There ride may be bumpy, but the economy and the markets continue to be headed in the right direction, according to top executives at Raymond James Financial, Inc.
While the economy is currently in a soft patch, “most of the signs suggest that it’s likely a temporary pause,” said Scott Brown in a presentation within Raymond James’ latest economic update. Brown is chief economist within the equity research department at Raymond James’ Raymond James & Associates, Inc. unit.
Last year ended strong, with consumer spending, business and consumer bank lending and hiring by small and mid-sized businesses all picking up, Brown noted.
The recovery is now battling headwinds including lingering problems in the housing sector, fiscal contraction at the state and local level and the ebbing of federal stimulus. But, according to Brown, the most important problem has been higher gas prices, which have “really sapped consumer purchasing power.”
Meanwhile, chief investment officer Dave Henwood opined that most Americans are “confused by the constant flow of negative news.” They worry, he said, about its impact on the economic recovery, on consumer and business confidence and how risk should be factored into equity valuations.
“These factors also tend to undermine investor confidence,” he noted.
Most investors remain cautious, and many are looking for stocks with high dividend yields, low price-to-earnings valuations and sustainable, positive business prospects,” he said.
Too many investors have too much of their liquid assets in low-yielding vehicles, he added.
Brown expects slower growth in the near-term, though “not necessarily” a contraction. That prediction follows relatively strong employment growth in February, March and April that was followed by a slowdown in May.
More bank lending and a Federal Reserve policy that continues to be accommodative are among the reasons that the recovery should continue, according to Brown.
Yet consumers remain concerned about the decline in home prices, something that, if continued, would likely impact their spending. A key factor behind softness in the housing market is the employment picture, said Brown.
“A full housing recovery needs much stronger job growth, he said, adding that there is “still a long way to go.”
One common concern that Brown said he's not preoccupied with is inflation.
The elements are not in place for a repeat of the runaway inflation of the 1970s, he argued.
Four decades ago, oil shocks sent union wages higher because of cost-of-living provisions within many union-employer contracts. Those increased wages then filtered into the non-union labor market, and inflation became deeply embedded in the labor market. Today, a key factor from the 1970s is missing: Union power is much weaker.
“This really is a lot different than the 1970s,” said Brown.
As for the prospects for a third round of quantitative easing by the Fed, Brown said the current slowdown is not severe enough for the Fed to start another round of asset purchases -- no QE3, in other words.
Such easing is something the Fed “takes very seriously,” Brown said. Another round would likely only be prompted by developments such as deflation or a drop in non-farm payrolls, he argued.
Brown also said he sees a chance for “somewhat better growth” in the second half of the year, although early 2012 remains a concern because the payroll tax deduction is set to expire.
Still, over the long term, “you can’t bet against the American economy,” he said. “I think we’re going to come back pretty strongly at some point.”