1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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

Large Cap Logic February 09, 2010 Investors will flock to U.S. large-cap companies, especially those with sound dividends, while small company stocks will remain relatively unloved…. Why Have Large Caps Outperformed Since August? November 19, 2009 Three themes help explain why that’s happening… A Steady Course November 05, 2009 Even though stocks have dropped a bit lately, there are reasons to be a little more optimistic…. The Shirt on My Back October 19, 2009 Signs of deflation seem to be all around us. The Social Security Administration just announced that beneficiaries won’t be getting a cost of living increase for the first time since COLAs were introduced in 1975. Inflation May be Inevitable… October 08, 2009 Among the factors for determining future allocation decisions is the most likely direction for inflation. We have noticed a number of investment firms launching new funds to profit from the inevitable return of high prices Inflation Paradox September 30, 2009 A little inflation is a good thing, because it shows that there is decent demand for products, and an economy that’s nicely “humming along.” Runaway inflation is not a good thing, however.

Tandem Performance Puzzle September 25, 2009 Typically, stocks and bonds go in opposite directions, a tendency that has exhibited itself throughout most of 2009. But in the last four weeks, long-dated Treasuries have risen right alongside equities, as the pair has each notched a 6% gain….

The State of the Consumer September 22, 2009 There’s some obvious trepidation out there among buyers, who would rather save than spend. But instead of money-market accounts (and their zero yields), it seems that most folks prefer to stash their savings in the stock and bond markets.