Keon: New turbulence will be less frightening, more exhilirtating
NEWARK, N.J.–(BUSINESS WIRE)–The United States could see much more robust economic growth than the consensus of market analysts expects, with the potential for more than five percent in real gross domestic product growth sometime in 2014, says Ed Keon, managing director and portfolio manager for Quantitative Management Associates, in his most recent perspective report. QMA is an asset management business of Prudential Financial, Inc., (NYSE: PRU).
Keon has called himself “cautiously optimistic” since first suggesting the markets entered the “Turbulent Teens” at the beginning of 2010. In his sixth installment of the outlook series, A Different Sort of Turbulence: Brace Yourself for Rapid GDP Acceleration, Keon says, “We are ready to drop the ‘cautiously.’ We suspect the turbulence over the next few years will be of the sort you get when you slam down the accelerator of a powerful sports car. The new turbulence might be less frightening and more exhilarating.”
The historic highs reached by the U.S. equity and some global markets that have recovered all the losses from the financial crisis and Great Recession represent a real recovery, the paper says, and a bull market should continue. The trend suggests that investors should consider increasing their allocations to stocks.
Keon says the underlying private economy was already growing at a robust rate in the first quarter of 2013, but that overall GDP has been dragged down by tax increases and government spending cuts, which reduce GDP in the short run. Once this “fiscal drag” fades in 2014, Keon suggests an improved labor market, increased consumer wealth from housing and stocks, pent up demand for autos and other goods and improved access to credit will fuel acceleration in GDP growth to five percent or more.
Keon adds, “The short term drag from tax increases and spending cuts has a silver lining. By 2015, the federal deficit will be substantially reduced and might even become a surplus.”
The Congressional Budget Office has already forecast the deficit down to about two percent of GDP, but with profits from Fannie and Freddie, increased capital gain tax payments from higher asset prices, and increased individual and corporate tax payments from a stronger economy, Keon suggests a balanced federal budget, and perhaps even a small surplus, is conceivable for 2015.
“The portfolios my team and I manage remain heavily overweight stocks and underweight bonds relative to benchmarks,” says Keon, a member of QMA’s asset allocation team, which managed about $45 billion in assets as of March 31, 2013. “Stocks are and always will be more volatile, and after the great run of the past two years, stocks might move sideways for a while or even correct. But stocks are likely to move higher on average for the next couple of years while bond portfolios might face significant headwinds over the next few years if rates rise in response to faster economic growth.”
QMA, with $95 billion in assets under management as of March 31, 2013, manages equity and asset allocation portfolios for institutional pension plans, endowments, foundations, and subadvisory accounts for other financial services companies.
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“Turbulent Teens VI” represents Ed Keon’s views, opinions and recommendations of Ed Keon regarding the economic conditions, asset classes, securities, and financial instruments referenced herein as of June 4, 2013. QMA has no obligation to update any or all of such information; nor make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. Information in the report constitutes “forward-looking statements,” including observations about markets and industry and regulatory trends as of the original date of the report. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward looking statements in making any decisions. No representation or warranty is made as to the future performance or such forward-looking statements.