BETTING ON TIPS, From Stephen J. Huxley, chief investment strategist, Asset Dedication
Buying and holding TIPS to maturity to supply a predictable stream of inflation adjusted income appears to be an even better strategy now than it was last year. Advisors who build immunized TIPS portfolios can manage market risk, default risk, reinvestment risk, along with inflation risk.
The breakeven point between TIPS and Treasuries has dropped since last year. Late last year, it would have taken an inflation rate of about 1.5% for TIPS to beat Treasuries over the next five years and 2.2% over the next ten years. Now it will only take an average inflation rate of 1.4% for TIPS to be a better deal over the next five years, 1.8% over the next ten years.
Historically, the chances are about 80% to 85% inflation will be higher than these rates over all 5-year and 10-year spans going back to 1927. This includes the Great Depression, of course. If one goes back only to 1947, the chances are about 90% for both five and ten years.
U.S. ECONOMY SHOWS RESILIENCE, From Liz Ann Sonders, senior vice president and chief investment strategist, Charles Schwab & Co.
While there remain many headwinds to the global economic recovery, we believe the United States has moved from recovery into a more-sustainable expansion, and we're optimistic on the equity market's prospects. In fact, the time it's taken for gross domestic product to reach prior highs, a feat completed by nominal GDP in the first quarter, has been relatively short, historically.
While talk has been growing of the possibility of a "double-dip" recession, fairly consistent economic indicators such as the yield curve (currently quite steep) and the Index of Leading Economic Indicators (LEI) suggest that the possibility of such an event in the near term is remote. The market pullback we've seen over recent weeks, with the Dow Jones Industrial Average posting its worst May performance in 70 years, has been disconcerting, but we believe it's more likely a relatively normal correction than the start of something more ominous.
Despite concerns growing about the global economy, led by Chinese economic growth slowing, the European debt fiasco and Japan's prime minister resigning, the US economy continues to show resilience. We're likely in a "soft patch," but that's not abnormal at this stage in the economic cycle; in fact, we've been anticipating a peak in the leading indicators, which often ushers in heightened volatility.
We expect housing data to be generally weak in the coming months as we "pay back" the gains seen in the past couple of months. Digging deeper, we can see that housing appears to be stabilizing and the prospects for more improvement are decent. Additionally, we've seen the jobs picture improve, notwithstanding last week's weaker-than-expected private payroll gains, with an average of about 200,000 jobs added to the US economy between January and May.
MOMENT OF TRUTH FOR EQUITIES, From Ibra Wane, strategist, Amundi Asset Management
Having reached new highs in mid-April, the markets plummeted even though quarterly results were up to expectations, valuations were not overly rich, and a concerted solution for the eurozone had just been unveiled. The surge in risk aversion was fueled by several factors. In Europe, the consequences of deficit-cutting could counteract the boost to exports from a weaker euro; in the United States, the recovery might actually be weaker than it seems because some of the drivers, such as the inventory cycle and fiscal and trade multipliers, will taper off; sustained momentum in emerging economies may falter because of preventive tightening and currency appreciation.
There is also uncertainty about the long-term pace of growth in developed economies against a backdrop of deleveraging. There is also the “echo chamber” effect that is particular to equity markets which can amplify imbalances. Moreover, a debate about the level of long-term interest rates has gradually edged out traditional concerns about earnings visibility and growth. And it undermines the argument that is generally favorable to valuations. If long rates were to rise because of an overall savings shortage, then the equity risk premium, currently generous, would become only relative.
THE WEEK IN REPORTS
Monday, June 14:
4-Weel Bill Announcement
Tuesday, June 15:
Housing Market Index
Wednesday, June 16:
Producer Price Index
Thursday, June 17:
Consumer Price Index