Economy's 'Moderate' Growth, Dose of Reality Could Drive Investors to More Predictable Investments
MADISON, Wis. -- Despite a slumping housing market, consumers continued to spend as interest rates increased during the fourth quarter of 2006, setting the stage for positive, but lower than average economic growth for this year.
This, according to the 2007 economic and market outlook from MEMBERS Capital Advisors, the registered investment advisor of CUNA Mutual Group, with nearly $14 billion in assets under management.
On the investments side, U.S. fixed income markets finished the year with strong positive returns in all credit categories in large part due to continued global economic growth, ample supplies of liquidity due to accommodative monetary policy and additional productivity improvements. Equity markets in the United States finished the year near record highs.
Looking forward at bonds in 2007, MEMBERS Capital said the Federal Reserve held the Fed Funds Rate constant over the second half of 2006, expecting growth to slow enough to bring inflation down. However, inflation still stands above the Fed's comfort zone and wage pressure has the potential to add to the inflation threat. There have also been early indications of a possible bottoming of the housing downturn, which may mean growth may not continue to be low enough to curb inflation. These two factors pose the risk that the Fed may have more work to do later in the year, according to MEMBERS Capital.
As for the stock outlook, the best investment values for 2007 are in the "higher-quality areas," said MEMBERS Capital. Inflation will remain near current levels with risk to the upside as the economy's rate of growth will continue to moderate before turning back up before year-end. This will allow the Fed to begin lowering rates by mid-year, though it may choose to wait for more proof of moderating inflation.
Corporate profit margins will ease somewhat from their record levels as expansion of overall valuations will provide upward pressure on stock prices that will more than offset the effects of declining margins.
According to MEMBERS Capital, global liquidity will continue to grow, providing further support to investment markets.
"Unlike in 2006, however, when almost everything about the economy turned out better than expected, the surprises will include more disappointments," the report read. "This occasional dose of reality is what will drive investors away from lower quality to more predictable investments as the year progresses."
The key risks--consumers, exports and capital spending sustain or an increase in the rate of economic growth, the Fed holds or even increases interest rates, and stock investors trade the expected multiple expansion for better than expected earnings growth and profit margins, MEMBERS Capital said. --email@example.com