Light at the end of the tunnel for the U.S. economy?

December 18, 2009

Kully Samra

- Kully Samra is UK Branch Director, Charles Schwab. The opinions expressed are his own.-

The last year was an unbelievable roller coaster ride in the financial world.  In the U.S. we saw the S&P 500 plunge to 667, a 12-year low, in March, and then rise over 60 percent from that low as the economy moved away from the edge of the cliff and started to recover.

As a result tried-and-true lessons were brought to light for investors, including knowing your risk tolerance, understanding what “long term” really means, and the ongoing benefits of diversification and rebalancing.

At Charles Schwab we remain relatively optimistic on the prospects for the U.S. markets in 2010 as economic conditions continue to improve. The U.S. economy has bounced well off the bottom and continues to improve, although not in a straight line, and the growing question is whether growth can be sustained.

However, we are careful not to be too buoyant in our beliefs and do suspect that gains will be much more muted than they have been since the March lows. This has already started to become apparent in recent weeks with the market moving more sideways than upward. In general however, we do believe that the trend is likely to remain higher.

We will be closely watching Washington in 2010, especially as government entities start to think about unwinding the massive stimulus measures put in place by both the Federal Reserve and the U.S. government.

We’ll also be watching the Fed as it considers when to start raising interest rates. At Charles Schwab we remain in the minority who believes rate hikes could begin before mid-year 2010.

It must not be forgotten that the 0 percent to 0.25 percent fed-funds-rate range was put into place during a financial emergency.

The U.S. is arguably out of the emergency room, making it difficult to justify extraordinary measures in perpetuity. Also, a rate hike of 50 or 75 basis points would still leave rates below 1 percent, arguably still extremely stimulative historically.

This view has also been reflected in our recently adjusted sector recommendations. We recently reduced our exposure to more cyclical sectors, as these tend to be the sectors that do well in the initial phases as an economic rebound.  Therefore, as we now believe that we’re moving into a less-volatile and more-congested sector environment, we have made appropriate adjustments.

In light of this more neutral stance, we have changed our outlook on the materials and industrials sectors to neutral from outperform, while also moving consumer staples and telecommunications to neutral, up from underperform.  This leaves us with an outperform view on the information technology sector and an underperform view on the utilities group.

The end of the year is typically a relatively quiet time for the market, offering investors a good chance to review their portfolio allocations and make sure they’re still consistent with their risk tolerances and return goals. Certainly, reviewing sector allocations should be part of that process as we position for the next stage of the developing economic recovery.

After what can only be described as a bumpy ride in 2009, at Charles Schwab we are feeling quite positive about 2010 and the prospects that the year may bring for investors in the U.S. markets.

Comments

A ROCK SOLID journeyman article. At Charles Schwab we remain relatively optimistic. BUT is that really so. No cigar. Derivatively optimistic is more to the Point. CERTAINLY I agree with you from your position and your genres position so certainly a very good article and summation by you here . However your singularity of position does not avail you of relativity as you are assuming vision of Value which I say you do not have and that you have derivative vision .

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