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Bullish MFS Strategist Swanson Sees America in Full-Swing Recovery

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Despite concerns about European debt and overheated Chinese growth, the U.S. economy is well into recovery–and that means American retirees need to take a closer look at their spending and saving patterns, MFS Investment Management chief investment strategist James Swanson said in a midyear investment outlook on Tuesday, June 2.

Even with a default of the debt of Portugal, Spain, and Greece, Swanson said, the world’s economy is nowhere near the crisis levels it reached during the Lehman-AIG episode of 2008.

“As a worst-case stress test, if you deplete about 28% to 30% of the base capital of European banks, my thesis would be that there’s still a lot of capital left over, and that’s without the European Central Bank using its [facilities similar to the U.S. Trouble Asset Relief Program] for those banks,” Swanson said. “This time around it’s very different. The world profit cycle is in a rejuvenation phase. There’s a V-shaped economic recovery going on which wasn’t going on when the Lehman-AIG crisis occurred.”

Meanwhile, in China, there may have been concerns that the country’s problems were spilling over into the rest of the world, but those market fears have been overstated, according to Swanson.

“China was growing at a 12% annualized real rate, and their goal is to run that country at 8%. They’re a command economy, so they can do that. I don’t think we should worry about a cooling of China’s property or share markets. Too much money has been going in at too fast a rate, but the government is slowing it down,” he said.

Of greater importance now for American investors is the massive infusion of free cash flow as a percent of sales at U.S. companies, Swanson noted, with market cap close to 50-year records.

“The implication of that is there’s a lot of cash on balance sheets,” he said. “These companies could buy back shares, raise dividend payout, hire new workers, spend on capex, or go on merger and acquisition booms. Any of those five options is either market market-friendly or economically friendly.”

Overall, Swanson added, corporate America is currently experiencing pent-up demand–and that will be good news for the workforce.

“The trend line is unit labor costs falling and productivity rising, and the implication is that profits as a share of GDP continue to rise. And they have been rising. This in my opinion is a recipe for this economic expansion to be sustainable because it’s these companies that do the hiring with a worker base that has to be increased now,” he said.

Historically, when GDP per worker hits the levels we’ve been seeing, jobs four months later, “and that’s exactly what we’ve witnessed,” Swanson said. “GDP per worker hit a record high in November and now in the March payroll numbers, and we’ll see on Friday if that positive move continues.”

The U.S. Labor Department is scheduled to release its monthly employment data for May this Friday, June 4, including the unemployment rate and nonfarm payroll jobs.

A bullish Swanson asserted that the market rally seen since March 2009 up to now signals good news for consumers.

“I don’t know where the thesis comes from that the U.S. consumer is tapped out, overleveraged and is going to save more. There is very little evidence of this,” he said. “In this worst recession since the Great Depression, consumption fell 1.6%. If that’s the worst that consumers turned off the spigots–1.6% over a two-year period–I can’t see why they would stay home now. The consumer is back, and this is the recipe for sustainability for this expansion.”

For retirement-age Baby Boomers, the profit-driven recovery hasn’t changed their tendency to buy more fixed-income products as they get older, and that could mean portfolio problems down the road, Swanson warned. There does seem to be a shift to fixed-income investment buying on the part of those 55 and older, he said, and that behavior is keeping interest rates lower, which is not a good thing for people who expect to live off coupon payments when they buy bonds.

“Sixty-year-olds are going to live another 20 to 30 years, and if they just go to fixed income they’re in for a rude awakening, Swanson said. “There is not enough yield, and we are at structurally low rates. Their idea that they can hold on to principal because bonds are safe should be re-examined. Plus, the credit quality of the entities behind them can’t pay them their retirement benefits and remain triple-A. That’s the problem these people face. With their advisors, they should figure out another way because loading up on bonds, which is what they still do in America 8-to-1 in the mutual fund world, doesn’t seem like a good strategy given the data that’s coming in now.”

Yet while Baby Boomers may be conservative about investing, that hasn’t stopped them from going on liberal buying sprees at the mall, Swanson added.

“As far as consumption, the normal pattern was thought to be that retirees consume less and acquire less. But this current generation that’s reaching retirement age now hasn’t shown a big behavioral shift yet in what they purchase at Wal-Mart and in daily consumption. They’re more affluent than their younger cohorts, and the predictions that Faith Popcorn and other prognosticators made 20 years ago that they would be cocooning and saving more has not yet occurred.”

Read an interview with MFS CEO Robert Manning from the archives of


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