KNOWLEDGE CENTER

The Global Portfolio Strategies Group recently released its second-quarter economic outlook. Below is a summary of its conclusions: 

• There is no disputing that economic growth has slowed in the U.S. and elsewhere. We would argue that this is another economic soft patch that will eventually resolve itself. 
• Most economists are looking for a rebound in U.S. gross domestic product (GDP) of close to 3% during the second half of the year, which is similar to the growth estimated for the first half. 
• There are still a variety of formidable headwinds that will likely impede overall growth and job creation, such as higher energy prices and a weak housing market. 
• Fiscal and monetary policies appear to have lost their potency as positive economic forces. While we think the extraordinary measures pursued by the government during the crisis period helped prevent an even deeper recession, we think the economy and the financial markets now would benefit from less government intervention. 
• It’s our contention that the U.S. is at the beginning of a profound shift toward actually dealing with such knotty problems as the unsustainable trend in public-employee pension and health-care benefits, the looming Medicare and Medicaid crises, overleveraged household finances, the housing overhang, and budgetary issues. 
• In the absence of a Greek meltdown or a financial accident among the weakest members, the needs of the European core will drive economic policy. We believe the European Central Bank will continue to cautiously raise interest rates over the next year in a desire to normalize monetary policy and short-circuit inflationary pressures. 
• In general, we are turning more cautious on emerging markets. Inflation remains a serious concern, and the danger exists that governments will be forced to take measures that slow their economies more than investors anticipate. 
• SEI has held to an overweight in equities (emphasizing U.S. large stocks) versus investment-grade debt. While this bet lost ground during the second quarter, we’re confident stocks will rebound relative to bonds. As business activity picks up, stock prices should respond positively relative to fixed-income assets. 
• We also favor corporate debt over the sovereign variety, and U.S. high-yield bonds over investment-grade. 
• Regionally, we favor a tilt toward U.S. equity versus Europe and Japan.

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Second Quarter 2011: Economic Outlook: A Sense of Deja Vu