Economic Outlook

Outlook Robust, With Both Downside And Upside Risks

The U.S. economic recovery, after downshifting in the summer, again has pride in its step. Strength in consumer spending has been a surprise to many. Housing could become the next surprising contributor to growth, although we see that developing over time. Inflation, at the core level, has actually slowed, which may constrain increases in Treasury yields. Risks include fiscal deficits, tightening monetary policy throughout many emerging and commodity-producing nations, and tighter fiscal policy elsewhere. Upside surprises could also occur, and by summer we could be talking of a Fed that is too accommodative.

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Equity Portfolios

Equities Still Priced At A Discount To Earnings, Despite Gains

While U.S. corporate profit growth has moderated recently, risk assets like common stocks (and high-yield bonds) appear to offer the best investment alternatives in the present environment. We remain concerned about high-Beta sectors of the market and anticipate Small Caps remaining underweight

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Fixed Income Portfolios

Higher Yields Reflect Global Economic Growth

Yields on sovereign debt moved higher around most of the world this past quarter. We view the increase in rates in the U.S. primarily as a market response to improved economic growth expectations.

Headlines are full of discussions about municipal bond debt with commentary ranging from a pending wave of mass defaults to little change from historic default levels (which for municipals is almost nil). While facing challenging circumstances and headline-making near misses, we expect the default rate will remain low as municipalities on all levels take action to balance their budgets

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