Insight & Commentaries
The first half of the year saw stocks move higher, led by domestic shares, while bonds, cash, and commodities (which typically do not move in lock step with stocks) generally lost ground.
Improving fundamentals last September led us to overweight stocks in portfolios at that time (see Upgrading Outlook, September 11, 2012). Our call was to remain overweight stocks as fundamentals were accelerating. Momentum was interrupted in April, and portfolio weights were returned to their long-run stock / bond target mixes and portfolios rebalanced.
Recognizing that interest rates remain still at very low levels relative to underlying growth, continued special attention to portfolio duration is still warranted, in our view. Accordingly, we have taken actions to shorten duration further in model portfolios by reducing holdings of longer-term bonds and reallocating a portion of those assets to shorter-duration floating-rate securities.
March economic data is disappointing so far, but far from recessionary. Last week’s retail sales report for last month was -0.1% compared to an expectation for a +0.3% increase and last month’s gain of 0.4%. Taken by itself, one month’s slippage in sales would not alter our assessment for continued slow growth. However, a series of other recent reports suggest a clear loss of momentum headed early in the second quarter.
We are entering the fifth year of recovery, with most of the data improved since last summer’s slump. Large amounts of deficit-financed spending and central bank liquidity are contributing to economic activity and lifting asset values. With the stock market back to pre-crisis levels, we want to look at how various “pillars” of the recovery are holding up.
Our analysis of incoming data suggests a decent start to 2013. These observations form the basis for our forecast as we start the year. Even though a policy misstep could always derail the economy, we expect a positive environment for investors because valuations appear reasonable and economic fundamentals are gradually improving.
A new phase of the economic recovery has begun. The slumping economy and cratering financial markets that greeted President Obama in 2008 are, thankfully, no longer with us. Today, we are in the third year of economic recovery, financial markets have substantially recovered, house prices are rising again, and employment rolls are expanding. As the crisis phase passes into history and the economy continues to grow, pressure to address deficits and debt will also grow.
With August now in the history books, we note that the downtrend in fundamental data appears to have been arrested and that a bottoming process is likely underway. Specifically, we saw encouraging signs in August that the U.S. consumer continues to spend in the face of higher gasoline prices. Automobile sales, for example, rose to a 14.46 million annualized rate last month, and chain store sales accelerated to a 2.6% year-over-year growth rate. Global manufacturing surveys also showed some modest improvement during the month, despite remaining near depressed levels.
Unless Congress acts, today’s tax rate on dividends is set to increase next year when the Bush tax cuts expire. This commentary explores the potential for a tax increase and what it might mean for investors.
Our posture has been a bit more cautious since our Fundamental barometer began to head south a few weeks ago. However, we are ever watchful for signs of improvement in the landscape. The past few trading sessions has shown at least a temporary willingness for global investors to let their hair down, throw caution to the wind, and go long equities. Our assessment is a bit more sober, but we are paying attention to what the data is telling us.
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