Jovial best describes the mood of the audience and Tom Naughton, Southern Colorado regional president, at a recent U.S. Bank Economic Forum breakfast at the Antlers Hilton.
Norman Alvis, senior portfolio manager for the bank, zipped through an investment outlook that kept people on the edge of their seats. Some highlights:
Markets move in phases. Most of us already know that, but not with the details that Alvis lives and breathes. In the early ’70s, he explained, the oil embargo hailed the advent of modern inflation, yet the Standard & Poor’s 500 index saw very little gain over 10 years, mostly due to inflation.
Fast-track through the ’80s, with Paul Volcker (then-Federal Reserve chairman) taking aggressive action to modify and control the economy, and the ’90s, paving the way for innovation with technology, bringing new money, new power and … a mortgage bubble/housing crisis. Zoom to 2013, and the stock market is up 150 percent.
Regarding politicians and how they affect the economy, Alvis quoted Luxembourg Prime Minister Jean-Claude Juncker: “We all know what to do; we just don’t know how to get re-elected after we’ve done it.”
For instance, during the Great Recession, fiscal health took a blow when the U.S. budget deficit reached 10 percent as a percentage of gross domestic product (compared to an average of 4.5 percent in the ’90s).
“That’s not a sustainable environment, and it completely changed political dialogue,” Alvis said.
Again, the Federal Reserve reacted during the latest recession to the “tremendous surge” in unemployment by lowering interest rates and increasing the monetary base. The federal target for unemployment is 6.5 percent, he said. So, “they’ve pursued full employment over the economy.
“Like it or not, consumption is a huge part of the economy — 70 percent,” he said, adding that consumer sentiment took a big hit for several years. In the U.S., “where goes the sentiment, there goes the economy.” Americans were too skittish to spend wildly, further hurting the struggling economy. (Not that we blame anyone for such reluctance.)
Although GDP is slowly returning to more normal levels, Alvis cautioned, “we don’t expect the economy to get back to its potential until roughly 2018.”
Keep breathing. Now that the facts are out on the table in plain sight, how does one invest?
“Sub-par growth is part of what we’re looking at for the near term, and it affects how we’re going to invest,” Alvis said. The Federal Reserve has a dual mandate: price stability and full employment. Once the mandate of unemployment is reached, “we expect to see a return to focus on price stability.”
Consumers feel better, household net worth has rebounded, and this “bodes well for investing and economic growth in the next few years.”
In the near term, Alvis expects 10-year Treasury notes and three-month T-bills to remain low until the economy returns to potential, and then rise to 5 percent for the former and a little more than 4 percent for the latter. Opportunity also exists in municipal bonds, and he doesn’t expect inflation to rise dramatically — the Federal Reserve ought to have ample leeway to adjust in time.
As for the U.S. stock market, “valuations are reasonable today; we’re at a long-term average. Stocks are not overpriced,” he said. Which means there’s no time like the present to invest in stocks.
In addition, non-U.S. stocks ought to grab your attention.
“International stocks in both developed and emerging countries are underpriced,” Alvis said. “So if you practice ‘buy low and sell high,’ you’ll hold a measure of these.”
“In China, the government has recognized how their economy has to change, and they’re taking action to shift that,” he said. In turn, Japan has taken more central bank action. Not to be outdone, the Eurozone has inched toward stability since the European Central Bank finally adopted (more wholly) quantitative easing.
Perhaps the most encouraging news involves the “explosion in U.S. energy production,” lowering natural gas prices per unit to $3.50, compared to $15 in China. Also, the U.S. has experienced a manufacturing renaissance, creating a new term: the “re-shoring” of manufacturing jobs.
If that’s not enough to make one giddy, low interest rates have made housing more affordable.
“Six percent is roughly the line,” Alvis said. “If you keep mortgage rates below that, it’s considered an incentive, and small business owners take money out of their homes,” which drives job creation and the economy.
Furthermore, U.S. population is expected to grow, which also helps the economy. And, finally, the ongoing rise in wages for the emerging-market middle class drives consumption in those economies, making U.S. manufacturing more competitive.
Now that, you can take to the bank.