Guggenheim Investments

10 Macro Themes for 2020

January 2020
10 Macro Themes for 2020

This collection of charts presents 10 of the macroeconomic trends we believe are

Investment Professionals
most likely to shape the investment environment in 2020.
Scott Minerd
Chairman of Investments,
Global CIO
1. Household Net Worth Gains Will Support Consumption
Macroeconomic and
Investment Research Group
2. Low Rates Will Underpin Housing Despite Valuation Concerns
Brian Smedley
Group Head,
3. The Pace of Fed Balance Sheet Expansion Will Slow Senior Managing Director

Maria Giraldo, CFA

4. A Tight Labor Market Will Further Depress Corporate Profit Margins Managing Director

Jeffrey Traister, CFA

Managing Director
5. Corporate Defaults Will Rise as Debt Burdens Weigh on Credit
Matt Bush, CFA, CBE
Director
6. Credit Rating Downgrades Will Add Headwinds to Business Investment
Paul Dozier
Director
7. The Fed’s Soft Landing Theory Will be Tested
Chris Squillante
Director
8. Consumer Confidence Will Hinge on the Health of the Labor Market
Margaret Kleinman, CAIA
Vice President
9. Historic Inequality Will Fuel Support for Unorthodox Policy Proposals
Jerry Cai
Senior Associate
10. The 2020 Election Will Influence the Economy in an Unprecedented Way Joshua Michnowski
Analyst

This document is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the authors but not
necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-
proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other
publication, without express written permission of Guggenheim Partners, LLC.

Please See Important Disclosures in Back of Presentation 2

Household Net Worth Gains Will Support Consumption
 Personal consumption
U.S. Household Assets and Liabilities, % of Disposable Personal Income
continues to be the main
driver of the U.S. economy,
Assets to Personal Income (LHS) Liabilities to Personal Income (RHS) Guggenheim Estimate helping to spur economic
850% 140%
growth in 2019 even with
business investment
contracting and the
130% manufacturing sector
800% experiencing a recession.

120%
 One reason for the
750%
resiliency of consumption
has been the health of
110%
consumer balance sheets.

700%  Post-crisis deleveraging has

brought down household
100%
debt burdens, while the bull
650%
market in stocks and steady
90%
home price gains have lifted
assets to near all time highs
relative to income.
600%
80%
 The 2019 stock rally should
support a positive wealth
550% 70%
effect, helping consumption
1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 cushion the economy even as
a variety of headwinds mount.

Source: Guggenheim Investments, Haver Analytics. Data as of 9.30.2019, estimate shown for Q4 2019 as the data was not yet available at the time of print. Due to the unpredictability of financial markets, there is no guarantee that the estimate
shown will prove to be correct.

Please See Important Disclosures in Back of Presentation 3

Low Rates Will Underpin Housing Despite Valuation Concerns
 We expect the housing
University of Michigan Consumer Sentiment Survey: Buying Conditions for Houses By Reason, Net % Balance
market to contribute
positively to U.S. economic
Buying Conditions Due to Rates Buying Conditions Due to Prices
growth.
80%
Good Time to Buy  Mortgage rates have come
70% down a full percentage point
over the past year, helping
60% home sales and construction
recover, a trend which will
50% continue into 2020.

40%  Consumers are highly

sensitive to mortgage rates,
30% with a big turnaround
underway in the share of
20%
consumers citing interest
rates as a good reason to
10%
buy a house now.
0%
 However, the rebound will be
limited, as high home prices
-10%
are denting home buying
Bad Time to Buy
-20% perceptions, offsetting some
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 of the benefits of lower
mortgage rates.

Source: Guggenheim Investments, Bloomberg, University of Michigan. Data as of 12.31.2019. Note: three-month moving average.

Please See Important Disclosures in Back of Presentation 4

The Pace of Fed Balance Sheet Expansion Will Slow
 In September 2019, it
Federal Reserve Assets, in USD Billions
became clear that the Fed
had drained too many
Coupon Securities Other Assets Repurchase Agreements (Repos) T-Bills
excess reserves, as
$4,600 evidenced by the spike in
Guggenheim overnight funding rates.
Forecast Since then, the Fed has
$4,400 added liquidity through repos
and Treasury bill purchases.
$4,200
 While the Fed has sought to
dispel the notion that this
$4,000 was QE in disguise, many
investors have pointed to
Fed balance sheet growth as
$3,800 a catalyst for strong risk
asset performance in recent
months.
$3,600
 We forecast further Fed
balance sheet growth in
$3,400
2020, but at a much slower
pace, which could undercut
$3,200 the “QE-lite” market
2016 2017 2018 2019 2020 narrative.

 We expect an IOER hike of 5

basis points in the first
quarter and tapering of bill
purchases in the second
Source: Guggenheim Investments, Haver Analytics, Federal Reserve Board. Data as of 12.31.2019. Coupon securities include Treasury notes and bonds, Agency debentures, and Agency
mortgage-backed securities. Due to the unpredictability of financial markets, there is no guarantee that the forecast shown will prove to be accurate.
quarter.

Please See Important Disclosures in Back of Presentation 5

A Tight Labor Market Will Further Depress Corporate Profit Margins
 A tight labor market has
U.S. Corporate Pre-Tax Profits* and Unit Labor Costs
increased the bargaining
power of workers, as the
Corporate Profit Margins vs. Trailing 10
vs Trailing 10-Year Average,(LHS)
Year Average in Percentage Points (LHS) number of job openings
Unit Labor Costs vs Trailing 10 Year Average (RHS) now exceeds the number of
unemployed workers. This
3.0% 10%
dynamic has pushed up
wage growth.
2.5% 9%
 At the same time, and
2.0% 8% despite a recent uptick,
productivity growth has
1.5% 7% remained sluggish, in part
due to lack of sufficient
1.0% 6% business investment during
this expansion. The net result
is rising unit labor costs.
0.5% 5%

 In an environment of limited
0.0% 4% pricing power, businesses
are struggling to pass on
-0.5% 3% higher labor costs, leading
to a steady erosion of profit
-1.0% 2% margins.

-1.5% 1%  We expect declining

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 profitability to weigh on
firms’ hiring and investment
plans in 2020.

Source: Guggenheim Investments, Haver Analytics. Data as of 9.30.2019. *Note: Profits with inventory valuation and capital consumption adjustments expressed as a percent of GDP.
Four quarter moving average.

Please See Important Disclosures in Back of Presentation 6

Corporate Defaults Will Rise as Debt Burdens Weigh on Credit
 Since the high yield market
U.S. Nonfinancial Corporate Business Leverage and Three-Year Cumulative Corporate Credit Loss Rates
came into existence in the
mid-1980s, rising leverage
Corporate Debt + Loans / Profits before Tax (LHS) Three-Year Cumulative Corporate Credit Loss Rate (LHS) has tended to coincide with
13x 9% an increase in defaults and,
ultimately, credit losses for
12x 8%
investors.

 Today’s corporate credit

11x 7% markets include more
below-investment grade-
10x 6% rated debt and more BBB-
rated debt (the lowest IG
rating) than ever before.
9x 5%
 The fundamental outlook
8x 4% for corporates is not good:
earnings growth is weak,
margins are falling, and
7x 3%
companies are being
downgraded by the credit
6x 2% rating agencies.

5x 1%
 In our view, it is
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 unsustainable for firms to
operate with historically
high leverage without a rise
in defaults. Tight credit
spreads suggest to us that
the market is being
Source: Guggenheim Investments, Haver Analytics, Moody’s. Data as of 9.30.2019. The three-year cumulative corporate credit loss rate is calculated using monthly credit loss rates, which
are estimated by Guggenheim using a combination of monthly and annual default and recovery data.
complacent about this risk.

Please See Important Disclosures in Back of Presentation 7

Credit Rating Downgrades Will Add Headwinds to Business Investment
 Although credit spreads
Moody’s Upgrades and Downgrades for U.S. Investment-Grade and High-Yield Credits, Count
tightened throughout 2019
for both investment grade
Corporate Upgrades Corporate Downgrades Net Count
and high-yield bonds, the
200 fundamental picture for
corporate credit worsened.
150
 Weak earnings growth and a
continued increase in
100 leverage has resulted in
more credits being
50 downgraded than upgraded
by the ratings agencies.

0  Lower ratings in the

aggregate are a reminder
-50 that corporate debt is
becoming riskier. Firms have
less cushion to withstand
-100
external shocks that could
cause a decline in earnings.
-150
 Lower credit ratings will
-200 make it more costly to take
2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 on additional debt, and
pressure to deleverage will
curtail business hiring and
investment, resulting in a
drag on the real economy.

Source: Guggenheim Investments, Bloomberg, Moody’s. Data as of 12.31.2019.

Please See Important Disclosures in Back of Presentation 8

The Fed’s Soft Landing Theory Will be Tested
 The unemployment rate has
Two-Year Change in the U.S. Unemployment Rate, in Percentage Points
fallen to just 3.5 percent, a
50-year low, and below most
6% estimates of the sustainable
natural rate.
5%
 The Fed expects to guide the
4% unemployment rate slightly
higher in the coming years,
3% the so called “soft landing
from below.”
2%
Median FOMC  We expect that momentum
Projection
1% in the labor market will
continue to fade, with
0% economic growth near
potential and further labor
-1% market gains constrained by
limited slack.
-2%
 Historically, once the two-
-3%
year change in the
unemployment rate turns
-4%
positive, the economy enters
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 a recession.

 The historical record shows

it is difficult to keep a lid on
rising unemployment, calling
into question the Fed’s soft-
Source: Guggenheim Investments, Haver Analytics, Federal Reserve. Actual data as of 12.31.2019. FOMC projections as of 12.11.2019. Federal Open Market Committee (FOMC) projections landing theory.
are economic projections of Federal Reserve Board members and Federal Reserve Bank presidents under their individual assessments of projected appropriate monetary policy.

Please See Important Disclosures in Back of Presentation 9

Consumer Confidence Will Hinge on the Health of the Labor Market
 The rate of change in
Conference Board Consumer Confidence Index, Y/Y Change consumer confidence has
proven to be a reliable
indicator of our position in
Consumer Confidence (Present Situation), Y/Y Change (LHS)
the business cycle.
Consumer Perception of Jobs Plentiful Minus Jobs Hard to Get, Y/Y (RHS)
70 35  Despite a 28 percent stock
60 30 market rally in 2019,
December’s “present
50 25
situation” consumer
40 20 confidence reading was
30 15 essentially unchanged from
20 10 a year ago.
10 5  This puts the year-over-year
0 0 change at a level that has
-10 -5 preceded past recessions by
-20 -10
just six months, on average.
-30 -15  For confidence to rise from
Confidence is
-40 below last year’s -20 here, the economy will need
-50 level despite a 28% -25 to create jobs at a faster
stock market rally pace in 2020, which seems
-60 -30
like a tall order given a
-70 -35 fading fiscal impulse and an
-80 -40 unemployment rate at a 50-
-90 -45 year low.
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
 While household net worth
gains should support
spending, any deterioration
in the labor market would
cause consumers to become
more downbeat.
Source: Guggenheim Investments, Haver Analytics, Conference Board. Data as of 12.31.2019. Shaded areas represent periods of recession.

Please See Important Disclosures in Back of Presentation 10

Historic Inequality Will Fuel Support for Unorthodox Policy Proposals
 Despite a 50-year low in the
Share of National Net Worth by Percentile Groups
unemployment rate and 10
years of economic
Top 1% Bottom 90%
expansion, many Americans
42% are struggling to get by and
are frustrated with
40% government policy.

38%  A key reason is income

inequality, which sits at multi-
36% decade highs.

34%  High inequality will fuel

popular support for
32% economically disruptive
policies such as a wealth tax,
30%
higher corporate tax rates,
universal basic income, and
28%
Medicare for all.
26%
 While the prospects for such
policies being implemented
24%
is fairly low, more prominence
22% in the public discussion and
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 among presidential
candidates will increase
policy uncertainty as
businesses and consumers
assess their likelihood and
potential impact.
Source: Guggenheim Investments, Haver Analytics. Data as of 6.30.2019. Shaded areas represent periods of recession.

Please See Important Disclosures in Back of Presentation 11

The 2020 Election Will Influence the Economy in an Unprecedented Way

University of Michigan Consumer Sentiment Survey: Reasons for Opinions on Business Conditions  Historically, respondents to
the University of Michigan’s
% of Respondents (12-Month Moving Average)
Consumer Sentiment survey
have cited the labor market
General Election Govt & Elections as the dominant factor
50% influencing their view of
overall business conditions.
45%
 Over the past several years,
40% the share of respondents
citing government policy and
35% elections as driving their
perceptions has surged. In
30% the past year it has been the
most cited factor.
25%
 Spurred by social media, 24-
20% hour cable news, and high
political polarization, this
15% development means that
consumers are making
10% economic decisions based
Donald Trump
on political developments.
5% Elected President
 This will make the outcome of
0% November’s election more
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 immediately consequential for
the economy than in the past.

Source: Guggenheim Investments, Bloomberg, University of Michigan. Data as of 12.31.2019.

Please See Important Disclosures in Back of Presentation 12

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