During the second and third quarters, American households should recover as much as $6 trillion of the $14 trillion in wealth that they lost since the onset of the financial downturn last year,
Ongoing economic policies and strong cyclical growth will drive a stronger economic recovery than the markets expect, especially in the United States. “We have a lot of policy left to go,” said Larry Kantor, head of research at Barclays Capital. He expects that about half of the federal stimulus money devoted to infrastructure will be spent in 2010. “Economic data will be better than expected, particularly in the U.S.,” Kantor said. “The recovery is not fragile. It has a lot more to run.”
Barclays recommends that investors favor equities over corporate credit, with a focus on cyclical sectors such as industrials and technology. Current profit margins in the industrial sector suggest that they are likely to hit bottom at nearly 120 basis points above the lows of the prior business cycle. Also, margins will bottom out sooner than they typically have at this point in the economic cycle, owing to substantial inventory liquidation. In the technology sector, several semiconductor companies have increased their quarterly guidance in the middle of their quarters. Furthermore, analyst opinion continues to improve about the sector. In addition, electronics was one of the strongest categories in August retail sales reports.
Aided by stronger industrial output and a more robust technology sector, Barclays expects U.S. GDP growth to reach almost 5% for the next six months, with 4.5% of that growth occurring in the second half of 2009. That will precipitate a strong recovery and stronger employment numbers. Kantor pointed out that even though the general market believes that unemployment will increase to 10% and stay there for a while, Barclays Capital projects unemployment to fall to 9.1% and 8.8% by the third and fourth quarters of 2010, respectively.
