Few will forget how the subprime-induced credit crunch put a halt to strong market trends in both North American and internationally late in the summer for 2007. Market sentiment made a dramatic reversal as fears of a global economic slowdown spread, while “volatility grew and investors ran from risk as fast as they could,” Andy MacLean and Clancy Ethans at Richardson Partners Financial said in a recent report.
In its 2008 Market Outlook, the family wealth management firm said it expects the U.S. Federal Reserve will be forced to abandon its policy of minimized interest rate cuts in favour of much more aggressive easing.
“The Fed knows all too well that deflation is a much more serious problem for an economy than inflation,” the report said. “We would thus anticipate that the rate cuts will continue until the credit crisis is alleviated.”
The firm also said it expects any pullback in U.S. economic growth will be relatively short, while global banks will tighten their lending and repair balance sheets. As for the U.S. housing market, Richardson said the worst is likely yet to come. However, corporate balance sheets are considered to be in their best shape ever.
“If consumer spending doesn’t collapse, the U.S. and other economies are unlikely to slip into recession,” the firm said.
It considers equity valuations attractive, noting that they have actually compressed during the rally of the past five years. The S&P 500 has appreciated at a lower growth rate than underlying profits since 2002, Richardson added.
It sees the market discounting a combination of worst case scenarios ahead. And while the volatility will likely remain, the firm doesn’t think the economic cycle is over.
“Furthermore, we anticipate that as traditional growth investing, led by large cap growth stocks, comes back into vogue we will begin to see multiple expansion,” it said.