On the same day that the Federal Reserve offered a somewhat sobering view of the U.S. economy, Wilmington Trust forecast a recession later this year or next.
In its latest capital markets forecast, Chief Investment Officer Tony Roth told reporters in New York that the U.S. economy, though currently outperforming the rest of the developed world, is “overdue for a recession… There is certainly one on the horizon.” The last recession, known as the Great Recession, ended in June 2009, more than 6-1/2 years ago.
“The risk of a U.S. recession has grown since the beginning of the year,” said Roth, citing the decline in housing permits and the continued, volatile stock market, which is down about 8%. “There is a material chance that we have a recession this year,” said Roth.
In the meantime, though, Wilmington Trust expects the Fed will raise interest rates once or twice this year, not the four times suggested by the Fed in December when it raised rates for the first time in almost 10 years.
Against that backdrop, Wilmington Trust sees limited opportunities for capital gains, which is why income will “become an increasingly important component of portfolios,” said Roth. Income-producing investments will not only provide some return for investors but also cushion any capital losses, said Roth.
To that end, Wilmington Trust recommends that investors own dividend-paying stocks as well as U.S. and international REITs, high yield bonds in select sectors and eventually emerging market stocks.
Dividends will grow 5% to 5.5% over the over the next 10 years, keeping pace with 2.5% inflation rate and 2.5% GDP growth rate, and account for an increasingly larger part of total returns of the stock market, said Cam Albright, head of the firm’s investment strategy.
Dividends accounted for 2.3% of the 15% increase in total return rise in the Russell 1000, which are the 1,000 largest companies of the U.S. equity market, over the past five years and will contribute about one-third of the 7.2% total return over the next 10 years, said Albright.
Albright expects the biggest growth in dividends will come from the tech sector, where companies are maturing, and from financials, as more firms, having met required capital ratios, will be able to return funds to shareholders.
He said the firm has made a “strong strategic allocation in U.S. and global REITs and a smaller allocation to high yield – “a great asset class to date [but] I’m not sure you want to marry it the entire time.”