2011 Economic & Investment Outlook
Advisors Capital Management
By Charles Lieberman
January 3, 2011
The outlook for economic growth has improved considerably over the
past few months, lending support to our judgment that growth will be in
the 3.5% to 4% range in 2011. Most importantly, this pace of expansion
will require increased hiring by firms, so the unemployment rate should
decline this year, falling below 9% by yearend. Interest rates should
continue to rise, returning to more normal levels, while stocks should
have another solid year.
Economic growth was gathering momentum early in 2010, when it was nearly
derailed by the credit crisis in Europe that served as a painful
reminder of our 2008 credit crisis experience. U.S. exposure to Greece
and Ireland was minimal, but that didn't stop households and businesses
from turning more cautious in their spending programs. Even so, as the
situation in European stabilized, spending improved here in the U.S.
A stronger economic recovery remains very likely. Monetary and fiscal
policies are aligned to promote stronger growth. Corporate profit
margins are near the previous cycle high and companies are sitting on
almost $2 trillion in cash. Many companies have started stock buyback
programs. Dividends are being increased. Capital investment is
recovering. And merger and acquisition activity is rising. Policy is
getting the intermediate results that it is designed to accomplish and
faster GDP and job growth should follow, most likely, quite soon.
The outlook for the housing market remains exceptionally contentious;
many people suggest that the high level of foreclosures will cause more
weakness that will persist for a few more years. We disagree. Home
construction has been severely depressed relative to the underlying
trends in household formation, creating enormous pent up demand for
housing. Inventories of unsold new homes are now at 40 year lows, so
the inventory glut built during the housing bubble is gone. Pent up
demand for housing will not become unleashed until job growth improves.
But as jobs are created in 2011, we expect investors to be surprised by
the rebound in housing.
Our macroeconomic views imply that the equity markets should continue to
perform well in 2011, possibly even better than in 2010. In contrast,
the healthier economic environment we envision suggests that the bond
market could perform quite poorly, continuing its fourth quarter swoon.
So, we remain biased towards economically sensitive equities and are
avoiding staples and other cyclically insensitive companies. We have
also reduced our bond holdings to minimal levels, substituting floating
rate bonds or convertibles, where possible.
The outlook, as always, is subject to surprises and assorted risks. The
plight of Greece and Ireland has not been resolved, as yet, and market
concerns could spread to Spain, Portugal and others in Europe. State
and local government finances are a mess domestically and the situation
could become disruptive, if investors become leery about lending them
more money while they try to get their finances in order. There is no
shortage of political hotspots around the world, from Korea to Pakistan
to Afghanistan to Iran to Iraq to Syria to Venezuela. And these are
just some of the hotspots we know about and its far from an exhaustive
list. So the safest bet is that something disruptive will occur, but a
solid expansion should continue barring any extreme event.
(c) Advisors Capital Management
