Young admits that the U.S. needs to see something taking shape next month in regards to talks over the debt ceiling, otherwise the U.S.’s AA credit rating may experience yet another downgrade. This could result in raised borrowing costs, which would in effect hurt prices of outstanding bonds.
“The deeper we get into January, the more difficult it becomes,” Young said. “If by late January there is still no progress, it would be a very negative situation, and would be a big shock to people.”
Credibility in the Markets
For the U.S. markets to have credibility entering 2013, there needs to be credible commitment from Washington to deal with fiscal consolidation in regards to tax and entitlement reform.
“Right now, business spending is very weak, because companies don’t have a sense of what the tax environment will be like next year,” Young said. “Companies need long term visibility of what tax rates are going to be before they commit to spending.”
If Washington can overcome partisan gridlock, then there will be room for P/E multiples to expand, and the potential of a secular bull-market, according to Young.
“We were fairly positive on stocks in 2012, and continue to be in 2013,” Young said. “Uncertainty from many moving parts leads us to be less positive, but our overall theme has not changed. That’s because in a low-rate environment, equity income is as important as ever.”