Advisor Solutions - Volume 2 Issue 2 - 20

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black. While more than 1,500 large-cap-value funds posted an average loss of 37 percent, according to Morningstar Inc., Forester eked out a 0.4 percent return, putting the fund at the top of its peer group for the trailing one-, three- and five-year time periods. Today, Forester is looking at the same view, but from a different perspective. Although housing prices have settled back down to more reasonable levels, Forester worries that many banks have been slow to post these lower valuations on their books. He estimates that only about 30 percent of total real estate losses have been realized in the bank sector. When the banks do begin cranking up the foreclosures and writing off their bad loans, home prices could get hit again, putting even more pressure on the write-downs that the banks will have to take. “That’s still out there,” Forester says, which is why he isn’t putting too much stock in the market’s rebound off the lows it hit last spring. “There has been a relief rally. Everyone is relieved that we didn’t fall off a cliff,” he says. Others share Forester’s concern that while the worst may be behind for the markets and the U.S. economy as a whole, investors could still be in for a bumpy ride in 2010. That doesn’t mean opportunities won’t abound—they will—but finding them will take a high degree of skill and, most likely, patience. “We are looking at corporate profit growth of about 10 percent in 2010. That’s good from where we came from, but it’s not back to pre-recession levels,” says Beata Caranci, Director of Economic Forecasting at TD Bank Financial Group. She believes

market gains over the next 12 months will be more closely tied to fundamentals of the economy, rather than the sharp spikes investors saw in the second half of 2009. “Investors have to be prepared for volatility because nothing goes up in a straight line. There will be profit taking, and the recovery is still very fragile.” (See interview below.)
Mixed SignalS

Finding where the real, self-sustaining economic growth begins and government stimulus ends remains an issue. As a result, there are a lot more questions than answers about the global economy in the year ahead and the sustainability of the nascent recovery. “The biggest concern is, when the government does stop putting lighter fluid on the charcoal briquettes, will they remain lit on their own?”asks Sam Stovall, Chief Investment Strategist for Standard & Poor’s Equity Research Services. “The thought is ‘yes they will.’” Still, even if the economy can gain some traction from the stimulus, it’s going to be a slow climb back up, says Thomas Atteberry, co-manager of the FPA New Income Fund (FPNIX). The global economy could have trouble recovering to the level of expectations that have already been factored into the markets, he says, particularly given the amount of debt that both the government and U.S. consumers have taken on. “Government intervention, providing liquidity functions in the marketplace to get things moving, has gotten us to where we are,” he says. “But that’s not a sustainable, long-term

The Tide Is Turning
Beata Caranci, director of economic forecasting at td Bank financial group, tells advisors what they can expect from the global economy and the investment markets this year.

Q: What’s your view on the global economy? A: We’re watching a couple of things. Right now the world is going through the postrecession, pent-up demand pop. We had such a high degree of inventory drawdown in the past year that the global economy is in a position to rebuild these inventories in response to even small changes in demand. This has been happening quickly in the developing economies, particularly China and the newly industrialized Asian countries. However, even the U.S. has benefited from this phenomenon, as evident by a rebound

in production and double-digit export growth in the second half of 2009. We had a highly synchronized global downturn, so the rebound has also been synchronized. The question now is what happens once those global inventories are restocked? We anticipate a little fizzle factor in the first half of 2010 before you move into long-term sustainability in the rebound. For the U.S. this means that the strong bounce seen in the fourth quarter of 2009, which was largely due to an inventory swing, will give way to about two-and-a-half percent growth in the first half of 2010. That’s still growth, but the

magnitude of the economic rebound will be about half of what you’d expect during the recovery phase, especially when benchmarked against the magnitude of the contraction experienced in 2008 and 2009. Q: Do you expect to see a “V”shaped recovery? A: No. That “V” part where you are bouncing off the bottom is what we are seeing right now, but that will be very difficult to sustain considering the amount of slack still in the economy. Between a higher consumer savings rate and the massive U.S. deficits, the govern-

Advisor Solutions | Volume 2, Issue 2

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Advisor Solutions - Volume 2 Issue 2

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