A Spoonful of Sugar

January 22, 2013

Countering the unpleasant taste of these forces that act as a depressant on our economy is the "sugar" of monetary stimulus.
-Arne Espe, vice president, mutual fund portfolios, USAA

  • The Mary Poppins song, “A Spoonful of Sugar,” is right in line with recent market actions. The “medicine” (fiscal austerity) is being dished out in the form of payroll and income tax hikes recently passed into law, and countering the unpleasant taste of these forces that depress our economy is the “sugar” of monetary stimulus. This dynamic creates a powerful incentive for investors to leave low-yielding assets such as money market funds and CDs and purchase assets with higher expected returns, such as corporate bonds and stocks.
  • The Fed’s efforts to drive up asset prices does seem to be working as seen by increasing home and financial-asset prices. Stock prices have been rallying, Treasury-bond yields remain relatively low, corporate-bond yields continue their decline, and gold has been rising.
  • This week brings investors a plethora of earnings reports. The USAA team views consensus earnings expectations for 2013 of 11 percent growth as optimistic, given their expectation of relatively slow growth, combined with margins that are already at historically high levels.
  • The USAA team’s 2013 investment outlook remains one of mild caution and they are slightly overweight in bonds and cash in their diversified managed portfolios. They favor international stocks to U.S. stocks because of their low valuations, and also like emerging-market stocks due to their low valuations and higher expected earnings growth rates. As a long-term inflation hedge, the team continues to show a preference for gold and precious metals mining stocks.



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