Welcome to The Outlook archives, where you can view several past issues featuring our investment and economic thinking. The Outlook is available in both PDF* and HTML format. We recommend that you review the PDF format, as it is closer in appearance to our printed version.
Time to taper the tapering talk: Why interest rates and inflation rates matter more
“Making monetary policy is sometimes compared to driving a car, with policymakers pressing on the accelerator or the brakes, depending on whether the economy needs to be sped up or slowed down at that moment. That analogy is imperfect, however, for at least two reasons. First, the main effects of monetary policy actions on the economy are not felt immediately but instead play out over quarters or even years. Hence, unlike the driver of a car, monetary policymakers cannot simply respond to what lies immediately in front of them but must try to look well ahead–admittedly, a difficult task. Second, the effects of monetary policy on the economy today depend importantly not only on current policy actions, but also on the public’s expectations of how policy will evolve. The automotive analogy clearly breaks down here, for it is as if the current speed of the car depended on what the car itself expects the driver to do in the future.” Federal Reserve Chairman Ben Bernanke 11/19/13
Looking Through the Politics – Why Equities Should Benefit from A Low-Growth Environment
The character of the post-crisis US economy augers well for a period of continued low growth, low inflation, low interest rates and rising corporate profits. One of the reasons this period has been so challenging for investors is that we are operating in an economic and investment environment that is unprecedented. While certain characteristics of this period are reminiscent of those past, there are critical differences as well. Few investors have operated in an environment that enjoyed the prospects for reaccelerating US manufacturing growth along with expectations of continued low inflation and near zero interest rates for a sustained period of time. The political dysfunction in Washington highlighted by the debt and deficit debate will likely continue to be a major distraction for investors until a long-term solution is established, but investors who take a longer-term view should be well rewarded.
A Favorable Environment for US Equities
The past few years have seen a significant shift in the trajectories of the major global economies. After coordinated efforts to reflate the global economy following the 2008 crisis, the cumulative effects of monetary and fiscal policy have put the US at the forefront of a successful emergence from the financial crisis relative to Europe and Japan. At the same time, China and the commodity-driven economies are struggling to rebalance their economies while maintaining acceptable growth rates. The US is undergoing a robust recovery in the housing, automotive and industrial sectors, making it an attractive market in which to invest. Among the key factors driving US industry is the energy sector’s ability to dramatically reverse decades of production declines which is resulting in lower energy prices and giving domestic manufacturers a significant production cost advantage. US corporate profits are also benefitting from lower capital costs and limited labor inflation, which are the same factors that are allowing the Federal Reserve to maintain its near-zero interest rate policy and creating the conditions for a potentially extended business cycle. The current combination of benign inflation, low interest rates and rising corporate profits is conducive to valuation multiple expansion and is favorable for equity investing.
Disinflation, Low interest rates and the move to US Energy Independence
Throughout our 40-year history, the firm’s views on inflation, interest rates and corporate profits have been fundamental to shaping our Outlook and investment portfolios. Today, it is our view that the forces of disinflation remain powerful and have important implications for portfolio strategy. We continue to anticipate low interest rates for possibly several more years as the Federal Reserve targets for inflation and unemployment are not likely to be reached until at least 2016. Clearly macro concerns remain; however, there are distinct positive secular and cyclical trends taking place in the US today, and corporate profits, margins and market valuations should be strong for those industries and select companies that are best positioned to benefit.