This firm has had a good handle on things for the last year (when I first gave them some funds to manage).
Weekly Capital Market Outlook
Robert T. McGee, Director of Macro Strategy & Research
U.S. Trust, Bank of America Private Wealth Management
Joseph P. Quinlan, Managing Director & Chief Market Strategist
U.S. Trust, Bank of America Private Wealth Management
In Brief
Investors keep missing the boat off the “island of fear,” preferring to hide in their caves with zero-yielding
survival gear. ECB President Mario Draghi helps markets understand the game-changing nature of the
recent summit.
? U.S. recovery turns three years old.
Still can’t get no respect. Nevertheless, a slow acceleration is under way despite all the short-term
noise.
? The financial markets are desperate for TLC: Trust, Leadership and Confidence.
Market uncertainty and volatility reflect the absence of TLC—trust, leadership and confidence. All
three metrics are tightly wrapped together and feed off each other; for the better part of this year,
there has been a negative TLC feedback loop. Breaking this negative loop will be key in the months
ahead.
Economic Outlook
Robert T. McGee
Director of Macro Strategy & Research
CAPITAL MARKET OUTLOOK
[ 2 ]
In the U.S., the bogeyman also varies by region, but generally is a monstrous imaginary figure used to
threaten children. The bogeyman therefore has become politically incorrect because of the possible
psychological damage that comes from threatening children. Often the bogeyman card is played by
politically incorrect parents to make children do something or to correct misbehavior with admonitions like
“go to sleep,” or “stop sucking your thumb,” or else the BOGEYMAN WILL GET YOU!
The “bogeyman mindset” sometimes takes other forms. In the run-up to the millennium, a mass hysteria
grew around a potential Armageddon to be caused by the technological chaos when the “1” before the
“9” in the 1900s turned to the “2” before the “0” in the 2000s. To ward off this massive disaster, the
Federal Reserve went so far as to flood banks with liquidity and options to buy liquidity in order to avert
possible gridlock in the banking system. This extra stimulus gave the stock market its final gasp, marking
the end of the Great Bull Market from 1982 to 2000. When the extra Y2K liquidity was pulled, the equity
market was at its most excessive valuation level since 1929. Otherwise, Y2K came and went without the
feared impact.
Today, there is a new bogeyman on the block called the “fiscal cliff.” Like Y2K, everyone in the markets is
talking about him in somber tones. Financial managers are trying to prepare for his attack. Yet, the
politicians who created him don’t have any interest in seeing him appear. He keeps hiding under the bed
and as long as you don’t make any risky investments he won’t come out and eat you!
The mass fear behind deepening “irrational pessimism” is also indicated by the collapse of interest rates,
even to negative levels on high-quality sovereign debt. If European Central Bank (ECB) President Mario
Draghi means what he says, the investors rooting for the demise of the euro will be sorely disappointed
and today’s rate levels will eventually be looked back on as a record aberration, much as the Y2K techstock
bubble was.
Recovery on Track
While everyone worries about what’s hiding under the bed, the U.S. recovery continues its slow, steady
advance (Exhibit 1). In June it turned three years old despite the fact that most people still think the
recession bogeyman is lurking about. The high-frequency data that are continually cast in a negative light
have blinded people to the more durable positive trend illustrated in Exhibit 1. The recovery has
averaged about a 2.2% growth rate in real gross domestic product (GDP) since the recession ended in
June 2009. For some quarters, like the fourth quarter of 2011, growth is above trend (4.1%). For other
quarters, like the most recent, it is below trend (1.5%). Big market mood swings around the trend are
short-term noise as well. In the meantime, stocks have doubled in value since March 2009 and are up
about 10% so far this year. |
