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1st Quarter 2013
The U.S. stock market had
a strong first quarter in 2013. The S&P 500 rose
10.6% (reaching an all-time high). The Russell 1000
was up 11.0%, the Russell Mid Cap 13.0% and the Russell
2500 12.9%.
We still expect U.S. GDP
growth of around 2% in 2013. Recent economic reports
suggest robust first quarter GDP growth but this forecast
comes off a very weak fourth quarter 2012 report. While
consumer spending is running at around 3.5% this quarter,
it has been fueled by a worrying drop in the personal
savings rate. The economy, too, is not yet reflecting
potential effects of tax rate increases or the "sequester",
with the attendant fiscal drag. Inflation and interest
rates are likely to stay low, which are positive factors
- the US's energy boom will help keep prices down and
help consumers. Housing continues to perk up and the
job market is improving. Corporate profits should continue
to climb at a modest rate, since we expect revenues
to rise. Meanwhile Europe remains in recession and China's
market has been flat which is unhelpful for U.S. exports.
We believe the U.S. stock
market will continue to rise modestly from now until
year end. The valuation of the S&P 500 is fair on
a trailing basis and is slightly undervalued on forward
measures. Compared to the 2007 stock market peak, the
S&P 500 has halved its leverage, profits are 13%
higher, dividend yields are up slightly while interest
rates are down approximately 2.8%. The U.S. continues
to be viewed as a safe haven compared to other markets
and US stocks are relatively attractive compared to
competing domestic asset classes. This will provide
momentum for the "great rotation" as investors
continue to move into equities in search of better returns.
The years since 2000 have
highlighted, however, the fragility of financial markets
in times of stress. At time of writing, the crisis in
Cyprus appears to have abated but another such crisis
in a larger economy could threaten bank and financial
system safety and send world markets lower. There continue
to be geopolitical instability on the Korean Peninsula
and the Middle East. There will also be some uncertainty
around the timing and impact of the ending of the Federal
Reserve's easy money policy. On balance, however, we
stay bullish on U.S. equities.
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