Investment Managers See a Soft Landing Followed By Strong Large Cap Growth

Slower growth lies ahead for the United States, say investment managers who responded to Russell Investment Group's September quarterly survey, as none of the managers believes that a recession is likely in the U.S. and half believe the U.S. will experience slower growth in the next six months compared to the annual growth rate of 2.9% in the second quarter 2006. However, 10% of the managers believe the U.S. will grow at a stronger rate whereas a little more than 40% of the managers believe the U.S. will grow at a similar rate to the 2.9% at which it grew in the last quarter.

At the same time, more managers view the market as undervalued than at any time since the survey began, although that number still trails those who see it as fairly valued. Those who believe the market to be overvalued has risen slightly, from 8% to 10%.

None-the-less, managers have raised their outlook for U.S. Treasuries and corporate bonds to their highest levels since the survey began. This view, combined with moderate bullishness towards equities, seems to indicate that some managers are expecting that stocks may move sideways for a while before once again turning upward, when it becomes apparent that recession fears have dissipated and that favorable earnings reports from many companies are ready to be rewarded by investors with increased stock prices. However, large-cap stocks are still favored over small-cap stocks.

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Although managers have raised their outlook for bonds, they have lowered it even further for real estate investment trusts (REITs), which now occupy last place in terms of bullishness. The outlook for the energy sectors, too, is the lowest since the survey began. Clearly managers believe that oil prices have peaked, at least for now, with tensions lessening in the Middle East and the 2006 hurricane season appearing to be mild. Their outlook for high-yield bonds remains low, as the managers appear to be anticipating that defaults on bonds will grow.

Most managers remain convinced — as they have over the last two years — that it is only a matter of time before large-cap growth stocks take off. Managers continue to be more bullish on this asset class than any other. They also point to relatively low valuations among growth stocks as an indication that they are good buys at these levels. But even the outlook for large-cap growth stocks — which has held the top spot on the list of bullishness since the survey began — has slumped from a high of 80 percent in the last quarter of 2005 to 58 percent now. However, as the monthly chart below shows, large-cap growth stocks have underperformed large-cap value stocks for the last seven years.

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