The U.S. Economy
The latest U.S. economic data has been somewhat mixed. A
reasonably strong start to the year relative to investors'
expectations gave way to some softness heading to the summer
months. Growth concerns bubbled up again during the second
quarter 2012 and 'risk-off' remerged as the common attitude
across financial markets. While certain indicators have shown
signs of weakness in recent months, other statistics are clearly
improving. As these headwinds and tailwinds collide, thunder
clouds may form occasionally, dampening investor spirits.
However, the overall slow growth trend remains intact and we
continue to expect a muted pace of expansion going forward. In
recent years, we've often noted that growth may be variable from
one period to the next and as a result of this, investor
expectations could ebb and flow around the slow growth trend.
Amid the current growth scare, perhaps it is useful to take a
look at the things that are going right for the U.S. economy, in
addition to the areas that are more troublesome. Doing so helps
illustrate why we believe growth should persist, albeit slowly.
Examples of things that are going right, or perhaps more
accurately, factors that bode well for the economy today include:
lower gasoline prices, low interest rates and ongoing
improvements in the flow of credit, as well as signs of
encouragement in the domestic housing sector.
The average price for a gallon of gas in the U.S. fell to a five
month low in June. This gives consumers a little more flexibility
in their spending decisions. Falling gasoline prices do not
motivate consumers to increase overall spending, but rather allow
them to spend on a wider variety of items which is advantageous
to economic growth.
Interest rates are low and credit growth is moving at a solid
pace. On a year-over-year basis, Commercial and Industrial loans
(C&I) are growing at a double digit rate. Meanwhile, consumer
lending is expanding at a mid-single digit rate and has quickened
in recent months as compared to the same time last year. With
regard to housing, progress has been choppy, but the trends in
sales of both new and existing homes show improvement. Mortgage
rates remain at or near all-time lows and ongoing traction in
this aspect of the U.S. economy could become more constructive
for growth in the months ahead relative to the soft patch of the
past several months.
In contrast, other factors have become more tepid. For example,
the slide in equity markets during the second quarter dealt a
blow to consumer confidence. The Conference Board's Consumer
Confidence Index declined for a fourth consecutive month in June
2012, falling to 62.0 from 64.4 in May. At June's level, consumer
confidence is much improved from the lows experienced last fall,
but is still generally indicative of weak overall confidence.
Consumers are less likely to spend when they are feeling
uncomfortable about the economy and this weighs on the potential
for growth.
Job creation in the U.S. has also weakened meaningfully since the
end of last year. In May, payrolls rose by only 69,000, a
distinct slowdown versus the 200,000+ monthly run rate of new job
additions witnessed from December through February. Indeed, with
the year-over-year change in real disposable personal income
hovering below 1%, it's clear that consumers have limited
firepower to fuel a substantial near-term pickup in the domestic
economy.
U.S. economic growth remains fragile and susceptible to external
shocks. A spillover of substantial weakness from Europe, or
policy errors in addressing domestic fiscal challenges later this
year, may lead to intensifying downward pressure on growth. That
being said, growth expectations are generally well grounded today
which means that there is also a possibility of upside surprise.
Even the softer data are still indicative of growth and we are
not seeing signs of excess in the economy. Investor uncertainty
has been on the upswing in recent weeks, but as it pertains to
the U.S. economy, we believe investors can take comfort in the
fact that the slow growth trajectory remains in place.
The Global Economy
The situation in Europe remains very fluid, but recent news that
Greece was able to form a functioning coalition government
following its second round of parliamentary elections in as many
months is an incremental positive. With a
pro-European/pro-bailout majority leading the way in Greece, the
potential for a near-term Greek exit from the common currency
bloc is reduced. That being said, the month or so that Greece
spent in limbo did not help it move any closer to rectifying its
long-term structural problems, and made the situation perhaps
even more challenging. Fortunately, the Eurogroup agreed to
disburse the remaining ?1bn that was part of a ?5.2bn package
allotted for Greece after the May elections failed to form a
government. This should help Greece avoid larger disruptions to
its economic and financial systems in the immediate future as
European leaders continue to meet and discuss the best course of
action for Greece and the broader Eurozone.
The news out of Greece did not give the markets much of a
reprieve from ongoing uncertainty in the region, particularly as
other European nations, namely Spain and Italy, continue to come
under intensifying pressure. On the bright side, this latest
growth scare, with Europe at the center, has pushed equity
valuations across the continent to near 20+ year lows. While
there is no question that economic growth in the region will
remain challenged for the foreseeable future, the weakness is
creating attractive buying opportunities for long-term investors
in well-positioned, well-diversified European businesses that
operate globally.
Beyond Europe, China recently announced a noteworthy policy
easing move. The People's Bank of China lowered its benchmark one
year lending rate by a quarter percentage point, bringing it to
6.31%. The one year deposit rate was reduced by the same amount
and stands at 3.25%. Markets reacted favorably to the news,
interpreting it as a sign that Chinese policymakers will be more
active in supporting demand and stabilizing economic growth going
forward.
Inflation
The year-over-year change in domestic headline inflation
continued to decelerate in May, falling below 2% for the first
time in 16 months. The Consumer Price Index (
CPI
) rose 1.7% in the twelve months through May, slower than the
2.3% pace recorded in the year through April. Declining gasoline
and crude oil prices drove the bulk of the slowdown. Meanwhile,
the core CPI, which excludes food and energy components, remained
largely flat on a year-over-year basis with the prior month. Core
CPI rose about 2.3% over the twelve month period ending in May.
In most other global economies, inflationary pressures remain
generally well contained. The rate at which prices are rising
across many emerging markets is quicker than in developed
markets, but not so much that it is limiting the ability of
policymakers to address growth pressures within the global
economy. India, however, is a unique example. Economic growth in
India has been slowing, but prices continue to move higher at a
healthy clip. Still, given the persistence of global headwinds to
growth, we do not expect inflation to re-emerge as a primary
concern for investors in the near-term.
Our Perspective
Weakness in equity markets during June moved our valuation
indicators toward a more attractive area of the neutral range,
but not enough to signal a strong buying opportunity. Similarly,
sentiment has come under pressure and experienced modest
declines; however, the level of pessimism we are seeing is not
indicative of an ideal time to buy. Economic indicators are
leaning toward the riskier side of neutral, meaning that the U.S.
economy may be in the latter stage of the cycle, but excesses
have not been built up to a point which would suggest future
growth is unsustainable. Overall, we continue to advocate an
overweight allocation to equities relative to bonds today.
Amid the slow growth environment, we believe an active and
flexible investment approach, coupled with a disciplined
valuation framework, is the best way for investors to capture
absolute returns over the long-term. Subsequent bouts of
volatility are likely as economic data ebbs and flows around the
slow growth trend, but in our view, investors should continue to
focus on well positioned businesses with attractive long-term
industry and company-specific fundamentals. Our main goal today
is to identify companies with sustainable competitive advantages
that are poised to capture non-cyclical growth opportunities in
existing or new lines of business, and in both native markets as
well as abroad. We believe companies that display these
characteristics and can execute effectively in a slow growth
global economy should stand out in the long-run.
In fixed income markets, our preference continues to lean toward
opportunities we are finding in the corporate sector. Our main
focus is on investment-grade corporate bonds, although, we are
also employing a selective approach to value opportunities we see
in the below investment-grade corporate bond market. With regard
to Treasuries, we continue to prefer U.S. Agency (i.e., Fannie
Mae, Freddie Mac, Ginnie Mae) mortgage-backed securities over
Treasuries.
Analysis: Manning & Napier Advisors, LLC (Manning &
Napier).Manning & Napier Advisors, LLC. is governed under the
Securities and Exchange Commission as an Investment Advisor under
the Investment Advisers Act of 1940.
Sources: ABC News, United States Data Response: Capital
Economics, Bureau of Labor Statistics U.S. Department of Labor,
Factset, Financial Times, Reuters, ISI: International Strategy
& Investment, The Wall Street Journal, Businessweek,
Bloomberg.
All investments contain risk and may lose value. This material
contains the opinions of Manning & Napier Advisors, LLC,
which are subject to change based on evolving market and economic
conditions. This material has been distributed for informational
purposes only and should not be considered as investment advice
or a recommendation of any particular security, strategy or
investment product. Information contained herein has been
obtained from sources believed to be reliable, but not
guaranteed.
This newsletter may contain factual business information
concerning Manning & Napier, Inc. and is not intended for the
use of investors or potential investors in Manning & Napier,
Inc. It is not an offer to sell securities and it is not
soliciting an offer to buy any securities of Manning &
Napier, Inc.
Approved SMA-PUB006 USCDN (7/12)
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