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WELCOME & INTRODUCTION

My Thoughts On The Current Market & Economic Cycle


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Now
My Thoughts On Where We Are Headed
Valuations
Price Is What You Pay. Value Is What You Get. Warren Buffett
20 Year Forward Annual Returns From P/E Levels y = -0.005x + 0.1388
R = 0.5453
15%

14%

12%

11%

9%

8%
Annual Return

6%

5%

3%

2%

0%
You Are Here
-2%

-3%
0 5 10 15 20 25 30 35 40
P/E 10
Deviations
Mean Reversion Is The Most Powerful Force In Investing. L. Swedroe
Real S&P 500 Index With Recessions
50

45
1,250.00
40

35

30

25

250.00
20

15
Long-Term Uptrend
Support Line 10

50.00 0
Jan-1871 Jan-1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006
Recessions S&P 500 (Real Price) Expon. (S&P 500 (Real Price))
Time To Recovery
Getting Back To Even Isnt An Investment Strategy. L. Roberts
Real S&P 500 Index With Time To Recovery
10
14 Years
2,048.00
9

8
1,024.00

23 Years 7

29 Years 6
512.00

21 Years
4
256.00

128.00 2

64.00 0
1904 1909 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
Recessions Real S&P 500 Index

50

-100
0

-50
100
150

35
Oct-1873 -27.12

21
Mar-1882 -18.31

26
Mar-1887 -18.38

19
Jul-1890 -26.93

17
Jan-1893 -13.77

23
Dec-1895 -19.32

20
Jun-1899 -32.35

32
Sep-1902 -40.05

18
May-1907 -18.39
Subsequent Market Declines

11
Jan-1910 -21.15
Historical Length Of Recoveries &

43

Jan-1913 -48.31 9

Aug-1918 -35.77
21

Jan-1920 -16.29

Economic Recoveries (No Of Mths)


26

May-1923 -2.09
20

Oct-1926 -80.61
49

Aug-1929 -43.83
79

May-1937 -47.20
36

Feb-1945 -16.25
44

Nov-1948 -8.27
38

Jul-1953 -20.50
Economic Recoveries

23

Aug-1957 -11.87
Subsequent Market Declines (%)

Apr-1960 -33.84
105

35

Dec-1969 -51.56
57

Nov-1973 -30.57
11

Jan-1980 -26.13
91

Jul-1981 -20.10

Jul-1990 -31.84
119
I know of no way to judge the future but by its past. Patrick Henry

72

Mar-2001 -51.24
94

Dec-2007
Lies, Damn Lies & Statistics
You only learn from your losses, not your gains Anonymous
Cumulative Bull vs Bear Markets (Points)
2000
1,804.81

1500 1,415.73

1000
675.60
583.32
500 352.15
213.84
121.62

0
(97.95)
(181.86) (192.57)
-500 (352.22)
(453.32)

-1000
(972.00) (919.98)

-1500
1904 1909 1914 1919 1924 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Cumulative Bull vs Bear Markets (Points)


Valuations Matter A LOT
Invest For 30-Years At 12% Annually Dave Ramsey
$3000 Annual Tax Savings Invested At 10% Compound, 20x PE and 10x PE
600000.00

500000.00

400000.00
22 Years Before Investing At 20x PE
Does Better Than A Mattress
300000.00 Savings Program

200000.00

100000.00

0.00

-100000.00

-200000.00

-300000.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

ShortFall Investing At 20x PE Shortfall Investing At 10x PE


$3000 Saved In Mattress $3000 Annual Savings Invested At 20x PE
$3000 Annual Savings Invested At 10x PE $3000 Annual Savings Invested At 10% Compounded
Life Expectancy Matters
Youre A Long Term Investor, Right? You Know That Guy.
Think Rates Are Going To Rise?
Interest Rates Reflect Economic Growth & Inflation
20% 18

16

15%
14

Fed Kills The Inflation Monster Via


Monetary Policy - And The Economic 12

10%
Growth Miracle Along With It.
GDP and Inflation

Interest Rates
10

8
5%

4
0%
Inflation Rises As Economic Growth
Strengthens Along WIth Wages, 2
Productivity & Incomes.
-5% 0
1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Recessions GDP Annual Chg. Inflation 10-Year Treasury Rate Poly. (GDP Annual Chg.)
Think Rates Are Going To Rise?
S&P 500 vs. Inflation, Wages Savings & Interest Rates
16.0 4096.0

14.0
2048.0

12.0
Inflation & Interest Rates, Wages & Savings

1024.0
10.0

S&P 500 (Log Base 2)


512.0
8.0

6.0
256.0

4.0
128.0

2.0

64.0
0.0

-2.0 32.0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
10-Year Treasury Constant Maturity Rate Consumer Price Index for All Urban Consumers: All Items
Personal Saving Rate Compensation of Employees: Wages & Salary Accruals
S&P 500 Stock Price Index
Think Rates Are Going To Rise?
S&P 500 & Interest Rates vs. Composite (CPI, GDP, Wages & Savings)
16.0 4096.0

14.0
2048.0

12.0
Inflation & Interest Rates, Wages & Savings

1024.0
10.0

S&P 500 (Log Base 2)


8.0 512.0

6.0 256.0

4.0
128.0
2.0

64.0
0.0

-2.0 32.0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

10-Year Treasury Constant Maturity Rate Composite Indicator S&P 500 Stock Price Index
Think Rates Are Going To Rise?
I Can't Be Out Of Money..
Consumption & Debt I Still Have Checks!
50% 70%
I Can Afford It - I Have Credit!

45% 68%

40% 66%
Household Debt

PCE
35% 64%

Households Lived Within Means


30% 62%

25% 60%

20% 58%
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015
Consumer Debt As % Of Wages PCE As % Of GDP
Think Rates Are Going To Rise?
Interest Rates Can Remain Low For A LONG Time
16

14

12

10

0
1/1/1857 1/1/1872 1/1/1887 1/1/1902 1/1/1917 1/1/1932 1/1/1947 1/1/1962 1/1/1977 1/1/1992 1/1/2007
Recessions US Long Term Rate: Consistent Series Long-Term Median
Source: Measuring Worth
Think Rates Are Going To Rise?
What Has The Fed Wrought?
Fed Interest Rates Vs. Real Economic Growth
(Time From First Hike To Recession)
16

14

12 Hiking Interest Rates


From Very Low Growth
Levels Leads To Recessions
10 Within 3-9 Months.

2 1970 1974 1997


Penn Franklin 1982 1990 1994 Asia/ 2000 2007
Central National LatAm 1987 S&L Tequila Russia/Dot.Com Subprime
0 Bank Bank Debt Crash Crisis Crisis LTCM Crash Crisis
1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
"???"
Count - 1st Rate Hike To Recession Recessions Fed Interest Rate GDP 5-Year Average
Crisis
Expectations Are High
Chicago Fed National Activity Index vs. Consumer Confidence
3 140.00

2 120.00

1 100.00

Consumer Confidence Index


CFNAI - 6 Mo. Avg.

0 80.00

-1 60.00

-2 40.00

-3 20.00

-4 -
1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

CFNAI 6-Month Avg. Consumer Confidence Composite Linear (CFNAI 6-Month Avg.)
Problems With Tax Reform
Politically Tax Reform Will Be As Tough As Health Care
A Tough Tax Fight Could Drag Out Longer Than Wall Street Is
Currently Estimating
CBO Estimates Current Corporate Tax Rate At 12-16%.
15% Corporate Tax Rate Will Have Muted Effect.
Tax Savings From ACA Repeal & Boarder Tax Wipe Out
Roughly $1.5 Trillion Of Effect
The Run In Stocks Was Based On Estimates Of $131/Share.
Actual Earnings For 2017 Will Be Closer To $118/Share
Earnings For 2018 Are Currently At $130/Share And Being
Revised Down
Border Adjustment Tax Will Be A Negative To Revenue Growth
Expectations Are High
Expectations Are High
Expectations Are High
The Real Problem Of Forward Estimates

129.91
130.00
130.03

120.00

Est. In Jan, 2016


Earning Per Share

Through 2017
110.00
Estimates Decline
Further In Feb, 2018

100.00

Hope Springs Eternal In March With


2018 Estimates At Same Level As 2017
90.00

80.00
Q1-2014 Q3-2014 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018

1/1/2016 Estimates 2/1/17 Estimates 3/1/17 Estimates


Bulls Still Running
INTERNAL DETERIORATION
CRASH PROBABILITIES
correction
probability
level
-20% 13%
-19% 18%
-18% 18% 13% chance of seeing at least one crash of 20% or worse prior to
-17% 20% year end.
-16% 20%
-15% 22%
-14% 32% 36% chance of seeing at least one crash of 10% or worse prior to
-13% 35%
-12% 35%
year end.
-11% 35%
-10% 36% 71% chance of seeing at least one crash of 5% or worse prior to
-9% 39%
-8% 42% year end, etc.
-7% 51%
-6% 60%
-5% 71%
--> 71% chance that the YTD gains will be lost, and perhaps
-4% 81% multiple times over!
-3% 89%
-2% 100%
-1% 100%
0% 100%
This Has Never Ended Well
HAVE MORE QUESTIONS?
Feel Free To Contact Me:
Lance@myclarityfinancial.com
281-501-1971

- OR
You Can Always Find Me At

www.RealInvestmentAdvice.com