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1 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. State of the Markets NIRI Seattle Presented at the University of Washington March 12, 2014 Frank Hatheway Chief Economist NASDAQ OMX Group, Inc.
2 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Moderate growth will persist in the U.S. in 2014 and beyond. GDP growth was strong in the second half of 2013, but on an annual basis GDP grew only 1.9% in 2013 compared to 2.8% in 2012. 2013 GDP figures were impacted by fiscal drag from the Fiscal Cliff and the Sequester which first hit the economy in Q4 2012. These effects are unlikely to be repeated in 2014. The structural fiscal and trade deficits in the U.S. and Europe remain significant threats to economic growth. Thumbnail of the U.S. Economy Introduction
3 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Weak Job Creation The current job recovery has been widely characterized as slow but steady. This recovery has had the worst job creation relative to the previous employment peak. The large number of discouraged workers currently outside of the labor force is also an economic drag. Part-time work and the long-term unemployment rate remain well above pre-recession levels. Improved Job Security Job losses reduce consumer income and indicate either a weak job market or economic instability. Job losses have dropped to pre-crisis levels indicating employment conditions have improved, suggesting a tight job market for skilled workers. The strength of both these measures has a considerable impact on the well-being of the overall economy and on the prospects for future growth. The Mixed News: State of the Job Market Economic Brief
4 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Real personal consumption expenditure is one measure of consumer spending habits. Consumption has risen to an all-time high, but its trend has slowed from 2.9% pre-recession to 2.1% since 2011, much like the trend of personal income. Consumption dropped 2.8% during the recession. Consumption spending surpassed its pre- recession peak at about the same time that personal income began to grow again. Due to the full percentage point drop in the growth rate of consumption since the recession, personal consumption is 9% behind its pre- recession pace. This gap will widen if current trends continue. Despite a slower absolute growth rate, personal consumption as a percent of U.S. GDP by has risen from 66% to 68% since the year 2000, demonstrating that faltering consumer spending is also of growing importance to the economy. Impact of the Job Market on Spending Economic Brief
5 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. A basic measure of consumers’ financial health is the trend of (inflation adjusted) real disposable personal income. Before the recession, disposable income was growing 2.9% annually. Since 2011, income has only grown 1.2% annually. Disposable personal income experienced a one-time bump in May 2008 but otherwise remained essentially flat for the entirety of the recession. This five year slump leaves disposable income 8% below its projected pre- recession level and this gap will likely be permanent unless personal income growth strengthens. Growth in personal income is an important driver of the economy as it is the primary determinant of consumers’ spending growth. Impact of the Job Market - Consumers’ Income Growth has Slowed Economic Brief
6 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. After a very rough summer in 2011, consumer confidence about the future of the economy over the next 12 to 18 months is recovering. It experienced its most recent drop from July to October 2013 but has recovered much of that loss as of January 2014. The slowly improving employment outlook has had a positive impact on consumer confidence. Although consumer confidence is improving, it remains well below its recent peak of 103 in 2004. Uncertainty about U.S. fiscal policy and the Eurozone is lingering in the intermediate-term so consumer confidence will continue to be volatile as global events demand attention. Consumer Confidence Brittle Economic Brief
7 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Home Values Continue to Improve Home values experienced a 13.8% year-over-year increase as of November 2013 according to S&P/Case-Schiller. The S&P Homebuilders ETF, which tracks U.S.-traded companies in the homebuilding sector, experienced y-o-y growth of +22% as of November 2013, slightly underperforming the overall market’s +27% y-o-y increase during that time. Since the stock market is forward looking, positive performance from this ETF suggests that the future demand for new homes will continue to increase as the housing recovery strengthens. Economic Brief
8 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Household Wealth, Assets, Increasing While some consumers finance their consumption with income, a minority base spending habits on household wealth. Many more use their wealth to supplement income-based spending. Unlike personal income, household wealth considers factors such as movements in asset prices including equities and real estate. Equities and real estate account for 19% and 23% of household assets, respectively. These particular asset prices have largely recovered from the recession, helping to drive growth in household wealth. However, asset prices may not continue their strong recovery as they ultimately depend on the health of the general economy. This means that improvements to other areas of the economy such as the labor market and consequently to consumers' income are very important going forward. Economic Brief
9 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Investors’ Attitudes Turn Cautiously Optimistic Looking at mutual fund flows, investors moved out of equity mutual funds after 2008 and did not return until 2013. January 2013 saw the highest monthly inflow into equity mutual funds since the crisis. Investors have remained relatively positive since then though not at the record level seen in January. Since talk of a Fed taper began, bond fund outflows have been heavy. However, net flows have been close to zero for bonds so far in 2014. Consistent with a lengthy move out of equities over the past few years, State Street’s Investor Confidence Index shows that investor portfolios became progressively less risky until last year. Starting in 2013 confidence started a sharp recovery and is now at its highest point since the end of the recession in 2009. Investor Brief
10 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. NASDAQ IPOs: Fewer But Bigger Deals Like the economy, the IPO market has been characterized by fits and starts since the crisis. In 2013, U.S. IPOs had their best year in both number of deals and capital raised since 2007. The 2 nd and 3 rd Q of 2013 were the strongest back-to-back quarters since the crisis and the 1 st Q of 2014 is on pace to surpass them both. After completing 36 Biotechnology IPOs in 2013, NASDAQ has already seen 15 Biotech IPOs in 2014. Typically, the IPO market takes time to recover from a market downturn or a period of elevated volatility. Without another upheaval, it should remain strong. Investor Brief
11 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Conclusion – Outlook for 2014 2013 Recap 2013 saw strong returns in the equities markets. Investors showed more of an appetite for risk by turning their attention to equity funds and ETPs with increased confidence. In both the U.S. and Europe, capital flows were weak but positive for fixed income Exchange Trade Products (ETPs) while commodity ETPs, particularly gold, experienced outflows. Questions for 2014 Will equities continue to be an attractive investment option due to strong central bank intervention or will the taper pick up pace as the U.S. and global economies recover? If so, flows into gold and other store-of-value commodity assets should remain weak or negative as investors’ appetite for risk remains high and the safety, limited upside, and low opportunity costs of non-income producing assets remains unattractive. If not, bond market volatility should increase significantly and perhaps equity market volatility as well. This may cause outflows from buy-and-hold accounts into other assets. – The commodity outlook is more complex and dependent on perceptions of inflation and relative safety of gold vs. sovereigns.
12 © Copyright 2014, The NASDAQ OMX Group, Inc. All rights reserved. Thank You Frank Hatheway Chief Economist email@example.com
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