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ASSET CLASS
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H.I.A. OUTLOOK
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COMMENT
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Real Estate Investment Trusts
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Negative
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Residential and commercial real estate suffering from over-supply.
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Commodities
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Neutral
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Weak demand globally.
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Bonds
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Neutral
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Treasuries are expensive but high quality corporate and municipals are attractive.
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Foreign Stocks
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Negative
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Export- and commodity-based markets punished by falling demand. Weakening US$ provides small offset.
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U. S. Stocks
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Positive
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Fairly valued; should move higher before foreign stocks
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MARKETS OUTLOOK (DETAIL)
REAL ESTATE
Recent data from the residential real estate market does suggest, in fact, at least a temporary reprieve from the torrent of negative news. February’s monthly release of existing and new home sales figures showed growth for the first time in months, driven by first-time homebuyers. As we’ve noted before, it’s critical for the sustainability of an economic recovery, and therefore market support, to begin the healing process in the real estate markets. While the valuation of certain REITs is at fire-sale levels, we believe it remains too early to shift from our “underweight” stance.
COMMODITIES
Some commodity prices, such as oil, have firmed since the beginning of the year. One spur of these prices is the stimulus provided by the Chinese government, which may have stabilized that country’s growth to some degree. On the other hand, commodities such as gold have seen their prices remain basically flat over that time. This market action is curious given the almost certain uptick in inflation that will occur as the monetary and fiscal stimulus takes hold. We still don’t expect stellar returns from this asset class since, on balance, we expect global demand to remain weak throughout 2009.
BONDS
Like commodities, the performance of and our outlook on the bond markets depends on what segment one considers. Treasury bonds haven’t yet sustained the sharp rise in yields many predicted when the government announced massive additional issuance, but yields are in fact higher, especially at longer maturities. High quality corporate bonds, which we favored in our inaugural Outlook piece, have seen their yield spreads decline, in some cases dramatically, as the market’s stress about corporate defaults has somewhat abated. We continue to expect that, although the global economy remains in a deflationary environment, the inflationary impact of the monetary and fiscal stimulus will ultimately cause yields to rise but improve credit quality; therefore our preference is to overweight high quality corporate bonds and underweight Treasuries.
FOREIGN STOCKS
Both US and foreign stock markets followed the same rollercoaster since the beginning of this year, suggesting markets have not “decoupled” to the degree seen in years past. Our expectation that foreign stock markets will lag those in the US hasn’t changed; many foreign economies are dependent on the US purchase of their goods, so it’s up to the US markets to lead the way.
U.S. STOCKS
With price-to-earnings multiples of 18.2 and 16.4 on 2008 actual and 2009 expected earnings, respectively, we find US markets remain fairly valued to slightly expensive. Stock prices have risen in recent weeks while corporate earnings expectations have continued to sag. We expect US equity markets remain range-bound with higher-than-normal volatility until they perceive economic improvement to be at hand.
Our preference for defensive sectors has diminished only slightly since the beginning of this year, having raised our weightings to Consumer Discretionary stocks in early March. We are, however, watching for the opportunity to increase our weightings to cyclical and beaten down sectors such as Financials and Producer Durables.
SOLUTIONS
Performance will probably lean on income production more than capital appreciation in the coming year. Taking advantage of this opportunity, HIA is developing strategies that will combine the lower volatility of high quality bonds with the attractive and stable dividends from defensive common and preferred stocks and other asset classes. These strategies will generate substantial income with less risk than an equity-only product while offering some capital appreciation potential.
Finally, a reminder: There’s no such thing as an all-purpose investment. Market forecasts like this one offer a comparison of expected return versus an asset class’s historical return and against other types of assets; they’re not meant to offer an explicit recommendation about which investments are appropriate for any specific investor. That’s determined by each investor’s unique circumstances and goals and is best evaluated by experienced advisors who offer objective advice – like Harmonic Investment Advisors.
Apr 29th
“Advance” 1Q09 Gross Domestic Product
Author: Kenn Lamson
Comments: 0
The Commerce Department reported that the “advance” estimate of first quarter real Gross Domestic Product fell 6.1%, on an annualized basis, from the fourth quarter of 2008. Today’s reading was marked by a continued downturn in exports, business investment and housing construction. Positively, consumer spending rose 2.2% in the first quarter. Excluding the effect of inflation, the US economy contracted at a 3.5% annual rate.
GDP has now fallen for three consecutive quarters, a streak that hasn’t occurred since the recession of 1974-1975.
As noted above, consumer spending, which represents about 70% of US economic activity, increased by 2.2% after negative readings in the past two quarters. While this rebound could be dismissed as a snap back from unsustainably negative readings, it’s worthy of note that the increase was mostly driven by spending on long-lived (and often more expensive) durable goods.
Unsurprisingly, investment in housing continued to spiral downward, falling 38% on an annualized basis in 1Q09, subtracting 1.36% from GDP. This decline was offset by international trade, which contributed 1.99% to GDP as exports declined less than imports.
A sharp decline in business investment in inventories, which hampers the economy in the short run, is both necessary and beneficial in the longer term, as companies resume a more normal pace of production in coming periods.
As noted, today’s release was the “advance” figure that is based in part on incomplete and estimated data. As with each Commerce Department GDP estimate, today’s release is subject to two additional revisions, which are labeled as “revised” and “final”.
Harmonic Investment Advisors believes that 4Q08 marked the bottom of this economic cycle. However, as noted in earlier commentaries we anticipate that the US economy will remain in recession throughout this year. Consequently our tactical asset allocation, sector weights and security selection remain skewed towards defensive and high quality equities and fixed income investments, although we began earlier this year to tilt our models towards a more neutral position to take advantage of attractive valuations and an economic recovery, albeit one that will likely be slow and fitful.