1. Columbia Economic Development
The Outlook for 2019 and 2020

2. APPROACH IDENTIFY MEANINGFUL TRENDS IN FINANCIAL MARKETS
IDENTIFY MEANINGFUL TRENDS IN IMPORTANT MONETARY AND ECONOMIC VARIABLES
(ARE FINANCIAL MARKET TRENDS RATIONAL?)
POSITION PORTFOLIOS

3. THE ANATOMY OF A CYCLE STOCK MARKET INTEREST RATES ECONOMY
Source: Hugh Johnson Advisors (HJA)

4. THE ANATOMY OF A MANIA (AND FINANCIAL CRISIS)
STAGES
Investment
Speculation
Financial Distress
Revulsion

5. MANIA
: 4,447%
: -80.4%

6. When the rest of the world has gone mad it is wise to imitate them in some small measure…monkey see; monkey do
“We have a risk of a melt-up, not a meltdown here.”
Despite where the markets are in equities, we have not seen money being put to work. We have record amounts of money in cash.
Larry Fink, CEO, BlackRock Inc.

7. Since December 21st S&P 500 up 21.7%.
April 26: 2940
December 21: 2417
Source: Bloomberg News; Hugh Johnson Advisors

8. Since December 21st “bull market sectors” have outperformed “bear market sectors”
12/21/18-4/26/19
Technology
32.6%
Consumer Discretionary
29.7%
Communications Services
27.6%
Industrial
24.6%
S&P 500
21.7%
Finance
21.2%
Energy
18.2%
Basic Materials
17.3%
Consumer Staples
13.6%
Real Estate
13.5%
Utilities
8.0%
Healthcare
8.5%
Source: Bloomberg News; Bear Sectors in Red
Source: Bloomberg News; Hugh Johnson Advisors. Bear Market Sectors in Red and Italicized

9. Index (Capitalization)
Mid capitalization stocks have outperformed large capitalization stocks
Index (Capitalization)
12/21/18 to 4/26/19
S&P 400 (Mid)
22.5%
S&P 500 (Large)
21.7%
S&P 600 (Small)
16.4%
Source: Bloomberg News; HJA

10. Longer-term interest rates may now have turned higher (???)
November 2nd: 3.23%
April 26th: 2.50%
Source: Bloomberg News; Hugh Johnson Advisors

11. Investment-Grade quality spreads are narrowing
January 11th: 2.46%
April 26th: 2.18%
Source: Bloomberg News; Hugh Johnson Advisors

12. Below Investment Grade quality spreads are narrowing
December 28th: 5.27%
April 26th: 3.65%
Source: Bloomberg News; Hugh Johnson Advisors

13. The yield curve. Investors becoming less optimistic about prospects for the economy
October 5th: 1.06%
April 26th: .14%
Source: Bloomberg News; Hugh Johnson Advisors

14. Probability of Recession
The yield curve is now narrowing. The yield curve enables us to quantify the probability of a recession starting in 12 months.
Month/Year
Probability of Recession
April-19
11.2%
May-19
11.1%
June-19
12.5%
July-19
13.6%
August-19
14.6%
September-19
14.5%
October-19
14.1%
November-19
15.8%
December-19
21.3%
January-20
23.6%
February-20
24.6%
March-20
27.1%
Source: Federal Reserve Bank of New York

15. Probability of Recession
Compare the current recession probability with the recession probability at start of Until probability reaches 30%....and it is now close!
Month/Year
Probability of Recession
Jan-08
37.8%
Feb-08
40.1%
Mar-08
41.7%
Apr-08
36.8%
May-08
32.0%
Jun-08
22.1%
Jul-08
28.5%
Aug-08
22.2%
Sep-08
19.1%
Oct-08
Nov-08
14.8%
Dec-08
11.7%
Source: Federal Reserve Bank of New York

16. Important Monetary and Economic Variables
The message of the financial markets is we may be in the late stages of the cycle, but we have further to go.
This message is consistent with message of important monetary and economic variables.
The message of important monetary and economic variables, is that we are not “at the end” of the current cycle.

17. Federal Reserve policy remains accommodative.
The “real” federal funds rate, the measure of Federal Reserve interest rate policy, is +.5% and remains somewhat low.
(The long-term average is 1.2%.)
Between the third quarter of 2017 (the end of quantitative easing) and the fourth quarter of 2018 The Fed reduced its holdings of financial assets from $4.5 trillion (Q3 2017) to $4.1 trillion (Q4 2018).
It has done so by reducing its holdings of treasuries and mortgage-backed securities by $378.3 billion or from 10.7% of all debt to 8.7% of all debt.
(The long-term average is 5.9%.)
Even so, the level of excess reserves ($1.533 trillion) remains high.

18. Total bank lending is turning higher
January 2016: 8.1%
March 2019: 5.5%
Source: Federal Reserve

19. As a result, the growth rate of the money supply appears to be turning higher.
October 2016: 7.7%
March 2019: 4.1%
Source: Federal Reserve

20. As a result, domestic liquidity conditions appear to be turning higher
September 2016: 4.6%
March 2019: -1.3%
Source: Bureau of Economic Analysis; Federal Reserve

21. International capital flows have surged and offset the domestic liquidity shortfall
October-November 2018: 2.72%
April : 2.51%
October : 1.90%
Q to Q3 2018
Foreign Investors: +$214.8 billion
Q4 2018
Foreign Investors -$591.1 billion
Source: Bureau of Economic Analysis; Federal Reserve

22. Index has risen 20 of last 24 months, but…
Leading Indicators for the economy continue to rise, but may be turning.
Index has risen 20 of last 24 months, but…
Source: Conference Board

23. Real Gross Domestic Product
Quarter
Consensus-Real GDP
HJA-Real GDP
1.5%
3.1%
2.6%
2.5%
2.2%
2.0%
1.7%
1.6%
2.4%
2018 Average
2.9%
2019 Average
2.3%
2.8%
2020 Average
1.9%
Source: Blue Chip Economic Indicators; HJA

24. A Fundamental Shift in Economy
Variable
The Growth Rate of Economy (1)
3.6%
2.3%
The Growth Rate of Population (2)
1.2%
1.0%
The Growth Rate of Labor Force (3)
1.3%
0.6%
The Participation Rate (3)
65.9%
63.4%
The Growth Rate of Productivity (3)
2.1%
(1) Growth rate of economy during quarters of positive growth.
(2) Calculated from employment/population ration Bureau of Labor Statistics.
(3) Bureau of Labor Statistics

25. The Top 10 in 1990 and 2018 Company 1990 Revenues 1990 Employment
Exxon Mobil Corp
$105.5
104,000
Apple Inc
$265.6
132,000
Altria Group Inc
$44.3
168,000
Microsoft
$110.36
131,000
General Electric Co
$57.7
298,000
Amazon
$232.9
647,500
IBM
$69.0
373,816
Alphabet
$136.8
98,771
Wal-Mart Stores
$25.8
271,000
Facebook
$55.8
35,587
Merck & Co Inc
$7.7
36,900
Berkshire
$225.4
389,373
AT&T Corp
$19.3
116,523
JNJ
$81.6
135,100
Coca-Cola Co/The
$10.2
24,000
Exxon
$279.3
71,000
Bristol-Myers
$10.3
52,900
JPMorgan
$131.4
256,105
Cigna Corp
$18.2
31,400
$500.3
2,300,000
Total
$368.0
1,476,539
$2019.6
4,196,436
Percent Change
448.8%
+184.2%
Source: Bloomberg News

26. Average Monthly Increase in Payroll Employment (000)
Quarter
Consensus-NFP
HJA-NFP
205
172
204
159
211
150
200
140
192
133
182
125
173 na
166
2018 Average
221
2019 Average
2020 Average
130
178
Source: Bloomberg April Survey; HJA

27. Consensus-Unemployment Rate HJA-Unemployment Rate
Quarter
Consensus-Unemployment Rate
HJA-Unemployment Rate
3.9%
3.7%
3.6%
3.8%
4.0%
2018 Average
2019 Average
2020 Average
Source: Blue Chip Economic Indicators; HJA

28. Average Hourly Earnings
Quarter
Consensus-Average Hourly Earnings
HJA-Average Hourly Earnings (Y/Y)
3.3%
3.2%
3.1%
3.0%
2.9% NA
2018 Average
2019 Average
2020 Average
3.4%
Source: Bloomberg April Survey; HJA

29. Consumer Inflation Quarter Consensus-CPI HJA-CPI 2019-01 1.7% 1.6%
1.8%
1.5%
1.9%
2.1%
2.4%
2.0%
2.2%
2018 Average
2.5%
2019 Average
2020 Average
Source: Blue Chip Economic Indicators; HJA

30. Consensus-Consumer Spending HJA-Consumer Spending
Quarter
Consensus-Consumer Spending
HJA-Consumer Spending
1.3%
1.2%
2.7%
2.8%
2.3%
2.2%
2.0%
2.4%
1.9%
1.8%
2018 Average
2.5%
2.6%
2019 Average
2020 Average
2.1%
Source: Blue Chip Economic Indicators; HJA

31. Federal Reserve Policy (federal funds rate 2.375%)
Quarter
Consensus Fed Funds Rate
HJA Fed Funds Rate
2.375
2.401
2.458
2.625
2018 Average
1.83
2019 Average
2020 Average
2.520
Source: Bloomberg April Survey; HJA

32. Short-Term Interest Rates (2- Year UST 2.28%)
Quarter
Consensus 2-Year
HJA 2-Year
2.49
2.44
2.37
2.50
2.38
2.55
2.43
2.53
2.59
2.75
2018 Average
2.52
2019 Average
2.42
2020 Average
2.65
2021 Average
2.66
Source: Bloomberg April Survey; HJA

33. Longer-Term Interest Rates (10-Year UST 2.50%)
Quarter
Consensus 10-Year
HJA 10-Year
2.70
2.65
2.60
2.53
2.68
2.57
2.75
2.62
2.77
2.66
2.80
2.73
2.84
2.83
2.81
2018 Average
2.33
2019 Average
2.59
2020 Average
2.76
2021 Average
Source: Bloomberg April Survey; HJA

34. S&P 500 Operating Earnings
Quarter
S&P 500 Operating Earnings
Y/Y%
10-Year UST
Price-Earnings
S&P 500
$140.12
13.9%
2.76
19.2
2696
$148.54
17.9%
2.92
18.2
2703
$157.75
23.0%
18.1
2851
$162.91
22.5%
3.04
17.7
2892
$162.73
16.1%
2.65
2882
$162.87
9.6%
2.53
17.6
2870
$163.79
3.8%
2.57
17.4
2855
$167.53
2.8%
2.62
17.2
2883
$173.18
6.4%
2.66
17.0
2941
$176.74
8.5%
2.73
16.7
2959
$178.69
9.1%
2.83
16.5
2944
$179.72
7.3%
2.81
16.3
2924
$181.67
4.9%
2.70
16.1
2932
$183.01
3.5%
2.68
16.0
2927
$183.96
2.9%
2.71
15.8
2907
$184.79
2.67
15.6
2891

35. Alternative Outcome S&P 500 (2940)
Quarter
S&P 500 Operating Earnings
Y/Y%
10-Year UST
Price-Earnings
S&P 500
$140.12
13.9%
2.76
19.2
2696
$148.54
17.9%
2.92
18.2
2703
$157.75
23.0%
18.1
2851
$162.91
22.5%
3.04
17.7
2892
$162.73
16.1%
2.65
2882
$162.87
9.6%
2.53
17.6
2870
$163.79
3.8%
2.57
17.4
2855
$167.53
2.8%
2.62
17.2
2883
$172.45
6.0%
2.66
17.0
2929
$177.58
9.0%
2.73
16.7
2973
$182.48
11.4%
2.83
16.5
3006
$187.55
12.0%
2.81
16.3
3051
$193.08
2.70
16.1
3116
$196.70
10.8%
2.68
16.0
3146
$199.11
9.1%
2.71
15.8
$200.70
7.0%
2.67
15.6
3140

36. S&P 500 (Using Half Way Between Forecast and Alternative)
Returns
Fixed Income
Year
10-Year UST
Total Return
Q4 2019
2.62%
1.99%
Q4 2020
2.81%
2.00%
S&P 500 (Using Half Way Between Forecast and Alternative)
Year
S&P 500
%Return
Q4 2019
2883
-1.9%
Q3 2020
2987
1.6%

37. New York State and 17 Metropolitan Statistical Areas37

38. New York State will track the National EconomyUS
Source: Bureau of Labor Statistics; HJA

39. Nonfarm Payroll Employment
As measured by the growth rate of employment New York State tied for 2nd among 7 New England states
Nonfarm Payroll Employment
State
2018
2019
2020
Vermont
-0.4%
1.4%
1.6%
1.7% US
0.9%
1.5% NY
1.0%
Massachusetts
0.2%
New Hampshire
0.1%
Connecticut
-0.3%
0.8%
0.7%
Maine
-0.7%
2.0%
Rhode Island
-0.1%
0.6%
Source: Bureau of Labor Statistics; HJA

40. Counties (over 50,000) County (over 50,000) 2018 2019 2020 2019-2020
Kings
6.6%
3.0%
6.1%
6.0%
Queens
5.3%
2.8%
3.7%
Richmond
5.1%
1.7%
3.5%
Bronx
5.9%
1.1%
3.4%
3.3%
New York
-0.7%
2.5%
2.6%
Saratoga
2.4%
2.3%
2.2%
2.1%
Ontario
-0.1%
2.0%
1.9%
Rennselaer
1.2%
1.8%
Rockland
1.3%
1.4%
Orange
0.6%
1.5%
Monroe
0.7%
Ulster
1.6%
Dutchess
0.5%
Westchester
0.4%
1.0%
Suffolk
-0.5%
0.9%
Nassau
0.8%
Erie
0.1%
Albany
-0.4%
0.3%
Onondaga
Niagara
-0.2%
Schenectady
-0.3%
-1.1%
0.2%
Tompkins
Oneida
0.0%
Broome
Source: Bureau of Labor Statistics; HJA

41. Counties (Under 50,000 Top 19) County (over 50,000) 2018 2019 2020
Sullivan
4.3%
4.0%
4.7%
4.8%
Schuyler
-1.5%
3.8%
2.6%
2.7%
Yates
-0.1%
4.2%
Greene
2.2%
0.2%
2.4%
Seneca
-0.7%
1.9%
1.8%
Orleans
-2.7%
2.5%
1.7%
1.6%
Chenango
0.5%
1.5%
Livingston
0.6%
1.1%
Herkimer
1.2%
Montgomery
-0.9%
1.0%
1.3%
Columbia
2.3%
Genesee
0.4%
0.9%
St Lawrence
0.8%
Cortland
-1.1%
-0.3%
Chattauqua
-1.0%
Washington
1.4%
0.3%
Oswego
Clinton
0.7%
Essex
-2.1%
Source: Bureau of Labor Statistics; HJA

42. Counties (Under 50,000 Second 19)
County (over 50,000)
2018
2019
2020
Steuben
0.5%
0.7%
0.6%
Schoharie
1.5%
0.9%
0.4%
Wyoming
-0.2%
2.0%
0.3%
Madison
-0.5%
0.2%
Wayne
-0.6%
0.0%
0.1%
Tioga
1.3%
-0.4%
Lewis
1.8%
Otsego
Warren
-3.6%
2.8%
-0.1%
Putnam
-0.9%
Franklin
-0.8%
Jefferson
-0.3%
Alleghany
-1.4%
Cayuga
-1.0%
Hamilton
-9.3%
9.0%
Cattaraugus
-1.1%
Delaware
0.8%
-1.2%
Fulton
-1.5%
-1.7%
Chemung
-2.0%
-2.2%
Source: Bureau of Labor Statistics; HJA

43. Other Issues: Housing, Oil, etc.43

44. Housing Variable 2018 2019 2020 2021 Housing Starts (000) 1249 1146
1120
1127
Sales of Existing Homes (Millions)
5.34
5.27
5.39
5.47
Existing Homes Median price (000)
$257.3
$264.9
$274.8
$287.3
Sales of New Homes (000)
620
580
562
558
New Homes Median Price (000)
$322.5
$323.7
$331.2
$339.9
Source: Bloomberg Analytics
Source: Bloomberg

45. Oil (West Texas Intermediate $64.00)
Year
Global Consumption
Global Production
Price
2018
99,513
94,082
$64.54
2019
100,859
95,273
$71.11
2020
102,223
96,335
$77.29
2021
103,605
97,410
$83.21
2022
105,006
98,488
$88.99
2023
106,426
99,569
$94.76
2024
107,865
100,647
$100.61 %
1.3%
1.1% %
1.6%
1.4%
Source: BP Statistical Review; HJA

46. The Risks 46

47. Deficits and Debt as % GDP
Fiscal Year
Deficits
Debt Held by Public
2017
-3.5
76.5
2018
-4.0
78.0
2019
-4.6
79.3
2020
80.9
2021
-4.9
83.1
2022
-5.4
85.7
2023
-5.2
87.9
2024
89.6
2025
-5.1
91.5
2026
-4.8
93.1
2027
94.5
2028
96.2
Source: Congressional Budget Office April 2018

48. The Risk
In a 2010 paper* Carmen Reinhart, now a professor at Harvard Kennedy School, and Kenneth Rogoff, an economist at Harvard University...argued that GDP growth slows to a snail’s pace once government-debt levels exceed 90% of GDP.
…Debt levels look benign until a critical point is reached, and then they don’t. The authors reckoned that beyond the 90% threshold, market perceptions of risk can jump. That could translate into soaring interest rates or financial-market stress, forcing hard choices: austerity, inflation or default.
The Economist
April 17, 2013 48

49. The Next Two Years from Washington
What Trump will want
A rate reduction for middle income tax payers
Increased spending on infrastructure
What Schumer and Pelosi will give
A rollback of the reduction in the tax rate on corporations from 21% to 25%.
Increased spending on infrastructure.
What Schumer and Pelosi want
Elimination of limits on deduction of SALT 49

50. Cost to US Consumers ($Bn)
Tariffs enacted or officially ordered under Section 232 (threats to national security) or Section 301 (unfair trade practices)
Tariff
Value of Imports ($Bn)
Tariff Rate
Cost to US Consumers ($Bn)
Section 232: Steel
$23.4
25%
$5.8
Section 232: Aluminum
$16.6
10%
$1.7
Section 301: Part 1
$32.3
$8.1
Section 301 Part 2
$13.7
$3.4
Section 301 Part 3
$159.3
$39.3
Total
$245.3
$58.8
Total US Goods Imports (2017)
$2,360,878
232 and 301 Tariffs %
0.1%
Tariffs on China
$506.3
China % US Goods Imports
21.4% 50

51. S&P 500 Operating Earnings
When will interest rates reach a level that will more than offset earnings?
Quarter
S&P 500 Operating Earnings
Y/Y%
10-Year UST
Price-Earnings
S&P 500
$140.12
13.9%
2.76
19.2
2696
$148.54
17.9%
2.92
18.2
2703
$157.78
23.0%
2851
$163.22
22.8%
2.98
17.9
2914
$165.93
18.4%
2.99
17.6
2925
$168.59
13.5%
3.05
17.4
2933
$171.24
8.5%
3.13
17.1
2936
$176.19
7.9%
3.26
16.9
2974
$180.53
8.8%
3.47
16.6
2991
$182.91
3.50
16.3
2982
$184.58
7.8%
3.69
16.0
2956
$15.99
5.6%
3.70
15.8
2935

52. The Outlook for 2019 and 2020 52

53. Perhaps it’s Time Not Timing that’s the secret to market success.
The average duration of the 11 post WWII bull markets has been 62.6 months.
The average annual return of the 11 post WWII bull markets has been 143.8%.
The average annual duration of the 11 post WWII bear markets has been 16.6 months.
The average annual return of the 11 post WWII bear markets has been -28.2%.
The average annual return of the stock market since 1980, including 5 bear markets and recessions, a stock market crash in 1987, and The Great Recession of has been 14.8%.
The average annual return of the stock market since 2000, including 2 bear markets and The Great Recession of has been 12.2%.
Perhaps it’s Time Not Timing that’s the secret to market success. 53

54. The Outlook for 2018 and 2019 (And Beyond)54

55. MANIA???
Three Years: 206.5%
Two Years: 246.9%
2018 (YTD): 110.5%

56. Domestic Liquidity Conditions-The Surge in International Capital Flows
While the Fed reduced it holdings of treasuries and mortgage-backed securities by $553.4 billion foreign investors increased their holdings by $644.1 billion and offset the domestic liquidity shortfall.
In additional while domestic investors reduced their holdings of US stocks by $803.6 billion foreign investors increased their holdings of US stocks by $435.8 billion and further offset the domestic liquidity shortfall.
As a result, the dollar appreciated 4.7%. (6.3% annual rate)
The dollar has continued to rise. Now up 7.6%.

57. The “race for the exits” can be transmitted to other parts of the financial markets and economy
Tech stocks, which have been front and center in America’s bull market, were believed by some punters to have an unlimited potential thanks to their part in the “Fourth Industrial Revolution.” The slump in the FAANGs is unlikely to go as far as bitcoin's, but there may still be plenty of scope for the companies' valuations to slide as investors realize they aren't immune to industrial cycles.
Kyoungwha Kim
Bloomberg News
Trees do not grow to the sky

58. Gross State Product (%)
As measured by Gross State Product (output) New York State May drop some.
Gross State Product (%)
State
2018
2019
2020
U.S.
2.9%
2.6%
2.4%
Massachusetts
3.1%
Vermont
1.1%
2.3%
2.2%
Rhode Island
1.4%
1.9%
2.1%
New England
2.0%
Maine
New Hampshire
3.0%
1.7%
1.8%
New York
Connecticut
1.2%
1.6%
Source: Bureau of Economic Analysis; HJA

59. What is going on in Broome? Tompkins? Saratoga?
County
2018
2019
2020
Kings
8.9%
7.8%
8.1%
Bronx
6.2%
4.0%
3.5%
Broome
1.3%
3.0%
3.2%
Oneida
1.4%
2.1%
2.6%
New York
0.8%
3.3%
2.2%
Tompkins
0.9%
1.7%
Rockland
2.0%
1.9%
Rennselaer
1.2%
1.6%
Ulster
Albany
0.4%
Dutchess
1.5%
Orange
1.1%
Richmond
5.0%
1.0%
Nassau
Westchester
Erie
0.7%
Suffolk
0.6%
Putnam
-0.4%
Monroe
Saratoga
2.5%
Source: Bureau of Labor Statistics

60. REPORT CARD VARIABLE 2017 FORECAST FOR 2018* OUTCOME**
ODDS OF A RECESSION
No Recession
US REAL GDP
2.2%
2.8%
2.9%
US NEW JOBS
2.0 million
2.6 million
2.5 million
US UNEMPLOYMENT RATE
4.4%
3.9%
US CONSUMER SPENDING
2.5%
2.6%
2.7%
US INFLATION
2.1%
2.3%
*Average for 2018

61. REPORT CARD VARIABLE* Q4 2017 FORECAST FOR Q4 2018* OUTCOME**
FEDERAL FUNDS*
1.195%
2.125%
2.23%
2-YEAR US TREASURY*
1.7%
2.25%
2.79%
10-YEAR US TREASURY*
2.4%
2.64%
3.03%
S&P 500*
2605
3002
2680
S&P 500**
2578
2858
2744
*Average for Q ** Average for 2018