The US economy will return to growth in 2002 after a difficult 18 months that have seen equities und...
The US economy will return to growth in 2002 after a difficult 18 months that have seen equities underperform.
The monetary stimulus aggressively injected by the Federal Reserve over the past 12 months is finally expected to bear fruit over the course of the year, but opinion is divided over when this return to growth will materialise.
David Rough, group director of investments at Legal & General Investment Management, says Alan Greenspan is likely to keep the Fed Funds rate below 2% for at least the first half of the year to maximise the potential for growth. With weak oil prices providing an added stimulus, Rough says a US recovery is virtually guaranteed.
He says: 'Although it may already be over the worst, growth will only return in the second half of 2002. This return to growth will be driven by the monetary stimulus that the Fed injected during 2001.'
Further redundancies and earnings downgrades will make the first quarter a difficult one though, according to Susan Everly, manager of the Credit Suisse TransAtlantic Fund, but she anticipates a slightly earlier recovery.
Everly says: 'We expect the market to rally in the second quarter of 2002 after a difficult first.'
She expects the market to start to see through the bad results prior to the earnings season. There will be winners and losers, however, and, Everly says, areas like capital goods and transportation will outperform due to a rebound in the manufacturing sector, while healthcare will also post strong numbers on the back of stabilising earnings growth.
Everly expects financial services to underperform over the next 12 months owing to concerns over deteriorating credit quality. Also likely to underperform are utilities, which are overvalued, and consumer staples, because of worries about the ongoing strength of the US consumer, she adds.
Mike Lenhoff, chief global strategist at Gerrard, is concerned about the outlook for US consumer spending. Lenhoff says consumer spending was weak over the first half of December, the acid test for such spending. He believes the consumer will continue to suffer in the wake of further corporate cost-cutting and therefore the anticipated recovery will not be consumer-led.
Lenhoff says: 'The initial sign of recovery should come from the corporate sector itself, once inventories have been run down further and new orders increase. That in turn will stimulate output, raise capacity utilisation and, in time, raise investment intentions. The equity market will not wait for all of this to happen but once it feels the prospect is in sight, it will move ahead.'
Lenhoff still remains confident that recovery could come in the first quarter and adds that a further, and probably final, rate cut is not out of the question.
He says: 'By May, the recovery induced by last year's reduction in interest rates should be evident. That will be the Fed's third meeting of the year and by then, its bias is likely to have shifted to neutrality.'
The Nasdaq may have to undergo a period of consolidation following its 40% post-September 21 low, Rough adds, although this is only likely to postpone and slow growth, rather than negate it.
Recovery anticipated 2002.
Possible further rate cut in 1Q.
Manufacturing expected to rebound.
Nasdaq to undergo consolidation.
Low 2002 consumer demand.
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