T his I s Not 2 0 0 8 –
Th e C a s e f o r
Further Economic Growth
and Stock Market Gains
I N V E S T M ENT
S TR ATE G Y
GROUP
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.
HEALTHY CONSUMER AND LABOR MARKET
Figure 1
U.S. Household Debt Service Ratio



Figure 2
Job Openings Are at an All-Time High



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 unsustainably 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 service 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.
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 unemployment rate has steadily fallen from over 10% to its
current 5.1%. Figure 2 shows that while job openings 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.
Consumer debt reached unsustainably
high levels prior to financial crisis.










(Source: Janney ISG and Bloomberg)


Debt service levels are now
at historically low levels.
Figure 3
Conference Board Consumer Confidence



(Source: Janney ISG and Bloomberg)








(Source: Janney ISG and Bloomberg)
2
W W W. J A N N E Y. C O M
While confidence was deteriorating by 2007,
it continues to move higher today.
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 Figures 4 and 5. This healthy consumer supports our
overweight of the Consumer Discretionary and
Consumer Staples sectors.
Figure 4
EASY CREDIT AND HEALTHY BANKS
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.
U.S. NAHB Homebuilder Index (SAAR)


Highest since 2005









Figure 6 illustrates the tight monetary policy pursued by the Fed leading up to the financial crisis.
This figure also shows the very easy credit conditions in place since the crisis. Considering that the
Fed has not even started raising rates, tight credit
conditions that harm the economy and stock market 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.
(Source: Janney ISG and Bloomberg)
Figure 6
Figure 5
U.S. Federal Funds Target Rate
U.S. Auto Sales (SAAR)





Highest since 2005








Fed induced tight credit conditions
by 2007.

Fed maintaining very
easy credit conditions
today.

(Source: Janney ISG and Bloomberg)
(Source: Janney ISG and Bloomberg)
W W W. J A N N E Y. C O M
3
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 National 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 pointing to financial system stress by the middle of
2007 but remain very calm today.
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.
Figure 7
U.S. Financial Conditions that Deteriorated well Before the 2008 Crisis,
Remain well Behaved Today
U.S. NATIONAL FINANCIAL CONDITIONS INDEX*
4
4
2
2
0
0
-2
-2
U.S. FINANCIAL RISK INDICATORS: TED SPREAD**
U.S. FINANCIAL RISK INDICATORS: ABS OPTION-ADJUSTED SPREAD***
1500
400
1000
200
500
BPs
BPs
600
0
0
-500
-200
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***
100
1000
750
50
%
BPs
500
0
250
-50
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
.
© 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
(Source: Janney ISG and BCA Research)
Easy Fed monetary policy settings and very low
levels of financial stress indicators are indicative
of a healthy financial system which should support
future economic growth. This also supports our
overweight of the Financial sector.
4
W W W. J A N N E Y. C O M
Table 1: Actionable Investment Ideas For Further Economic Growth
Company Name
Ticker
Forward
P/E
Earnings
Growth
Dividend
Yield
Credit
Rating
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.
Gaining share with best combination of
CHIPOTLE MEXICAN GRILL INC
CMG
38.19
21.37
growth and store level returns.
Largest fast food restaurant in the world
MCDONALD’S CORP
MCD
19.73
7.89
3.48
Awith significant dividend.
Iconic consumer brands with a strong
WALT DISNEY CO/THE
DIS
18.30
11.90
1.81
A
management team.
Consistent earnings track record with
COSTCO WHOLESALE CORP
COST
26.52
9.94
1.11
A+
strong cash flow and balance sheet.
Apple platform has over 90% customer
APPLE INC
AAPL
11.89
16.98
1.71
AA+
retention and is returning cash.
E-commerce continues to take share and
AMAZON.COM INC
AMZN
72.18
47.77
AAAMZN is the dominant force.
pharmacy health care provider
CVS HEALTH CORP
CVS
17.95
14.68
1.26
BBB+ Largest
well positioned for aging demographics.
Dominant brands well positioned for
PEPSICO INC
PEP
19.58
5.96
2.91
A
higher discretionary spending.
Blue chip consumer product firm with
PROCTER & GAMBLE
PG
18.33
7.57
3.70
AAsignificant dividend yield.
Offers diversified exposure to 87
CONSUMER DISCRETIONARY ETF
XLY
Consumer Discretionary stocks.
ISHARES U.S. HOME
Offers diversified exposure to 38 home
ITB
CONSTRUCTION ETF
construction stocks.
S&P/CS
S&P/CS
S&P
S&P/CS
S&P/CS
S&P/CS
S&P/CS
S&P
S&P
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.
Solid returns, valuation support and is
ALLSTATE CORP
ALL
10.87
9.70
2.00
AS&P/CS/J
returning cash to shareholders.
Industry
leading
revenue
growth,
solid
DISCOVER FINANCIAL SERVICES
DFS
9.38
8.90
1.96
BBB- credit quality and buying back shares.
S&P/CS/J
Top
management
and
deep
bench
with
JPMORGAN CHASE & CO
JPM
9.77
6.90
2.75
A
S&P/CS
risk reduction as a catalyst.
Solid management and well positioned
WELLS FARGO & CO
WFC
11.65
11.71
2.85
A+
S&P/CS
for consumer credit needs.
Real
estate
that
is
well
positioned
for
a
SIMON PROPERTY GROUP INC
SPG
32.56
7.55
3.07
A
S&P/CS
healthy consumer.
FINANCIAL SELECT SECTOR SPDR
Includes
88
stocks
for
broad-based
XLF
ETF
financial sector exposure.
Includes 90 equally-weighted regional
SPDR S&P REGIONAL BANKING ETF
KRE
bank stocks.
Includes 64 U.S. insurance provider
ISHARES U.S. INSURANCE ETF
IAK
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.
Very diverse product line, strong cash flow,
MEDTRONIC PLC
MDT
15.18
6.90
1.90
A
S&P/CS
valuation and dividend support.
Multiple
catalysts
driving
ImmunoBRISTOL-MYERS SQUIBB CO
BMY
35.51
13.58
2.42
A+
S&P/CS
Oncology franchise.
distribution benefitting from strong
MCKESSON CORP
MCK
15.23
15.77
0.49
BBB+ Drug
S&P/CS
pricing with cross-sell opportunities.
HCV market still in early stage while
GILEAD SCIENCES INC
GILD
9.00
6.52
0.41
Astock is trading well below historical
S&P
levels.
Hospital fundamentals are solid with HCA
HCA HOLDINGS INC
HCA
15.06
10.96
S&P
levered to many growth categories.
Cap-weighted
basket
of
318
companies
VANGUARD HEALTH CARE ETF
VHT
offers broad exposure.
ISHARES U.S. MEDICAL DEVICES
Cap-weighted basket of 49
IHI
ETF
manufacturers and distributors.
ISHARES U.S. HEALTHCARE
Cap-weighted basket of 50 health care
IHF
PROVIDER ETF
providers.
ISHARES US PHARMACEUTICALS
Cap-weighted basket of 41
IHE
ETF
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
Credit Rating - Rating assigned by Standard & Poor’s to the long term obligations of the issuer if repaid in the local currency of the issuer.
W W W. J A N N E Y. C O M
5
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