 |
The rate of GDP growth in
the first quarter appears to have slowed further from
the anemic 0.6% rate of the 4th quarter of 2007. We
expect first quarter GDP growth to turn out to be flat
to slightly positive. This has been a consumer led pull
back. Although personal consumption expenditures were
up in January and February, they were probably flat
to down in March. Consumers have seen their net worth
decline as both housing prices and the stock market
continued to slide. Food and energy have continued to
take an increasing share of the wallet. Tight credit
markets have affected, and will continue to affect,
both consumers and businesses. Mortgage rates have not
come down as much as Treasury Bonds and credit is tight
for consumers. Credit availability or the lack thereof,
is also affecting businesses. This has led to the services
sector weakening, as well as a slowdown in durable goods
orders. Tight credit is a result of the deleveraging
of the financial services industry, which will continue
for a while.
For the full year, however,
we believe that the US will narrowly avoid recession
and that GDP growth will be in the 1 - 2% range. Core
inflation will run around 2% but headline inflation,
thanks to stubbornly high food and energy prices, will
remain 3.5 - 4%. We expect productivity growth to remain
positive and interest rates to come down further. Meanwhile
the weak dollar and stronger economic growth outside
the US will continue to be good for exports. All these
factors, plus the fiscal and monetary stimulus already
in the system, will provide support to GDP.
The biggest risk remains
the job market. So far initial jobless claims and the
unemployment rate have stayed relatively low and out
of recession territory, but are moving up. If, however,
they spike up, that will bode ill for the economy. Additionally,
any energy supply disruption or global turmoil could
hurt the economy and the stock market. Finally, we expect
the process of credit normalization to continue. Until
last year, credit defaults had been running at very
low levels by historical standards. The woes of the
mortgage market have been now well publicized but we
expect to see further deterioration in consumer credit
card debt and in commercial credit, as default levels
go back up. The upcoming Presidential election will
also inject some uncertainty into the financial markets.
Reflecting the weakness
in the economy, we expect further downward earnings
revisions, which may include more major write-offs in
the finance sector. We also do not anticipate the P/E
of the stock market expanding in the near term. As a
result, the market will continue to be choppy. But as
certain oversold areas rebound, we still expect the
overall US stock market to be able to eke out a single
digit positive return this year.
We have been underweight
financial and consumer stocks for the past six months.
As some of the economic and financial turmoil subsides,
we expect to add to those sectors in the portfolio.
|