An “irrational quest for safety” drove all kinds of nutty economic and investment behavior in 2011, said T. Rowe Price Chairman and Chief Investment Officer Brian Rogers on Tuesday at a media conference in New York. Irrational thinking explains why companies’ cash levels are so high, why this year’s investment bubble was the 10-year Treasury note, and “why people are terrified of risk and volatility,” according to Rogers.
“This year has been an exhausting one,” said the chairman of the Baltimore-based global investment management firm with $453.5 billion of assets under management, pointing to the congressional supercommittee’s failure to come to an agreement this week as well as the debt ceiling crisis last August.
But looking ahead to 2012, five T. Rowe Price experts at the conference said investors shouldn’t give up just yet, because there’s good news ahead for some U.S. and international stocks along with certain areas of the fixed-income market.
Here, then, are T. Rowe Price’s economic and investment outlooks for 2012:
Running in Place. “Company profit margins are high and rising” and “more Federal Reserve stimulus in the year to come is likely as growth lags Fed expectations,” said Chief Economist Alan Levenson. While market volatility has been giving investors a crazy ride, the U.S. economy should see a modest but sustained recovery in 2012, Levenson says. His 2012 forecast is for real GDP growth of 2%, core consumer price inflation of 1.5% to 2% and an unchanged unemployment rate of about 9% even though job growth will pick up in the second half.
Volatility vs. Valuations. “While the market doesn’t make sense now, we’re actually quite sanguine about its growth going forward,” said John Linehan, head of U.S. equities and co-portfolio manager of large-cap value strategy. “We’ve seen a lack of conviction in the marketplace with unprecedented volatility, but we’re actually not going anywhere. For 2011, we’re roughly flat.” Looking ahead, Linehan sees a “glimmer of hope” in equity valuations. If volatility doesn’t drive the U.S. economy into another recession, he said, stock valuations will save the day because U.S. companies are sitting on piles of cash and stocks are trading at 20-year lows in terms of price to trailing earnings. “Currently,” Linehan said, “over 200 stocks in the S&P 500 are paying higher dividend yields than the 10-year Treasury.”