Our U.S. equity recommendations over the past couple of years have shown mixed results, with large-cap and high-quality stocks lagging behind in the market rally, but growth maintaining a consistent edge over value. After a fresh assessment of current conditions, we conclude that these portfolio tilts still make sense today.
U.S. equity investors, corporations, and consumers continue to exercise restraint amid signs of economic stability.
For all the hand-wringing over the private equity overhang, most problems seem confined to the large buyout space; things look a sight better for mid-market funds, some of which may be poised to capitalize on opportunities created by the credit crisis.
Deteriorating municipal finances have implications for investors though default risk is remote. However, there are technical drivers that may support the tax-exempt market for some time.
Cyclical factors appear to be dollar supportive against other major developed markets currencies, while secular fundamentals argue for continued U.S. dollar weakness against emerging markets currencies.
The year 2010 will likely be a challenging one given the high expectations reflected in current market prices, uncertainties surrounding the economy and government policy, and the absence of clear signs of sustainable economic strength.
Thus far, record issuance of U.S. Treasuries has been absorbed by a changing mix of buyers, with increased domestic participation. Treasury buyers should tread carefully in 2010, maintaining deflationary hedges while considering the potential impact of the changing supply/demand dynamics.
Given the numerous headwinds facing the U.S. venture industry, at the moment we believe venture capital makes sense only for the small subset of investors fortunate enough to have access to select high-quality managers running appropriately sized funds.
Fed purchases of more than $1 trillion in government-related securities in 2009 have dominated the market, but a first quarter halt to these purchases may pressure prices.
Investors that favored high-yield bonds over equities have fared well over the past year, but further upside may be limited.