An analysis of the economy and
U.S. Economy – We are witnessing continued economic weakness in the U.S., and year-over-year payroll growth has dropped to a new one-year low. Most coincident economic indicators have weakened considerably, especially on a year-over-year basis. The Fed hopes its quantitative easing measures will improve employment and boost core inflation expectations (from current deflation concerns), but the economic impact has largely already played out. Recent tax hikes and the potential spending sequester are a concern and the U.S. continues to remain vulnerable to adverse shocks. Corporate America has taken advantage of record low interest rates to lever up from a low base, leaving it more vulnerable as earnings (and revenue) pressures continue to mount. Companies remain largely unwilling to add workers given the uncertain economic and policy environment in Washington. Consumer real incomes and savings rates remain below historic levels. Meaningful economic improvement, however, hinges on global policy makers shifting to a pro-growth stance, staunching the European crisis, and the global economic downturn running its course.
European Economy – Europe remains in recession, but we expect it to become “less bad” as austerity measures are relaxed and monetary policy remains accommodating. There are still risks of continued eurozone flare-ups, especially on the periphery, but the eurozone authorities remain committed to do “whatever it takes” to prevent a recurrence of a crisis.
Equity Market Strategies
The U.S. is vulnerable to shocks such as the European crisis or tensions in the Mideast and Asia. We therefore favor a more diversified portfolio that offers greater growth and defensive exposure, with strong financial strength and attractive valuations. We believe these companies should outperform in this environment. While equity valuations in general appear fairly valued on a long-term basis, stocks are vulnerable in the near-term due to economic weakness and external shocks. While Fed quantitative easing has helped financial assets temporarily, the underlying economic and company fundamentals will remain challenged. The recent rise in interest rates will put additional pressure on stock valuations in the absence of the fundamentals improving.
- Higher quality companies fairly valued on a long-term basis, though the shorter term is fraught with risk
- Managements enhancing shareholder value through share buybacks and dividend increases
- Federal Reserve is very accommodative
- Earnings and revenue growth quickly weakening as likely recession in the U.S. and most of developed world begin to sting
- Weak consumer income and savings bode ill for consumption
- Exports/imports growth increasingly challenged
- Housing price growth will moderate
Fixed Income Strategies
Our short-term portfolios are managed long relative to benchmark duration, as we believe the front-end of the yield curve will remain anchored by accommodative monetary policy. Intermediate and long-term taxable portfolios are positioned just short of benchmark duration, as Fed tapering concerns pressure the longer end of the yield curve. We remain underweight Treasury exposure in favor of spread product such as corporate bonds, CMBS securitized product and taxable municipal securities.
We have been actively moving our tax-exempt portfolios closer to benchmark duration.
- Fed on hold until inflation is greater than 2.5% and unemployment is less than 6.5% unless caused by falling participation rate
- Corporate credit fundamentals remain healthy
- Growing pressure to reduce government debt/spending
- Continued low inflationary pressures
- Weak global economic environment
- Government policy uncertainty
- Structural budget deficit imbalance
- Increased shareholder-friendly activity
- Potential outflows to equity market
- Fed tapering, asset purchases
Our Investment Strategy
- The balanced allocation should perform well in a variety of situations, including if the U.S. economy slows materially or if it merely maintains a stable lower growth pattern.
- We are maintaining our strategic allocation to equities for all models. We are also recommending a tactical underweight to fixed income and a tactical overweight to diversifying assets for all models except the Fixed Income and Aggressive Growth models. Within diversifying assets, we have an overweight to alternative strategies.
- Effective July 25, 2013, we will increase the tactical allocation to International Developed Equity from 40% of the developed equity allocation to 50% for all models that have an equity component. The tactical allocation to U.S. equity will be reduced on a pro-rata basis.
- The weighting to emerging markets equity is currently below the long-term target allocation.
The opinions expressed herein are those of the Sterling Advisory Solutions Team, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.
Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other government agency, and are subject to investment risk, including possible loss of principal invested.