Tuesday, January 19, 2010

In the Shadows of the Great Recession

In the Shadows of the Great Recession

The Great Recession will cast a long shadow over markets.

The Great Recession was transformational, and will cast and long shadow over the world in which we live, work, spend, and retire. This period will likely leave lasting impressions on the economy not dissimilar to those following the Great
Depression, World War II, or the end of the Cold War.

Constructive near term before multiples come under greater pressure.

We’re constructive on the stocks over the next 12 months, with a year-end S&P
500 price target of 1,250. However, once the current recovery is behind us, focus
will shift toward the duel threats of rising inflation and slower earnings growth,
putting downward pressure on valuations.

The growing national debt — the stiffest of many headwinds.

Many structural challenges have arisen from the Great Recession. The large and
growing national debt is the most potentially damaging, with the OMB forecasting
interest and entitlements to top 62% of federal spending in 2019 (vs. 45% today).

Long-term investment implications — cash will be king.

We are focused on a number of signposts that will signal a necessary shift from
offense to defense, most likely at some point over the next 12-24 months. In an
environment with rising discount rates and fading multiples, cash will be king.
Winners in this environment should include Value stocks, high dividend payers,
and companies that can grow earnings in an otherwise weak economy.


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