Economic Outlook

Growth Expectations Rising As Markets Sense Impact Of Stimulus

After the first half’s -3.6% per quarter average, we believe the economy should improve in the second half of 2009 on plentiful fiscal and monetary stimulus and growing pent-up demand for goods and services. Recently, the U.S. dollar has fallen near 15% from its March peak, on growing global confidence. By shifting demand in the U.S. toward exports and abroad toward consumption, a gradual decline in the U.S. dollar can be an additional stimulus to the U.S. economy and result in more balanced global growth.

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Equity Portfolios

Earnings Growth Helps Stock Investors Gain Confidence

Our base-case, moderate assumptions for earnings growth and shifts in P/E multiples suggest robust U.S. large-cap equity returns between 15 – 20% over a two-year horizon. Corporate bonds, particularly high-yield bonds, should also generate reasonable returns, albeit below stocks’. Risk to the base case is as much on the upside (higher returns) as it is on the downside. We like the economic prospects for some non U.S. markets. However, prices have caught up, and may now be a little optimistic.

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Fixed Income Portfolios

Corporate Bonds Still Offer Value Over Government Debt

The bond market continues to show signs of stabilization and recovery. The difference in yields between government bonds and corporate bonds (the spread) has narrowed closer to its historical average, the result of encouraging economic reports and stronger balance sheets with added liquidity. Meanwhile, the steepness of the yield curve (the difference in yield between short-term bonds and long term bonds) has changed very little. This points to investors’ expectations for future growth, but may also be hinting toward fears of inflation – something the Federal Reserve is watching also.

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