Monday, January 12, 2009

Light at the end of the tunnel

Experts see rebound in 2nd half thanks to stimulus jump-start

Pensions & Investments

By Robert Porterfield and Timothy Inklebarger

Posted: January 12, 2009, 12:01 AM ET

James Swanson

The economy will rebound in the second half of this year, fueled by federal government stimulus and consumers reopening their pocketbooks, money managers, economists and investment strategists say.

“The good news is that fiscal and monetary authorities are throwing their kitchen sinks at the crisis," said Jay Feldman, director of economics at Credit Suisse Securities LLC, New York. But, he cautioned, “the policy medicine is also very experimental and there are no guarantees it will work. Any outcome will be determined more by the political process than by the underlying economic process than at any time in recent memory.” ...

“It’s difficult to look around corners and say when this is going to bottom out and what shape we’ll be in,” said Chris Probyn, chief economist for State Street Global Advisors in Boston, “but I expect moderate recovery in the second half based upon aggressive federal policy and reaction to it.”

Many experts agree that gross domestic product will be down 3% to 5% in the first quarter and flat during the second quarter, perking up in the last half of the year.

Mr. Probyn and others believe the key tests will be what happens after the housing market bottoms out — perhaps later this year — and whether debt-burdened consumers loosen their grips on their wallets.

Matt Eagan, vice president of Loomis, Sayles & Co., Boston, said consumer spending would continue to be a drag on the GDP, but the government’s Troubled Asset Relief Program and subsequent government spending by the incoming Obama administration would serve to offset the impact of consumer belt-tightening.

... If consumer spending drops 5%, that could be made up by $800 billion to $1 trillion in new government spending, ... Mr. Eagan said.

Optimistic view

James Swanson, chief investment strategist for Boston’s MFS Investment Management, is more optimistic that the consumer will drive the recovery. The tea leaves tell him “daylight comes this summer as low mortgage rates, government stimulus actions and housing availability” kick in.

“You just can’t get consumers spending,” said Mr. Swanson. “The credit mechanisms just aren’t there. But this downward spiral will stop.” ...

“I don’t think it will be a V-shaped recovery,” said Steve Walsh, chief investment officer of bond manager Western Asset Management Co., Pasadena, Calif.

He said consumption patterns will be significantly lower than in recent years, and the U.S. is entering a “slow-growth period” that would last longer than 2009 or 2010.

“Absent a quarter here or there, it might be a long while before we see 4% sort of growth,” he said. ...

“Housing led us into this merry mess,” said Russ Koesterich, managing director and head of investment strategy at Barclays Global Investors, San Francisco, “and the housing market is critical to recovery.” ...

Andy Stenwall, CIO of Nuveen Investments’ taxable fixed-income team in Chicago, said Nuveen’s forecasting models show the housing markets to return to normal by 2011.

“I think it’s a function of affordability,” he said. “If homes are down 30% to 40% and you can get mortgage rates at the 4% range, then that will entice people to step in.”

Assets are cheap

For financial institutions sitting on the sidelines flush with cash, or “healthy players” as James W. Paulsen, chief investment strategist for Wells Capital Management, Minneapolis, characterizes them, there will be bargains galore once the paralysis of investor fear that precipitated the economic crises subsides.

“The spark to watch for will be investors beginning to buy distressed assets in sufficient quantity for their prices to rise, boosting capital ratios of financial counterparties and encouraging lending to resume,” said Stuart A. Schweitzer, global markets strategist for JP Morgan Asset Management in New York. ...

“Illiquidity has exaggerated spreads in the corporate bond market,” he said, “and implied default rates are well in excess of anything witnessed in the past 25 years.”

Nuveen’s Mr. Stenwall said the high-yield market is his No. 1 pick for the year. He’s also betting on asset-backed securities, credit, structured products and foreign exchange. “We tend to balance our exposures,” he said.

... “Traditional valuation measures such as earnings and book value multiples, as well as in-house stock-bond risk premium, look highly attractive by historical standards, but considerable uncertainty hangs over the prospect for corporate earnings,” Mr. Schweitzer wrote clients in a recent report. ...

“So much money is now being parked in zero-return assets, but this will move into the market sooner or later,” MFS’ Mr. Swanson said. One sector Mr. Swanson thinks might be a good bet is large capital goods — engineering and equipment companies that will get a shot in the arm from a very huge infrastructure program proposed by Mr. Obama. Other sectors to watch, he said, are health care and technology.

Contact Robert Porterfield at and Timothy Inklebarger at

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