Investment outlook

Jim Swanson

By Phil Castle, The Business Times

 James Swanson tells what he considers the “other side” of media stories focusing on bad economic and financial news.

            Despite election-year reports to the contrary, the news is mostly good, Swanson contends. The United States economy remains stable with record corporate profits, rising consumer spending and an improving housing market. Moreover, the stock market continues to offer investment opportunities.

            “For some reason, the media aren’t telling you the other story out there. …. There ought to be the other side of the story,” said Swanson, investment officer and chief investment strategist for MFS Investment Management, a Boston-based firm with nearly $300 billion in assets under management.

            Concerns persist, though, Swanson said, among them rising gasoline prices and a looming “fiscal cliff” with the prospect of higher taxes and government spending cuts. Mounting federal debt and unsustainable spending for Medicare, Medicaid and Social Security programs pose additional threats.

            Drawing on his more than two decades of experience with MFS Investment Management, Swanson offered a wide-ranging analysis in a Grand Junction presentation hosted by the Oakley, Wanebo, Love and Keller wealth management group of Wells Fargo Advisors.

            Swanson first addressed conditions in Europe and China before turning his attention to the United States. Europe faces recession not so much as a result of rising debt, but uncompetitive labor costs driven higher by government interference, he said. The problems aren’t likely to escalate into a banking crises, however, or result in the breakup of the European Union and a return to separate currencies. And Swanson doesn’t expect Europe to drag the U.S. or the rest of the world into recession. “It’s not pretty. But it’s not the end of the world.” In China, growth slowed as interest rates were ratcheted higher to curb inflation, Swanson said. But more robust growth is likely to return next year. What’s more, China and other emerging countries offer investment opportunities as they move toward consumption cultures. In the United States, the economy remains “sturdy and stable,” Swanson said.

            Corporate profits have reached record heights as companies have found ways to increase earnings in the midst of modest economic growth overall, Swanson said. Those profits in turn have improved cash flow, reduced debt levels and eventually will lead to job growth. “The fuel of this engine of the economy is there.” U.S. companies continue to profit from some of the lowest labor costs per unit and the second highest productivity level in the world, he added.

            Consumer spending has rebounded in terms of everything from retail sales to airline travel and even cruises, Swanson said. As workers put in longer hours and earn more wages, consumer spending likely will increase further.

            The crash of the housing market in the U.S. and resulting loss of construction jobs is partly to blame for continued high unemployment rates, Swanson said. But the housing market has shown signs of improvement with increasing sales and shrinking inventories, he said. “I think  we’ve seen the bottom.”

            Lower prices and record-low mortgage rates have made housing more affordable than ever and likely will turn more renters into homeowners, he said.

            At the same time, though, rising oil and gasoline prices remain a concern. When gasoline prices rise to a certain proportion of disposable income, recession usually follows, Swanson said. At current levels, that’s about $4.25 a gallon. Swanson said he expects gas prices to moderate in the short term. But threats loom on the horizon. If Iran were to make good on threats to close the Straight of Hormuz if attacked, the country could block the flow of fully 20 percent of the world oil supply. Iran alone accounts for another 5 percent of the world oil supply, he said. A substantial interruption in oil supplies could send gasoline prices higher.

            Meanwhile, a “fiscal cliff” looms in the United States with higher tax rates and government spending cuts scheduled to take effect at the beginning of next year unless Congress acts beforehand, Swanson said. While Congress probably will wait until the last minute to swerve away from the cliff, Swanson expects action nonetheless that could include higher tax rates for the wealthy, although not the middle class, as well as delays in government spending cuts.

            The long-term problem of mounting government debt remains, however. Unsustainable spending on Medicare, Medicaid, Social Security and the new health care legislation exacerbate the problem, Swanson said. Research has shown that as public debt levels approach the value of the economy, economic growth slows, he said. In the U.S., the national debt equals gross domestic product, the broad measure of goods and services produced in the country. Congress isn’t likely to address the situation until there’s a crisis, however, he added. For now, Swanson said recession doesn’t yet appear on his “radar screen.”

            Business cycles in the U.S. average about five years in length, and it’s been three years since the official end to the last recession, he said. Moreover, there are no signs that conditions that have triggered recessions in the past soon will happen again. Of the 11 recessions that have occurred in the U.S. since World War II, nine were caused by increases in interest rates meant to curb inflation. The other two recessions were caused by bursting bubbles — heavy investments in technology companies in the 1990s and the buildup in the housing market prior to the Great Recession, he said. Swanson said he doesn’t expect interest rates to increase for another one or two years. “I don’t see any bubbles bursting,” he added.

            The stock market continues to lag behind rising corporate profits, he said. Stock prices have increased about 120 percent since the most recent low point in March 2009. But markets rebound on average 170 percent to 180 percent, so there’s room for improvement, he added.

            U.S. stocks offer some of the best investment opportunities, especially dividend-paying stocks and technology sector stocks, Swanson said. Municipal bonds and emerging markets also offer good opportunities, he added.

Even as media reports portray the situation differently, the sky isn’t falling, Swanson said. “Don’t buy into the Chicken Littles of the World.”

Phil Castle is editor of the Grand Valley Business Times, a twice-monthly business journal published in Grand Junction. Castle brings to his duties nearly 30 years of experience in editorial management positions with Western Colorado newspapers. In addition, his free-lance work has appeared in a variety of publications, including the Washington Post. He holds a bachelor's degree in technical journalism from Colorado State University.
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