Market strategist reports economy, private sector looking optimisticWritten by Duane Ramsey | | firstname.lastname@example.org
“The U.S. economy, especially the private sector, is doing pretty well and looking optimistic,” John Augustine, chief market strategist for Fifth Third Bank, told an audience of the bank’s investment customers May 30 at the Toledo Club.
The current landscape of the U.S. economy is optimistic with consumption, investments and exports all being positive. The primary building blocks of the U.S. economy include housing starts, vehicle sales, construction, employment and exports, all of which are doing well.
“We hope you’re seeing it in your business. We need to get some of the balance sheets back into the economy,” Augustine told the audience of investors.
U.S. business has made an impressive rebound with corporate profits, capital expenditures, and capacity utilization all up. Business optimism, ranking higher than that of consumers’, had its highest reading since 2007.
U.S. stocks had the best performance in the first quarter of 2012 since 1998, Augustine reported. Stocks experienced a downturn in the second quarter due to the situation in Europe but are still providing an average annual yield of 3.94 percent.
Dividends currently yield more income from stocks than bonds. The earnings yield of the Standard & Poor’s 500 and the 10-year treasury yield show the largest separation since the early 1950s.
“It’s a rare occurrence, even abnormal, in an unusual environment. When it splits, it will be more profitable for stocks than bonds. We have to be ready when those lines of separation come back together,” Augustine said.
Government spending is the big unknown, he said. The U.S. government is now 24 percent of the economy with expenditures of nearly $2.5 trillion dollars. Most of the industrialized world is in the same position, he indicated.
“Europe has big issues and we don’t know how it’s going to turn out. It’s too close to call. It’s in the politicians’ hands this summer,” Augustine said.
“China’s economy is slowing down while in transition from export-based to domestic. It will be a several-year process,” he said.
Only 35 percent of China’s economy is based on domestic consumption, compared to 70 percent in the U.S. The export numbers for the two countries are almost exactly opposite.
Investors can expect a third consecutive summer of heightened volatility and stock correction. However, the U.S. is outpacing what’s going on in the rest of the world, according to Augustine.
“We have time to get our fiscal affairs in order in the U.S. Next year, we’re going to be facing what we call the fiscal cliff or the single biggest risk to the economy,” Augustine said.
He explained that the government is considering sequestered spending cuts of $250 to $300 billion with 14 different tax provisions due to expire on Jan. 1.
The elections will impact the market by creating volatility but will not have the finality we want, Augustine said.
“America is voting to get the Congress it wants over the next few two-year elections. In the end, they will make the right decision no matter who wins,” he said.
Augustine told investors to focus on five factors leading up to the elections and end of 2012.
- Investors need to rebuild or rebalance their investment portfolios.
- Businesses should maintain or increase purchasing power.
- Stocks are the new bonds, with lower valuations and higher income yields.
- Maintain a representation of real assets in their portfolios, including commodities, gold and real estate, to offset currency concerns.
- Be dynamic in their investment management.
Investing is about allocating capital today to produce average annual returns that exceed the expected inflation rate of 3.5 percent to 4 percent in 2012 and build future purchasing power.
Augustine recommends that all businesses and investors should have a written strategic plan with growth initiatives for the next three to five years.
Augustine specializes in portfolio management for Fifth Third Bank with $25.6 billion in assets under management. He heads the Funds Management Team and is a member of the Investment Policy Committee and Markets Strategy Team at Fifth Third.