The best news for investment firms in recent months might be the simple pronouncement the recession is over. At least that’s the word from the Business Cycle Dating Committee of the National Bureau of Economic Research, which declared the Great Recession ended in June 2009.
For some investment analysts, the pronouncement reflects improvement in some economic indicators and is more than just a psychological lift for businesses and their employees.
“Corporate earnings are much stronger than I thought possible,” says Doug May, president of May-Investments in Grand Junction. May says companies have cut costs, improved profits and are helping the stock market. May says such indicators fly in the face of his prediction of a double-dip recession.
Yet, he isn’t rescinding the prediction just yet. “I think the broad perception in headlines (for news stories) will worsen in the next couple of months.”
News of economic downturns can also harm investor confidence, which has a real effect on markets. “A lot of this is perception and confidence-based,” May says.
May’s investors give his firm the reins when it comes time to shift funds from one section of the market to another.
The trust in the firm paid off for many investors in 2007 and 2008, when May predicted the financial downturn that began in the fall of 2008. He converted large portions of investment portfolios from stocks to lower-risk bonds prior to the recession. As for more recent predictions, May says he forecast an unemployment rate hovering around 9.5 percent and a 2 percent gain in the gross domestic product this year. Both predictions look fairly accurate so far.
As for the next year or so? He might reconsider the advice to invest in bonds due to concerns about a “bond bubble.” Much as heavy investment in Internet companies and real estate created short-term demand and unsustainable prices, investment analysts worry about a downturn in the bond market.
One reason to worry is investors have pumped $537 billion into bonds and mutual funds in the past three years —roughly the same investment as the stock market realized from 1997 to 1999, prior to the dot-com bust. Should interest rates rise, as some analysts have expected for months, bond yields will generally drop.
“There’s enough reason to be concerned with bonds,” says Justin Reed, financial advisor for Waddell and Reed in Grand Junction. But as during the stock market boom times, bonds are providing some good times for investors. Reed says his company features a bond fund paying off at annual rate of 9 percent.
He suggests that investors shouldn’t bail on bonds, but should follow the traditional advice of diversification of investments.
May doesn’t think a bond bubble is waiting to burst because the size of the bond market is much larger than the stock market. That $537 billion investment represents just 1 percent of the bond market, whereas the same figure is about 5 percent of outstanding capitalization on Wall Street.
Financial advisors point to the importance of risk-tolerance when deciding the best move for a client.
“The best investment really has to do with the goal and time frame of the investment,” says Jim Roland, financial advisor for Edward Jones in Grand Junction. “You don’t want to use short-term investments for long-term gains.”
When aiming for a long-term gain, Roland says the stock market is still a good option over a 20-year period. For a short-term investment, a certificate of deposit might be the best choice.
Individual decisions about investments should depend on the risk tolerance of the investor and whether retirement is near or far away, analysts say. If investors don’t have many years in which to realize a return, lower-risk investments can make more sense.
“You can’t count on the past” when it comes to a short-term prediction for the stock market, says Reed.
May is hopeful a rebound in the energy business and a stepped up alternative energy sector will help improve conditions. He also says an upturn in the auto industry is feasible, while improvement in real estate sales and prices will happen more slowly.
Early last year, May predicted emerging industrial powers such as China would lead the world out of the recession. He still sees emerging markets as a key to continued recovery. And he says wise investors will realize many people in places like China and India will increase their use of packaged foods and soft drinks before they’ll buy second homes in resort areas. So he’s keeping an eye on companies that meet such basic demands.
“The 80 percent outside of the United States and Europe will be using light, heat, food and clothes (at an increasing rate),” says Roland.
He cautions investors to understand that trends which occurred in the past might not return. For example, he says baby boomers who thought they’d be in better financial shape might bemoan the days of double-digit percentage increases in their investment portfolios.
But they also might forget that they’ve done pretty well over the past 20 years. They might be wise to drop the dreams of those large returns and deal with current opportunities.
“So many people are concerned with the bad news,” Reed says. “There’s a lot of good information out there. So many areas are doing well.”
Reed forecasts slow growth in the coming year or so. He foresees extension of some of the Bush-era tax cuts as reason to spur business growth. However, he suspects businesses that realize more income are bound to stash some of the money due to uncertainty about regulation and taxes under the Congress that will govern next year.
As for the unemployment rate, May says analysts who look for jobs to lead the way to prosperity are looking at the picture in reverse. “Employment will follow a real recovery,” he says.
Two giants in the recovery could be the technology and health care sectors, he said. In health care, profits are about 20 percent higher than in 2008, he says.
Science and technology funds were at the forefront of a recent presentation from Waddell and Reed during an annual client meeting.
Such funds will likely pay off, but require risk-tolerance, Reed says. He says a typical pattern for new technology is that it does well and provides a good return on investment when first introduced. Then the technology has some problems that need to be ironed out, and the returns level off or drop. Finally, the technology might take off faster than ever when the kinks are worked out, providing a long-term gain.
“Our fund manager is looking at technologies used everyday and by everyone,” Reed says.
Over the past 60 years, the science and technology fund has averaged an 11 percent annual return, he adds.
As for the short-term, May says history suggests the rest of the year will bring good news. Stocks generally rise over the final three months of a year that features a mid-term election, he says.
No matter how an investor dices the numbers and predictions, he can be reasonably sure 2011 will bring both expected and unexpected developments. As the new year approaches, it could be a good time to review investment plans.