Phil Castle, The Business Times:
Doug May offers a decidedly more optimistic forecast of economic and financial conditions these days than just five months ago.
“I’m actually pretty upbeat today,” said May, president and chief investment officer of May-Investments in Grand Junction. “When you look at the facts, there’s a lot to be upbeat about.”
May expects the United States economy to expand, stock prices to trend higher and unemployment rates to retreat in 2012 even as what he terms a “fear bubble” pops.
While concerns over the debt crisis and a likely recession in Europe persist, May believes sufficient financial measures have been put in place to ultimately resolve those problems.
May’s forecast for 2012 follows a year in which what was initially a modestly bullish outlook turned bearish in August. As it turned out, there was a “disconnect” between a slowly expanding economy and a U.S.
stock market that remained in the doldrums, he said.
The economy reflected normalizing conditions with improving consumer confidence, increasing retail sales and lower jobless rates, he said.
Meanwhile, though, emotions continued to influence the stock market with high volatility, but no overall gains.
Even with no growth, the Standard & Poor’s index of 500 stocks fared better than major global markets, May said, especially those in emerging countries.
Gross domestic product in the United States, the broad measure of good and services produced here, rose at an estimated 1.8 percent in 2011, while the national unemployment rate fell to 8.5 percent.
May said he expects the slow growth that occurred in 2011 to continue in 2012 with 2 percent growth in GDP.
Given that consumer spending financed in large part by home equity loans boosted reported GDP before the recession, more modest growth in
2012 will still reflect expansion, he said. “I think, for a while, 2 percent is about as good as it gets.”
May also bases his outlook on his own leading economic index, which forecasts growth. Nine of 10 components of the index are strengthening, he said, including bank lending, corporate profits, drilling activity, money supply, new orders for manufactured goods, optimism among small business owners and retail sales. Only shipping activity, a measure of exports, has weakened.
“It is very difficult to put forth a bearish case,” he said.
Job growth should continue in 2012 as well, May said, pushing the jobless rate down another point to 7.5 percent.
While the Federal Reserve has vowed to keep short-term interest rates at historically low levels until at least mid-2013, long-term interest rates could move higher, he said.
The stock market will offer better opportunities in 2012, May said.
With corporate profit margins climbing to near all-time highs, the market remains undervalued, he said. May said he expects stock prices to increase 15 percent to 20 percent in 2012 with a 7.8 percent return on equity investments.
The stocks of companies in the technology sector should perform especially well, he said, while telecommunications stocks likely will continue to fare poorly.
The “fear bubble” will pop, May said, as consumer spending and investment improve. Even concerns about Europe will subside as people realize the reality of the situation isn’t as dire as the predictions.
“As far as I’m concerned, the sooner the better.”
May said he doubts Europe will avoid recession, but sufficient financial measures have been put in place to deal with sovereign debt and banking issues. “The bank trouble in Europe will be contained.”
Decreasing volatility in stock markets blamed on conditions in Europe support his view, May said. “I think the market agrees with me.”