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.
The powerful move in equities from their March lows has outpaced fundamentals. History indicates that at this point in the cycle the easy gains have been made and returns going forward will likely be muted.
The U.S. government’s policies to combat the financial and economic crisis appear to have been much more effective in bolstering the financial system and revitalizing capital markets than in stimulating the economy, but capital markets remain fragile and the policies have introduced a number of serious investment-related risks.
High-yield bonds and loans are normally unattractive to taxable investors, but current conditions are more favorable than usual, and careful manager selection may tip the balance in investors’ favor.
The collapse in S&P earnings over the past year and the range of future possible earnings estimates create high uncertainty around U.S. equity valuations.
The financial and economic crisis continues to create a broad and deep range of investment opportunities, many of which remain attractively valued, even after taking the recent rally into account. Given the risk that cheap assets will end up worthless, we emphasize the importance of careful manager selection across the board. Further, we caution that…