- Even with the sizable recovery in the stock market from last year’s lows, it is too early to take profits, in our view. There is still a sizable amount of cash on the sidelines, and as earnings continue to outpace expectations, we expect equities to head higher.
- Bullish cyclical market forces, which include inventory rebuilding, slightly improved consumer spending, a lack of inflationary pressure, and better than expected earnings, are overwhelming bearish systemic economic problems. This is a short-term phenomenon; the hope is that the longer-term issues are dealt with, and as the economy grows, we can grow out of a number of these issues.
- The banking system is still facing a number of problems, including a relatively low ratio of loan loss reserves to problem loans. The extent of these issues depends on the commercial real estate market, which has been surprisingly resilient thus far.
- As we have discussed previously, economic growth continues to be uneven. As the U.S. picture has improved, Europe has seen some deceleration. The emerging markets are still humming along, however, and seem to have almost uncoupled from the rest of the world.
- There seems to be no inflationary pressure in the economy, even in China. The threat of deflation is still more significant at this point in the recovery.
- There is a risk of dollar appreciation, which would adversely affect our foreign investments. The greenback is still the world’s reserve currency, and as the domestic economy improves amid sovereign debt problems such as Greece, there could be a flight to quality. However, the recent Fed move to increase rates should help depress the Yen, which should buoy Japanese stocks.
- Sovereign debt pressures are centering on the PIGS (Portugal, Ireland, Greece, and Spain). Although it appears that the resolution in Greece is imminent via the IMF, the fear is that its problems could spread to other countries. The problem encountered there is small (their total outstanding government debt is less than $400 billion) compared to the housing issues we have faced here (total estimated losses of over $1 trillion). The good news is that Greece’s current situation will put pressure on all countries to enact a sensible deficit reduction plan.
Ben Warwick is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.
See More of Ben Warwick’s Portfolio Gourmet Blog Post
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