Experts Talk ISM, Construction Spending, Stocks

BusinessWeek compiles comments from Wall Street economists and strategists on the key economic and market topics of Dec. 1. Michael Englund, Action Economics Today's U.S. ISM [November manufacturing index] and construction [spending for October] figures signaled a weakening trajectory for the factory and construction sectors into the fourth quarter that is bucking the recovery, reinforcing the view that U.S. growth will remain anemic despite the post-bankruptcy vehicle-sector bounce in the third quarter. And the third-quarter gross domestic product (GDP) growth rate now looks poised for a further downward revision, to 2.5% growth, that is right in line with our initial estimate, before the big 3.5% "advance" GDP figure that was later revised to 2.8%. Thanks to today's downward back-revisions for construction, what once appeared to be a sharp GDP bounce in the third quarter that [might] sputter in the fourth quarter is now turning out to be the modest, but positive, 2% to 2.5% bounce in both the third and fourth quarters that we had initially assumed as we passed through midyear. David Bianco, Bank of America Merrill Lynch We expect both energy and financials to appreciate strongly in 2010, but the direction of the U.S. dollar has different implications for the two sectors. Under a scenario of significant further declines in the U.S. dollar—driving up commodity prices—energy is likely to outperform financials. Financials could come under severe pressure if a dollar crisis forced the Fed to hike prematurely. However, moderate U.S. dollar appreciation upon U.S. economic recovery and subsiding inflation fears, as BofAML forecasts, would probably cause financials to outperform energy. A more stable dollar would improve investor confidence in the Fed staying on a long hold and would also mitigate the risk of an oil price surge. Strong oil prices, despite a firm dollar, would likely drive energy [price-to-earnings ratio] expansion. We believe the "dollar carry trade" has become the nickname for general investor positioning that reflects optimism on the world economy and commodities and pessimism on the U.S. economy and inflation fears. We prefer to highlight that the combination of low interest rates in mature economies and strong growth in emerging economies is of great benefit to many large [Standard & Poor's 500-stock index] multinationals. Larry Hatheway, Kenneth Liew, UBS Equity and credit valuations are 'fair,' global growth remains uneven, and in 2010 market volatility may increase. Yet we opt to increase allocations to equity, credit, commodities, and real estate for 2010. Why? A gradually improving global economy and the prospect of higher policy rates undermine the case for government bonds, nominal and inflation-linked. Cash returns remain unattractive. Stocks and corporate bonds are likely to outperform, along with commodities and selected REITs. But in a world of lower returns and higher volatility, increased allocations to 'risk' assets only makes sense if accompanied by a lower cyclical profile in terms of sector and style. Squaring the portfolio paradox (lower risk-adjusted returns but higher allocation to risk assets) requires a redistribution of risk within the portfolio. Robert Quinn, Standard & Poor's Equity Research We expect European equities to perform well in 2010, vs. historical averages, and forecast a 14% total return from current levels. For 2009, equities have been the biggest absolute gainers; but on a risk-return basis, corporate credits—which exhibit three to four times less volatility—have been the clear winners. Recent movements in equity markets can be characterized by the 'race to 50' as purchasing manager indices and other leading survey data typically fueled the market. With the eurozone composite [Purchasing Managers Index] now comfortably above this level and the 'easy money' made—or ruefully missed for many—we believe many investors are unsure what price returns one can expect when the growth returns.

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