By Peter Goetz, fund manager at US Large Cap Portfolio Manager for Dresdner RCM Global Investors ...
By Peter Goetz, fund manager at US Large Cap Portfolio Manager for Dresdner RCM Global Investors
Although still positive, recent economic data points to a deceleration in economic activity from the first quarter's robust pace, as well as a lack of follow through from the turn in the inventory cycle.
The Federal Reserve alluded to just such a scenario in the FOMC comments from last March's meeting when describing the unfolding recovery.
However, investors appear to be giving more credence to the risk that final demand might not materialise as soon as was hoped.
This view was probably bolstered by comments from a number of companies, especially in the more cyclical industries including technology, suggesting that business activity remains weak and that the outlook continues to be uncertain and difficult to forecast.
The consumer has continued to hold in, fuelled by the ongoing strength in housing.
Technology and telecommunications stocks have been especially weak throughout the year, as the fundamentals for these businesses continued to be challenged.
Consumer staples stocks have performed well, viewed as a safe haven in this difficult market, as have stocks tied to the strength of the housing cycle.
We continue to maintain our cautious outlook for the market and the economy as a whole. While it is clear the economy has indeed turned the corner, we question the strength and sustainability of the recovery.
This was not a typical downturn and, therefore, expectations of a typical recovery seem misguided.
The economy in the second half will probably not be as robust as many stock prices appear to discount.
The size of existing private sector debt built up during this business cycle, by both consumers and corporations, will act as a head wind on economic growth going forward.
Stocks are likely to be caught in a trading range over the near-term and sentiment is likely to remain volatile. Positive news on the economic front and on earnings is likely to be offset by negative news on those same subjects.
In addition, concerns about the quality of earnings and relatively expensive valuations will combine to keep a lid on stock price appreciation.
Other issues that could negatively impact the economy and stock prices include fear of rising interest rates, rising current account and budget deficits and a weaker US dollar.
We remain somewhat defensive but have recently been adding to stocks that fall into two camps: those that will deliver outstanding earnings regardless of the strength of the recovery and those that will benefit from an improving business climate and where valuations are still reasonable.
Year-over-year earnings have troughed.
Improving earnings expected for 2003.
The Fed is unlikely to raise short-term rates.
Growth is decelating from Q1's strong pace.
Concerns about US accounting integrity.
Fund flows exacerbated by weak dollar.
Has run Cautious Managed fund since 2011
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Invested from 2006-2011