace international markets.
22
2016 performance by asset class
Total returns YTD
21.3%
17.1%
13.8%
12.1%11.2%
9.9%
5.9% 5.6%4.9%
1.0% 1.0% 0.5% 0.2%
U.S. SmallCap
U.S. HighYield
U.S. MidCap
U.S. LargeCap
EM Equity EM U.S. $Bonds
EM LocalBonds
U.S.Corporates
Int'l DevBonds
U.S.Government
Int'l Dev Eq Cash U.S.Municipals
Data as of December 31, 2016. Source: Bloomberg.
What really drove financial markets in 2016?
Despite focus on political risks, improving economic indicators coincided with strongest equity rallies.
This underlies our belief that rising interest rates on higher growth does not threaten U.S. equity markets.
23
S&P 500 vs. Citi U.S. Economic Growth Surprise Index
-60
-40
-20
0
20
40
60
1,800
1,900
2,000
2,100
2,200
2,300
4-Jan 13-Feb 24-Mar 3-May 12-Jun 22-Jul 31-Aug 10-Oct 19-Nov 29-Dec
S&P 500 (left axis)
Citi U.S. Economic Surprise Index (right axis)
Data as of December 31, 2016. Source: Bloomberg.
OK, politics played a role, too…
Post-election equity rally strongly tilted towards sectors most likely to benefit from Trump agenda.
Cyclical (and rate) momentum should carry these trends into 2017, but policy uncertainty remains high.
24
Post-election U.S. sector performance based on expected policy changes
Total return (%)
-4
-2
0
2
4
6
8
10
12
14
16
18
Financials TelecomSvcs
Energy Industrials Materials S&P 500 Cons Disc Real Estate Health Care Info Tech Utilities Cons Staples
Data as of December 31, 2016. Source: Bloomberg.
Rising rates bad for bonds, good for bond investors
U.S. bonds are entering a bear market for the first time since the 1950s as rates rise from all-time lows.
Rising rates are good over the long run for diversified investors, but will be headwinds for returns in 2017.
25
Data as of December 31, 2016. Source: Bloomberg.
Low current yields effectively cap expected returns on fixed income over the medium term (%)
-1
2
5
8
11
14
17
20
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Core U.S. Bonds - Yield
Core U.S. Bonds - 3-year annual return
U.S. dollar strong on attractive relative yields
Believe it or not, the U.S. has relatively high interest rates right now, and foreign investors have noticed.
Expectations for still-further rate increases are pushing U.S. dollar to uncomfortably high levels.
26
U.S. dollar overvalued and close to all-time highs with U.S. rates rising vs. rest of world
Data as of December 31, 2016. Source: Bloomberg.
1
1.1
1.2
1.3
1.4
1.5
1.6
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2005 2007 2009 2011 2013 2015
German-U.S. 2-year spread (left)
U.S. dollars per euro (right)
U.S. credit spreads have quickly normalized
Corporate credit still offers higher yields than U.S. Treasuries, but is no longer unusually attractive.
U.S. high yield is still highly correlated to oil prices, “search for yield” is less urgent with rates rising quickly.
27
0
250
500
750
1,000
1,250
1,500
1,750
2,000
1994 1998 2002 2006 2010 2014
IG Credit
HY Credit
U.S. credit spreads fell during 2016 close to their cycle lows
Credit spread to Treasuries (basis points)
Data as of December 31, 2016. Source: Bloomberg.
Stock-bond tradeoff in U.S. far less compelling
The stark outperformance of U.S. stocks over bonds in recent years has corrected a large mis-valuation.
The case for better-than-normal equity market returns compared to fixed income is weaker moving forward.
28
U.S. equities no longer unusually attractive compared to U.S. Treasuries
U.S. equity risk premium over Treasuries
Data as of December 31, 2016. Source: Bloomberg, Robert Shiller.
-2
-1
0
1
2
3
4
5
6
7
8
1983 1987 1991 1995 1999 2003 2007 2011 2015
Black Monday
Stocks Cheap
Stocks Expensive
But rising interest rates do not threaten stocks yet
Monetary policy tightening does not pose a material risk to stocks when supported by stronger growth.
Historically, a rise in rates from very low levels has been correlated with good stock market returns.
29
U.S. equity valuations have not come under threat from rising rates except at very high levels
S&P 500 Forward P/E
5
10
15
20
25
30
0 2 4 6 8 10 12 14
10-year U.S. Treasury yield
Current
Source: Factset, I/B/E/S.
Stocks cheaper outside the U.S.
Valuation is a poor predictor of short-term returns, but a better tool for gauging long-term performance.
After eight-year rally, U.S. stocks are now expensive compared to nearly all other markets globally.
30
Compared to somewhat expensive U.S. stocks, international markets are very attractive
“Shiller" valuation for major equity markets
Data as of November 30, 2016. Source: Research Affiliates, Robert Shiller
0
10
20
30
40
50
U.S. Developed Emerging
Current Valuation
Median
Maximum
Minimum
Best trade idea: stocks over bonds outside the U.S.
Equity risk premiums have not narrowed much outside the U.S. with rates still very low.
Pricing disparities in international markets should start to drive flows into equities given improving growth.
31
German equities very cheap compared to German fixed income, while U.S. has normalized
Data as of December 31, 2016. Source: Bloomberg, Robert Shiller.
0
1
2
3
4
5
6
7
Apr-07 Jul-08 Oct-09 Jan-11 Apr-12 Jul-13 Oct-14 Jan-16
German equity risk premium
U.S. equity risk premium
Investment outlook summary
We expect asset classes outside the U.S. to improve on their
2016 performance.
Rising interest rates may be painful for bond investors in 2017
but are necessary for higher income returns in the long run.
Despite near-term risks, investors should maintain exposure to
a range of bond categories for their portfolio diversification
benefits.
Tactically, we prefer stocks over bonds outside the U.S. where
risk premiums remain attractive and global central bank
policies remain accommodative.
U.S. small-cap stocks should benefit from lower taxes, a
stronger dollar, and potential for higher consumer spending.
Our preferred U.S. sectors are financials, industrials,
technology and consumer discretionary given our expectations
of a cyclical upturn in growth.
32
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© 2017 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017
This material is prepared by TIAA Global Asset Management and represents the views of Timothy Hopper and Brian Nick as of January 12, 2017. These views may change in response to changing economic and market conditions. Any projections included in this material are for asset classes only, and do not reflect the experience of any product or service offered by TIAA. The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Past performance is not an indicator of future results.
Please note that investments in equity and fixed-income securities are not guaranteed and are subject to market, interest rate, inflation and credit risks. Some fixed-income sectors may be subject to liquidity risk. High-yield investments are subject to higher credit risk, and investments in foreign securities are subject to special risks, including currency fluctuation and political and economic instability. Investments in asset-backed securities may be subject to prepayment or extension risks.
TIAA Global Asset Management provides investment advice and portfolio management services through TIAA and over a dozen
affiliated registered investment advisers. Nuveen Investments is an operating division of TIAA Global Asset Management.
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