Macro

2012 Update Positioning for the Stretch Run

August 20th, 2012 | By Nick Sargen

Overview

September marks the four year anniversary of the worst financial crisis in the post war era. Along the way, we’ve learned a lot about how the U.S. and global economy have responded to this unforeseen shock: (i) recovery has been sub-par and inflation tame despite massive policy stimulus; (ii) interest rates have fallen to record lows in most of the developed world; and (iii) stock markets have turned choppy in the past two years.

While economic and financial conditions in the United States have improved gradually over this period, many investors today are uneasy about the following developments:

  • Global growth is the softest since recovery began in the spring of 2009.
  • Confidence in the euro-zone is fragile at best.
  • The political divide in the United States leaves the election outcome and ensuing policy response highly uncertain.

In this context, investors are torn at times between seeking risk and avoiding it, but two dominant themes have emerged: (1) Bond investors have pursued yield relentlessly; while (2) Equity investors have favored stocks that offer attractive dividends, quality and predictability irrespective of valuations and long-term earnings prospects. This environment, in turn, has frustrated many active managers: According to BernsteinResearch, only about 20% of large cap managers are beating their benchmarks, which is a 30-year low.

What’s an investor to do in such an environment?

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